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Summary

  • Papua New Guinea focused InterOil has beefed up its balance sheet.
  • InterOil is moving ahead with its drilling program to develop its massive acreage.
  • InterOil has bigger ambitions as it eyes Asian markets.

The future of InterOil (NYSE:IOC), the Papua New Guinea focused independent oil and gas company, as a major exporter of liquefied natural gas, or LNG, from the island nation is looking better.

The company's major asset includes its interest in the island nation's Elk and Antelope gas field, one of the largest gas fields in Asia estimated to hold as much as 7 trillion cubic feet of gas, and exploration licenses covering more than 16,000 square kilometers, mainly in the Eastern Papuan Basin. As compared to the Western Basin, the Eastern Basin is relatively under-explored, but it is home to Elk and Antelope fields.

The company has recently released its second quarter results in which it swung to a profit of $52.3 million from a loss of $13.2 million in the same quarter last year, largely due to the $49.5 million gain on sale of assets to Puma Energy. In terms of continuing operations, the company's loss came in at $15.7 million, nearly flat from the same quarter last year.

Monetization

Earlier in June, InterOil sold its refinery and petroleum products distribution business to Singapore based Puma Energy to $525.6 million. The deal made Puma Energy the owner of the only refinery on PNG. For InterOil, the deal allowed the company to monetize its assets as it increases its focus on its core business and the LNG assets.

Earlier in March, InterOil sold a majority of its stake in the PRL-15 block, which includes Elk and Antelope, nearly 40%, to France's Total SA (NYSE:TOT) for an initial payment of $401 million, reducing its position in the field to 35.5%. InterOil will receive an additional $73 million when a final investment decision is made and $65 million on production of the first cargo.

The asset sales have strengthened InterOil's balance sheet. The company's cash reserves, including restricted cash, have climbed from $85.9 million a year ago to more than $575 million at the end of the second quarter.

Moreover, the company also has more than $17 million as non-current restricted cash which could gradually become a part of its cash reserves with improvements in its credit profile. Additionally, the company also has around $300 million in undrawn facility from Crédit Suisse.

Overall, InterOil's CFO Donald Spector has said during the conference call that cash reserves and credit facility will translate into total capacity of $885 million.

The increase in funds will support the company as it moves forward with its largest exploration and drilling campaign, which includes drilling of up to 8 wells in 2014-15. The company spudded three wells in March but had to temporarily stop working on one of those wells (Wahoo) due to safety concerns when it encountered higher than anticipated pressures.

LNG Exports

InterOil's quarterly results were released just three days after the company announced the name of Chris Finlayson, a former head of the BG Group as its new Chairman.

InterOil and Total have been mulling about developing a major onshore LNG export project that will supply the gas from Elk and Antelope to the Asian markets, such as China and Japan. I believe that Finlayson's position at the top shows InterOil's seriousness about developing its own LNG export project in the future.

Over the last thirteen months, InterOil has made some big changes in its management. In July last year, the company named Michael Hession, a veteran of Woodside Petroleum and BP (NYSE:BP), as its new CEO. Earlier this year, in January, the company also hired new COO and CFO.

With LNG export project, InterOil and Total will be following the footsteps of Exxon Mobil (NYSE:XOM), which has already started shipments of LNG to Asian buyers from its massive $19 billion LNG export project in PNG.

Conclusion

InterOil's long term future depends heavily on its ability to export LNG from PNG to Asian buyers. This appears to be a distant dream as the company neither owns, nor has access to any LNG export terminal. InterOil is still analyzing its massive acreage, which is about as large as thirteen New Yorks and is in the early stages of planning about a potential LNG export project.

That said, the company's successful monetization efforts will support its drilling program, which underpins its future. It is encouraging to see that InterOil's ambitions to develop its acreage as well as to export the fuel to Asian buyers are backed by Total, a behemoth in the LNG space with annual production of more than 12 million tons.

InterOil's shares have risen by 17.7% this year, closing at $60.61 on Friday. There are several catalysts at work that can translate into an upside for InterOil's shareholders. Most notably, the company could enter into an agreement with Exxon Mobil to turn its LNG exporting dream into a reality. InterOil could also become an acquisition target for E&P companies looking to add one of Asia's largest gas fields to their portfolio. Additionally, InterOil could also announce another asset sale, or attract another partner to develop its assets, on the back of positive well test results from the ongoing drilling program.

Notes:

InterOil Financial Statements Q2-2014 and H1-2014 [Pdf]

InterOil Investor Presentation August, 2014 [Pdf]

InterOil PR Q2-2014 [Pdf]

InterOil Q2 2014 Results - Earnings Call Transcript

Source: InterOil Is Looking Much Better