InterOil's Investors Are Gushing Over $526M Refinery Deal

Correction: Corrects the first paragraph to say InterOil stock is up 25% for the year to date, not 2.5%.

NEW YORK (TheStreet) - -The Papua New Guinea (PNG)-focused InterOil Corp (IOCannounced the sale of its refinery and petroleum products distribution business to Puma Energy for $525.6 million. Investors have already shown their delight by pushing shares up over 2% to $64.22, up 25% for the year to date.

The deal will make the Singapore-based Puma Energy a major player in PNG's emerging energy industry and the owner of the only oil refinery in the island nation. For InterOil, the deal will allow the company to increase its focus and expand in its "core upstream and LNG [liquefied natural gas] business," InterOil's COO Jon Ozturgut said in a statement.

The announcement comes after InterOil sold most of its stake in the prized Elk and Antelope gas field to Paris-based supermajor Total (TOT). InterOil is currently evaluating its lease holding and will release the well-test results in the near future. Positive test results can open doors to additional deals with energy companies looking to add PNG's gas reserves to their portfolios.

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InterOil's shares are priced 11.5 times trailing earnings, below industry's average of 17.9 times as per data compiled by Thomson Reuters. Any additional deals, particularly related to equity interest in the company's acreage, or strong test results can act as a catalyst for further upside.

On the other hand, InterOil's long-term outlook looks uncertain as it neither owns nor has access to an LNG export terminal.

InterOil has 36% interest in the Elk and Antelope field, one of Asia's biggest undeveloped gas field. Overall, the company owns several exploration licenses in PNG covering an area of around four million acres.

The current sale of non-core assets shows the company's ability to monetize its assets. Three months ago, InterOil completed the sale of 40.1% of its gross interest in a block covering the Elk and Antelope gas field to the French oil major Total for $401 million. Besides InterOil and Total, Oil Search (OISHY) is also a majority stakeholder with 22.8% gross interest.

As per the terms of the deal, InterOil will receive an additional $73 million when Total makes a final investment decision and $65 million on the production of the first LNG cargo.

Moreover, the two companies are talking about developing a new LNG export terminal in PNG to tap into the growing demand of energy from Asian economies.

InterOil's deal with Total gave a boost to its cash reserves which climbed from $95.7 million at the end of March 2013 to more than $453 million at the end of March 2014. The sale of its non-core assets to Puma Energy will further strengthen InterOil's cash position.

Armed with strong cash reserves, InterOil will proceed with its massive $300 million drilling and appraisal program, which is more than twice as large as last year's. The company is currently evaluating its enormous acreage in PNG, which also includes Triceratops gas field which sits 35 kilometers north-west of Elk and Antelope. This drilling program will improve the company's ability to monetize the rest of its acreage.

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Earlier this month, InterOil's CEO Michael Hession said that other oil and gas companies have started showing interest in InterOil's assets. Moreover, analysts have said that InterOil can become a potential takeover target by larger companies looking to capitalize on the growing demand of energy from Asia, such as Australia's Woodside Energy.

Over the long term, InterOil aims to become a producer and exporter of fuel to Asia. However, the company does not own any export facilities. The construction of an LNG export terminal requires a lot of time, and a lot of capital.

Currently, Exxon Mobil (XOM) is the owner of the PNG's first and only LNG export project, and it has not signed any deal with InterOil. America's biggest energy company has already started shipments from its project to a Japanese utility company.

That being said, it took Exxon Mobil nearly four years and $19 billion to construct its export facility. The price-tag alone is nearly six times as large as InterOil's market cap.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates INTEROIL CORP as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate INTEROIL CORP (IOC) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its compelling growth in net income, largely solid financial position with reasonable debt levels by most measures and attractive valuation levels. However, as a counter to these strengths, we also find weaknesses including weak operating cash flow and a generally disappointing performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income increased by 7859.9% when compared to the same quarter one year prior, rising from $4.00 million to $318.64 million.
  • The current debt-to-equity ratio, 0.30, is low and is below the industry average, implying that there has been successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.23, which illustrates the ability to avoid short-term cash problems.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. In comparison to other companies in the Oil, Gas & Consumable Fuels industry and the overall market on the basis of return on equity, INTEROIL CORP has underperformed in comparison with the industry average, but has greatly exceeded that of the S&P 500.
  • IOC has underperformed the S&P 500 Index, declining 10.49% from its price level of one year ago. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time.
  • Net operating cash flow has significantly decreased to -$15.24 million or 137.56% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.

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