Initiating date: 09-21-04
12-18 Month Price Target $48.00
Increased Price Target from $33 to $48 on 12-03-04
Increased Rating from 4 to 6 on 06-15-06
Papua New Guinea represents the eastern half of the island of New Guinea located north of Australia between the Coral Sea (to the South) and the South Pacific (to the North). The island of New Guinea consisting of Indonesia on the west and Papua on the east is the second largest island in the world, while the total land mass of Papua itself is a bit larger than the state of California. The country has a population base of approximately 5.5 million people governed by a constitutional monarchy with a parliamentary democracy, and a legal system based on English common law. Consequently, the country represents a compelling destination for foreign investment with respect to limited sovereignty risks. According to the World Fact Book (www.cia.gov), "Papua is richly endowed with natural resources, but exploitation has been hampered by rugged terrain and the high cost of developing infrastructure. Agriculture provides a subsistence livelihood for 85% of the population. Mineral deposits, including oil, copper, and gold, account for 72% of export earnings. The country's lack of "developed infrastructure" is in fact the basis of IOC's opportunity here, as prior to the company's shipment in August (2004) of the first refined crude products, the country was one of only a few in the world that produced oil, but had no domestic refining capabilities. The economic advantages of a local refinery for both the company and the country are compelling, and again, provide the platform for a considerable opportunity.
The company's operating model should become clearer as we move through the next few quarters. To that end, I would submit that the operating model is likely to be quite fluid. While the company's midstream operations have both front end and back end agreements in place that should buttress the downside of the equation, there are multiple scenarios that could lead to better results than I have provided for in the model. Beyond revenue recognition, the company is nearing the end of its mid and downstream development phase(s) and is quickly transitioning into operations, so the potential for differences in the actual expense results versus my projections for a few quarters is likely considerable since there is essentially no historical data to build around. That being said, as the model indicates, my expectation is that the company is at the front end of a dramatic revenue, earnings and cash flow expansion.
Finally, I have confined my analysis primarily, and my price target totally to the company's midstream and downstream operations. In other words, the company's upstream oil and gas development program is a free ride in the context of my analysis and corresponding valuation at this point in time. Considering the market caps of a lot of public development stage oil and gas deals these days, "free" is a pretty good deal. More importantly, the ultimate development of the upstream assets could provide a leg up in the stock that could substantially outrun the valuations I am arguing here for the other two pieces.
DISCLAIMER STATEMENT
The information contained in this report has been written by David Lavigne of EdgeWater Research Partners LLC ("Edgewater") and has been derived from sources considered reliable, but cannot be guaranteed by us. Edgewater and Lavigne are not aware of any material conflict of interest known at the time of the publication of this report. Financial projections and estimates herein represent our independent analysis based upon information in conjunction with the Company's publicly available financial statements. Edgewater and Lavigne may maintain positions in the securities referenced, which may change at any time without notice. Edgewater does not receive fees, warrants or any other compensation from issuers in connection with its research. It does however, encourage issuers and it representatives to subscribe to Edgewater's research, and from time to time, issuers and or their representatives may also purchase individual copies of Edgewater's research products. Edgewater and Lavigne may own options, rights or warrants to purchase any of the securities of the Company. This report is for informational purposes only and is not to be construed as specific investment advice or recommendations, nor as an offer to sell or a solicitation of an offer to buy any securities. The securities referenced are speculative in nature and may not be suitable for your specific investment objective. For specific investment advice or recommendations, please consult with your investment representative.
