Advisory suggestion to oil investors

FINANCIAL adviser Raymond James says InterOil investors should ditch ExxonMobil shares after the $US2.5 billion takeover they’ve already approved is finalised.
Advisory suggestion to oil investors Advisory suggestion to oil investors Advisory suggestion to oil investors Advisory suggestion to oil investors Advisory suggestion to oil investors

The firm's Houston-based senior vice president and equity research analyst Pavel Molchanov has long been bearish on ExxonMobil, and advised InterOil shareholders that the oil company was poorly positioned to take full advantage of a sustained oil price recovery.

He attributes this to ExxonMobil's structural overweight to refining, chemicals and because, within its upstream segment, non-LNG gas does not directly benefit from rising oil prices.

He also noted that ExxonMobil shares were already pricing in long-term prices at an above-consensus West Texas Intermediate price of $US70/barrel.

Molchanov advises current InterOil shareholders sell the post-buyout shares and use the proceeds to re-invest into any of a wide range of oil-levered stocks like fellow New York-listed entities Halliburton, Hess, Marathon Oil and Whiting Petroleum.

He also believes InterOil founder Phil Mulacek's last-ditch attempt to delay ExxonMobil's acquisition will fail.

The Court of Appeal of the Yukon has accommodated an expedited hearing with respect to the appeal lodged by Mulacek, which is scheduled to be heard on October 31.

In addition, the Court of Appeal of Yukon granted a stay of the Supreme Court of Yukon's order approving the transaction, pending the hearing.

Papua New Guinea-focused InterOil continues to believe that the offer by ExxonMobil represents compelling value for all InterOil shareholders and vigorously opposes Mulacek's appeal.

The Supreme Court of Yukon approved the transaction on October 7, finding that it was fair and reasonable.

InterOil shareholders will get $45/share in ExxonMobil shares plus contingent value rights.

The latter will be converted into cash upon resource certification, which is likely in 2017, at a pre-determined formula. Those rights could be worth up to $US27/share - much more than the $5/share implied by the current InterOil stock price.

Yet Molchanov said that even under this best-case scenario, two-thirds of the value for InterOil holders will take the form of ExxonMobil shares.

"So, what to do with those shares? Our straightforward answer: sell them right away and use the proceeds to reinvest into any one of a wide range of oil-levered stocks, across market caps and places in the value chain," Molchanov said.

Raymond James has had an ‘underperform' rating on ExxonMobil since November last year.

"In a broad thematic sense, Exxon screens uniquely poorly in the context of our forecast for sustained oil price recovery into the $60s by year-end 2016 and even higher in 2017," Molchanov said.

"This is not an issue of market cap but rather ExxonMobil's structural overweight to refining, chemicals, and (within upstream) non-LNG gas - none of them directly benefiting from rising oil prices.

"Second, ExxonMobil shares are already pricing in oil prices that are reflected in our above-consensus price deck. Since the Exxon/Mobil merger in 2000, the stock's price-earnings ratio has averaged 14.8x. Extrapolating from that, we find that the implied 2017 EPS figure would require $70 WTI/$73 Brent."