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IOC technicals versus fundamentals

April 8th, 2008 · 1 Comment

The exciting situation we are following at IOC can also be studied from a technical point. There is good and bad news. Let’s get the bad news out of the way. If we look at the two year graph, we can conclude that IOC is not in any long-term uptrend, and we have not retested the lows of two years ago.

However, it seems that we have put in a bottom at 15. We have twice tested that and are currently bouncing off from that low, which is somewhat reassuring. It would be nice if we could break the 50 day moving average at a little above 20.

Does this technical picture actually matter? Not a whole lot. We are on the verge of results from Elk4, and these can either be good, excellent, or disappointing. No middle way here. Let me explain.

Good results will confirm the deliverability of the Elk resource, that is, if porosity and permeability of the limestone at Elk4 are good, then Elk will move that much closer to being confirmed (there is an engineering firm working on an independent assessment as well).

That will all but confirm the viability of an LNG facility. That doesn’t make it inevitable there is going to be one built, but at least it shows that it can, and perhaps that it should. Such a facility cost something in the order of $6B, so we would have to wait for any outside financiers.

This is not such a tall order as that large sum would suggest. There is a large and growing demand for energy (especially relatively clean energy as that coming from natural gas) in Asia, and there are plenty of parties who would be able to finance such an LNG facility.

If Elk gets confirmed (present estimates vary between 3.5 and 18.8Tcf), it will be too big a resource not to develop.

Bad results would be a dry hole. No gas (or not sufficient due to low permeability), or insufficient porosity (that is, insufficient flow). Elk would come under pretty serious questioning. Although it would not be definitive, it would create serious problems for IOC. They have another chance at Antelope, an adjacent resource where they’re drilling next, but they would need another big find to stay afloat.

the stockprice would crater, perhaps as low as $10 in the case of bad results.

Excellent results would be those that increase the resource estimates, or finding oil. The presence of a reef structure could do the trick. Reef structures have the highest porosity and permeability. Oil would be a bonanza, as it can be used almost immediately in their own refinery, greatly increasing cashflow.

We think bad results are not likely, especially after the early indications in the fourth drilling update, as we argued yesterday. However, if you want to play this, they should not be discarded, some put options could provide crucial protection.

The jury is still out whether the results will be good, or excellent. It’s likely that fundamentals will take over from technicals pretty soon..

Tags: IOC

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