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Raymond James take on DST#4

July 28th, 2008 · 1 Comment

It’s already on the Yahoo board, but for the sake of completeness:

  • Having concluded drill stem testing of the Elk-4 well, InterOil reported in its latest drilling update that the results establish a gas/condensate column of 2,028 feet in the Elk/Antelope reservoirs. Significantly, we believe these results confirm sufficient resource potential for at least the first train of the LNG project, and additionally, increased levels of condensate encountered may support a liquids-stripping facility. The company announced that the well will be completed as a gas and condensate producer.
  • The fourth and final drill stem test (DST #4) on Elk-4 was performed between 7,546 and 7,628 feet, with the lowest known gas at 7,668 feet. The stabilized gas flow rate was 10.4 MMcf/d. The tested zone produced 18 Bbls of condensate per MMcf of gas, with no water – a hefty increase of 13 Bbls/MMcf compared with the top of the reservoir in Elk-1 (which was drilled in 2006).
  • This confirms richer hydrocarbons over the tested interval and supports the possible option of building a liquids-stripping plant, which would boost near-term cash flow. While the drill stem testing is done, work at Elk-4 continues.
  • After a 4 1/2 inch production liner is set, the company will conduct an extended full flow test of the entire open hole section. We expect a significantly higher flow rate and potentially increasing condensate levels as the well cleans up.  While there is more data to come (we believe over the next 2-3 weeks), the DST #4 results fully support previous indications regarding the well’s gas and liquids content and bode well for the prospect of selling a portion of the field to a strategic partner.
  • We believe that InterOil is acting prudently in continuing its conservative, steady-as-she-goes approach for developing its understanding of the reservoir.  The new data collected at Elk-4 should allow outside reservoir engineers to meaningfully increase the low end of the range of resource potential at the Elk/Antelope structure.
  • The increased levels of condensate and high Btu content natural gas encountered in the deeper section of the reservoir should also meaningfully increase the economic returns and value of the entire LNG project.
  • Once the analysis is concluded, we would anticipate a strategic partner stepping up to the plate and taking an interest in Elk/Antelope, the LNG plant, and an LNG offtake agreement – aligning its interests with InterOil across the range of the company’s business segments. We continue to believe that this transaction has the potential to create an implied “industry” valuation several fold higher than the market’s current valuation of InterOil shares. We reiterate our Strong Buy rating.

So, it seems that indeed our first take was a little too negative and the liquids stripping plant is still very much in the cards. We were sure about sufficient gas for the LNG facility though. Nice to have that confirmed.

Tags: IOC

1 response so far ↓

  • 1 Jim Tate // Jul 28, 2008 at 10:10 pm

    Good report, thxs