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Daily Distortions No.35. Henry Blodget should retract..

April 9th, 2010 · 2 Comments

But he hasn’t. Is he up to his old tricks?
It certainly looks like it. He was barred from the securities industry after revelations from the Nasdaq dot.com bullmarket time he took money from companies to tout them and didn’t take his own touting all too seriously (and that’s putting it very mildly). So now he operates as editor and CEO of The Business Insider, which apparently gives him the freedom to write what he wants (under the guise of just providing ‘discussion material’).

It’s difficult to consider the following article as anything else but a deliberate attempt to mislead, especially after several comments pointed out the misstatements. It is also interesting that Blogdet didn’t write the misleading article himself, but he quotes an anonymous ‘source’ (which is most likely Barry Minkow or Lobdell). He clearly has learned his lesson though, stating:

  • we cannot and are not vouching for the accuracy of the analysis or conclusions

What is done in the article is confront claims (about resource  from a December 2008 presentation from InterOil with remarks (from a year before that) from their own geologist. The article then argues that their own geologist show that the December 2008 presentation is grossly misleading

1) The InterOil geologist was speaking about Elk
From Blodget’s anonymous source in the article:

  • But perhaps you might believe Interoil’s own geologist (Adrian Goldberg) and his 2007 presentation to the the Australian Society of Exploration Geophysicists.  In it he describes the Elk discovery.  (Elk is in adjacent limestone well site to the record Antelope discoveries that the company has touted more recently.)  Note this paper is dated 2007.
  • “The Elk gas field was discovered by InterOil in 2006 after drilling the Elk-1 wildcat well. The reservoir consists of a thick limestone succession of Eocene to Miocene age. Due to limited outcrop of limestone in the area, complex tectonics and limited geophysical and offset well data, fracture characterization of the reservoir has been a challenge.
  • From well cuttings and wireline logs at the Elk-1 and Elk-2 the reservoir matrix porosity is relatively low with pay zones of >5% porosity on the order of tens of meters. However drill-stem testing of the Elk-1 well produced impressive flow rates of up to 102 MMCF per day with a calculated absolute open flow of 2,850 MMCFD.”
  • There are a few key lines here.  The geologist states that the “fracture characterization of the reservoir has been a challenge”, that the pay zones are on the “order of tens of meters” and despite the small pay zones the flow rates are impressive.

2) The InterOil December 2008 presentation speaks about the WHOLE Elk/Antelope resource
Again, from Blodget’s anonymous source:

  • A December 2008 presentation argued that these reservoirs were thousands of feet (indeed over over a thousand meters) deep.  To quote:
  • “The carbonate limestone’s have a proven thickness, porosity and deliverability in PNG that qualify as a world-class reservoir…
  • The deep marine carbonates range from 900 feet (300 meters) to over 3,000 feet (900 meters) thickness…
  • The carbonate reefs have thicknesses from 3,000 feet (900 meters) to over 5,900 feet (1,800 meters)”]

So, InterOil’s December 2008 speaks about carbonate reefs. Are there reefs in Elk? No. So the December 2008 presentation is speaking about the whole Elk/Antelope resource. Antelope wasn’t yet drilled, but seismics indicated the reef in Antelope and also provided clues about resource pay.

Futhermore, it looks likely that InterOil’s December 2008 presentation is talking about resource thickness or gross payzones, which in the case of Elk are six times as large as the net payzones (net payzones are zones

3) Further, the Blodget article is doubly misleading as The geologist was clearly speaking about NET pazones (payzones above a threshold porosity), while the December 2008 presentation making the (according to Blodget) misleading claims speaks about payzones (which, in Elk’s case, are much bigger).

So Blodget’s article seems doubly misleading. Not only does it slam Elk/Antelope’s resource caracterization from InterOil’s December 2008 presentation) with just the much smaller payzone at Elk, it actually uses the net payzone at Elk, which is much smaller even than that.

4) The facts
Always good to know. From p.15 of InterOil’s presentation to Raymond James investor conference. You’ll see:

  • Elk1 Gross payzone 620ft, net payzone 88ft
  • Elk4 Gross payzone 600ft, net payzone 166ft
  • Ant1 Gross payzone 2600ft, net payzone 2277ft
  • Ant2 Gross payzone 1224ft, net payzone 1175ft

So:

  1. Elk gross pay is much higher than it’s net pay
  2. Antelope’s pay (gross or net) is manyfold that of Elk (and to appreciate just how big these are, go to OilSearch website)
  3. In essence, what Blodget’s anonymous source is doing is taking the smallest number (88ft) from the geologist and arguing that InterOil’s december 2008 claims of a much larger resource are misleading.

It’s clearly nonsense. Needless to say InterOil didn’t lie and Blodget should retract this smear of an article. He did provide an ‘update’, but that doesn’t goes way short:

  • * UPDATE: Several readers suggest that the company was referring to a different drill site–Antelope–than the geologist (Elk).  If that is true, the analysis that follows is wrong.  We checked the source presentation, and it is not clear which site the company is referring to.  The comments appear to apply to the Papua New Guinea sites GENERALLY, which is misleading.  But it’s possible that the comments accurately describe the Antelope site, while in the analysis below the geologist is referring to Elk.

No Mr. Blodget, InterOil’s December 2008 presentation is not misleading.

  1. It’s speaking about Elk/Antelope (as Elk doesn’t contain any reef)
  2. It’s not speaking about much smaller (in Elk’s case) net payzones (as the geologist does, which is then used to slam this December 2008 presentation as misleading).

And in an earlier article, Blodget excerpts from the same anonymous analyst, again claiming he cannot vouch for it’s accuracy. That’s good, because it clearly isn’t. For instance:

  • Far from being a “frontier” drilling site, InterOil’s sites in Papua New Guinea were explored and abandoned years ago by other energy companies.  These companies abandoned the site because they had concluded that, despite promising signs, there was not much there there.  The investigation’s author believes that InterOil may eventually conclude the same thing.
  • The type of rock and gas and oil resources at the InterOil sites have a peculiar characteristic that is a great help if one wants to make exciting announcements and pump up a stock price but of less help if one actually wants to produce energy.  Specifically, the sites produce enormous initial pressure of gas and/or oil.  Unfortunately, because of the type of rock, they do not actually prove to be promising development and production sites, because the initial pressure is not sustained.

This is, well, just plain nonsense. These sites have been abandoned because there was no market outlet and natural gas prices were low (from the Oil and Gas Investor Magazine):

  • lnterOil entered Papua New Guinea in 1999, when no other companies were drilling the Eastern Papuan Basin. Operators had found gas in the basin in the l950s and 1960s, but, without ready markets, drilling faded. Except for the lnterOil wells, only two wells had been drilled in the basin since 1970. During the same period, 39 wells were drilled in the rest of the country.
  • InterOil has tallied a series of firsts for the country: It was the first to run Falcon gravity and magnetic surveys

So, note:

  1. Only two wells were drilled in the relevant part of the country (OilSearch operates in the highlands).
  2. No previous license holder discovered Elk/Antelope (let alone drilled, tested, cored, appraised it and have it assessed by third party resource evaluators like GLJ). InterOil did because it used novel seismic methods (and/or sheer luck, who knows).

The claims about “the type of rock and gas and oil resources at InterOil” having the characteristics of “producing enormous initial pressure” but “the initial pressure is not sustained,”, as Blodget’s anonymous source has it, is not substantiated by any fact. The only “evidence” we’ve seen in favour of this rests on the Puri-1 well, a well drilled in 1957-58.

The Puri-1 well produced 1610bbl/d of oil for nine days after which it watered out. This happened because there was only a  small pocket of oil there, drilling it out draw the water into the resource rock, which showed up after a good week.

Now this is the only item the critics have to support their theory that the wells in Elk/Antelope won’t be able to sustain their flow long enough to make the resource economical. And it’s a pretty ridiculous item. All wells that share a certain geology should dry up at the same day? Even if they’re actually in different resources? Even if these resources are of hugely different sizes? Nobody can say Elk/Antelope is a small resource, apart from having payzones over 2000ft, wells have already proven it out miles apart.

Even wells in the same resource can behave in quite different ways, let alone wells in different resources.

These InterOil critics have absolutely no background in the oil and gas industry (Barry Minkow is an accountant, so is Sam Antar, William Lobdell is a former religion journalist) so they depend on panicking shareholders which don’t have that background either.

It’s not a surprise that in all those years, during all those company presentations, investor meetings, industry presentations (many transcripts are still available at interOil and shareholdersunite), and analyst reports no single question has ever been fielded about what these critics argue is InterOil’s biggest problem, wells depleting fast and InterOil therefore having to drill so many as to make the resource uneconomical.

We have already dealt with this issue on two separate occasions (for details see here and here), and the main conclusions are:

  1. Because of locational and infrastructural advantages, InterOil’s LNG facility is budgeted at $5-7M, half that of Exxon/OilSearch $15B venue, also on PNG.
  2. Since the Exxon/OilSearch project has already taken the final investment decision and has sold out it’s gas, we can assume it’s deemed profitable. So a project half it’s cost (and actually somewhat bigger in size) should also be profitable This gives InterOil a huge margin for drilling cost (to the tune of almost $10B).
  3. In fact, rather than having drilling disadvantages, all the evidence points at InterOil’s wells being cheaper and more productive, extending it’s advantage over the Exxon/OilSearch project.
  4. Compared to Australian coal-seam projects (wells do not flow at all, they have to be made to flow so thousands of wells have to be drilled, treated, and manned) InterOil’s resource is also likely to be far cheaper.

To show you bad intentions, even after the Blodget article where the InterOil geologist comments from Elk are (mis)used to argue that Interoil’s December 2008 resource characterization is misleading has been so comprehensively proven wrong (see the comments under the article) that even Blodget himself added a comment (see above), Sam Antar, pal and financier of Minkow regurgitates it as a fact as if nothing happened. How surprising..

Tags: Daily Distortions · IOC

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