Interoil owes Merrill Lynch $130M, which is due early May. We argued earlier that it is unlikely that Merrill will actually call in this loan, as they have a big stake in the LNG plans and were generous in extending this very same loan last year at a very generous 4% rate. We forgot to mention that Merrill actually took the better part of a private placement of convertible preferred shares (yielding 5%) as little ago as last November, further cementing their relation. Here is the whole story:

• InterOil Corporation Agrees To Additional USD15 Million Private Placement. November 22, 2007 InterOil Corporation announced that it has entered into a definitive agreement for the private placement of USD15 million of convertible preferred shares with Merrill Lynch Commodities Inc. The initial transaction involves the sale of 517,777 convertible preferred shares at a purchase price of USD28.97 per share, yielding net proceeds of USD14.25 million. The agreement provides that an additional USD15 million of convertible preferred shares may be sold to other institutional investors within 14 days of the initial sale. InterOil plans to use the net proceeds of this offering to conduct appraisal and development activities on the Elk / Antelope structures, including acceleration of these activities by contracting a second drilling rig, and for general corporate purposes.

Here is the SEC filing , it turns out that their other partner in the LNG facility, Clarion Finanz, took 323K of the common shares at $23.18 (from another private placement around the same time), a pretty good price at that time, so both partners are still on board (to say the least) as off late last year.

Merrill’s 517K preferred shares can be turned into common shares if the share price of those equals or has exceeded U.S.$36.94 per share for a period of at least 10 consecutive trading days on the Principal Market (AMEX).

We think that Merrill will at least wait for the upcoming results of the Elk4 well which is currently in its last stages. Not to do so would seem very illogical. After all, they extended the $130M loan and provided $15M more though that private placement to enable InterOil to properly assess it’s Elk property .

Merrill (and we all) knows little more now than when they extended the loan and participated in that private placement, so why not at least wait for the conclusions of Elk4? So, it turns out, once again, things really depend on the outcome of Elk4.

A success (which is pretty likely, in our view), will all but secure the progress of the LNG facility, of Liquid Niugini, of which both InterOil and Merrill hold a 1/3 stake. This will further cement their relation, and provides Merrill with every incentive not to break up with InterOil.

If Elk4 turns out to be a failure , things will get harder (but they will so anyway, as shorters will be all over this once again). It’s still likely they will wait turning the screws for the planned well after Elk4, which drills into Antelope, adjacent to Elk, as that structure looks as promising as Elk itself (which contains a hole that flowed 2.85Bcf through an open hole).

We repeat. We don’t think it’s likely that Elk4 will be a failure, it doesn’t need to discover any new gas, just prove the deliverability of the gas that has already been discovered . Elk4’s location has been carefully chosen with the help of millions spent on seismic studies after Elk1, the big discovery well.

And, in an often overlooked little fact, Marathon Oil started an LNG facility in Equatorial Guinea when they only had 1.5Tcf of reserves , and according to Mulacek in a presentation in Jan this year (see p27), banks and customers alike only require 10 years of supplies.

So, since current resource estimates vary between 3.5 and 18.8Tcf, Elk4 really must be a terrible disappointment for parties to pull the plug on the LNG facility. That seems quite unlikely. Demand for LNG is just exploding, especially in Asia . In Japan, LNG sells at double the price compared to the US.

Even if we will be at the low end of the resource estimate after Elk4, there seems to be enough gas to go ahead with the LNG facility, certainly Mulacek thinks so , and Liquid Niugini, the company that will manage it (IOC is 1/3 owner, with the rest split between Merrill Lynch and Clarion Finanz) alredy past the pre-FEED work, selecting Bechtel as the constructor.

Even in the worst of the worst cases, there are other gas sources that could supply the LNG facility, or even if Liquid Niugini loses the race to build one, IOC’s gas could conceivably be used in another LNG facility (Liquid Niugini is not the only one with LNG plans). What seems sure is that an LNG facility will be build in Papua New Guinea.

This is what Raymond James had to say about the latest Elk4 drilling update :

• "Since the last drilling update, the Elk-4 well has been drilled an additional 700 feet, through a shallow water marine transition zone. The well encountered the top of the limestone section and drilled 145 feet into the limestone formation. The well had encouraging gas shows during the process. The weelbore was unstable, and InterOil has squeezed cement into the well to stabilize the hole. The company will redrill that section immediately, set a liner into the limestone, and continue to drill deeper. We find the progress thus far highly encouraging and believe that gas observed at these levels bodes very well for the Antelope structures immediately south of this location, the top of which is 1,250 feet higher than the current limestone penetration. We remain optimistic that the company will continue to provide encouraging information from the well as it proceeds to the anticipated total depth of 8,000 feet."

Doesn’t strike us as a failure, but in drilling, nothing is a sure bet, so if you’re long, do a little hedging, as we’ve argued before .