Opportunities in smallcaps header image 2

InterOil had quite a day, some final observations.

May 1st, 2008 · No Comments

Never a dull moment with this one. 1.5M shares traded, almost 20% up. Things could be worse. And they’re likely to get better, although we might still have one hick-up. 

1) Gas had to be flared. It’s not conclusive proof, but it’s a strong indication of significant gas pressures at Antelope. Proof would be to measure them with a DST test. But the room for doubt on this front has severely narrowed.

2) In a couple of days the Merrill Lynch loan is due. InterOil’s bargaining position will be enhanced, but Merrill might want a bigger slice of the pie. It wouldn’t be a disaster. Why?

3) That pie is likely to have gotten a whole lot bigger. If the DST test is positive (and there is every sign it will), than InterOil has not one, but two gas fields. Although they are connected, Antelope is another field. The resource estimates will increase quite a lot.

4) This will prove the viability of Elk and Antelope to underpin the proposed LNG facility of which InterOil and Merrill each have a 1/3 stake (Clarion Finanz holds the remainder). They do have a common interest.

5) One has to realize that when Wayne Andrews arrived at his $65 Net asset value for IOC, spot LNG prices were about 1/4 of where they are today in Asia. He also said at the time that the $65 was more like a floor, not a target, and certainly not a ceiling.

With (in all likelihood) a (much) bigger resource and gas prices quadrupling since, we begin to understand what he was on about…

And, there might very well be more catalyst propelling the share price in the coming months:

  • there could be oil (all oilfields have gas on top in PNG)
  • the liquids they found at Elk1 and again today could be sufficient to use in the refinery, providing instant cash-flow
  • Netherland Sewell, a world-class engineering firm, will perform an independent audit of the Elk (and now Antelope) property
  • An agreement with the PNG government about the LNG facility, giving Liquid Niugini (of which IOC holds a third) an almost unassailable lead over competing LNG projects.
  • An agreement with outside (Japanese, Korean) investors for a participation in the LNG facility.
  • The active negotiation with a strategic partner for the sale of a 10% interest in Elk, which has the potential to create an implied “industry” valuation several-fold higher than the market’s current valuation.
  • The possibility of farm-out opportunities to industry partners, which could further accelerate the exploration of the company’s extensive acreage position.
  • The need for the shorts to cover their 10M outstanding short shares if any of this happens..

It’s going to be an interesting couple of months..

But first, we have to get over the Merrill loan issue.

Tags: IOC