These are very exciting times. It’s a near certainty that they have a second significant natural gas find, and with the booming times for energy in general, and liquid natural gas (LNG) in Asia in particular (we wrote extensively about that yesterday), that could hardly come at a better time. The next week or so is going to be a wild ride. Fasten your seat-belts.

However, keep in mind that the gas find has not been 100% confirmed, but the long wait will be over pretty soon. In fact, it could be any day now. Then, there is the unsettled issue of the outstanding Merrill Lynch loan ($70M). We argued earlier that Merrill should take the lead from the other holder of the same loan, Clarion Finanz, who converted it into equity.

That swap, and its conversion price, $22.65 which seemed generous at the time, propelled the stock higher, and it has held up very well in very heavy volume again today in an otherwise dreadful market. Very promising, and we are sure the parties that hold large short positions from before the first gas discovery are now feeling distinctly uncomfortable. Soon they could be twisting and turning in the wind.

Settling the Merrill loan will probably involve a considerable amount of dilution. There are two comments to make here:

• If that happens, it’s an issue of millions, while Antelope might very well run into the billions. Exploration type companies need to go to the capital markets from time to time, it’s a matter of fact.
• Analyst Wayne Andrews from Raymond James suggested that that Merrill would have converted in a similar manner if they would have wanted to.

This suggest that they might want a better deal, although the funny thing is, because of the rising stock price, it’s actually more likely that they will have to settle for a worse deal. Wayne Andrews suggested another, very interesting possibility however.

InterOil might be in negotiation with a third party (or parties). Now that Elk4 looks like a success, and they might very well have not one, but two big natural gas fields, we would hardly be surprised if there are a number of interesting parties willing to pay significant premia.

The problem is the time scale, they only had an extension of the loan for a week, and by next Monday, this issue has to be settled one way or another (although it’s not totally inconceivable that there will be another extension).

What does it all amount to? Well, we have two issues, the Merrill loan and a DST test proving the provisional finds at Elk4. On the latter, we’re fairly sure these will be good and they could in fact be excellent. Elk4 might have similar, or even bigger gas pressures than Elk1.

And it’s not totally out of the question they will find oil if they drill deep enough (which they might not, because they might want to hurry up with the DST test to have a better negotiation position versus whoever they’re negotiating with).

The Merrill loan could have an outcome the market wouldn’t like (a substantial dilution of the outstanding shares), but it could, as Wayne Andrews suggested, also have a very good outcome if a third party steps in.

Keep your eyes on the ball though. The Elk4 DST test is an order of magnitude more important. Significant gas pressure seems all but assured, and this will significantly increase the Elk/Antelope resource estimate. Compared to this, that $70M loan is small fry. The market seems to arrive at that conclusion also.

Then there is the issue of timing, which comes first? Impossible to say. If bad Merrill loan news comes first, it might very well be the last chance to load up, so would that really be that bad?