Raymond James update on InterOil 6/08

It’s already on the boards, but for the sake of completeness we post it here as well.

  • In its latest drilling update, InterOil reported a massive preliminary flow rate of 63 MMcf/d following the completion of its Elk-4 well. This exceptional flow rate, producing from a relatively small (4½ inch) borehole, represents merely the first gas flows from the well since the company installed production tubing.
  • Furthermore, the company has yet to acid-stimulate the well, which should further enhance the productivity of this already world-class discovery, with the next step being the installation of additional testing equipment to increase the overall flow capacity.
  • Translation: we believe that Elk-4 is capable of generating even higher flow rates. Lest there be any confusion, we are thoroughly impressed with this initial flow rate and believe the company has confirmed a world-class hydrocarbon discovery.
  • Another key data point coming from this update is the strong condensate flow rate of 1,130 barrels per day. We remain highly encouraged by the natural gas/liquids composition, with the condensate level reaching an estimated 18 Bbls/MMcf for the entire section.
  • In fact, we believe that this high liquid content points to the prospects of developing a liquids-stripping plant, which would accelerate near-term cash flow and further enhance the value of the overall project.
  • The company also disclosed significant surface flowing pressure of 2,243 psi and down hole reservoir pressure of ~3,700 psi, alongside high-quality condensate characteristics with 48 degrees API gravity.
  • This impressive initial flow rate at Elk-4, which we believe has room to move higher following additional production testing, should pave the way for a number of upcoming catalysts for InterOil.
  • First, and not necessarily in this particular order, we believe that this down-dip test of the reservoir should provide the engineers with enough data to refine (and increase) the resource estimate for the Elk/Antelope structure, which should most likely support a full two train LNG development.
  • Second, this production test should enable the PNG government to move ahead with the project agreement.
  • Lastly, 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.
  • This transaction has the potential to create an implied “industry” valuation several-fold higher than the market’s current valuation of InterOil shares.
  • In conclusion, as supported by this recent production test, we believe that InterOil has discovered several billion dollars worth of hydrocarbons, while the enterprise value of the company remains under $1 billion. We reiterate our Strong Buy rating.

We have little to add to this.

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