Some things are worth waiting for..

Some observations and conclusions:

1) Antelope’s drilling speed so far compares very favourably to all it’s previous wells. This is a well known phenomenon in economics called ‘economics of learning’. Just repeating the same activity automatically improves it’s performance over time. We are pleasantly surprised.

2) We cannot stress enough, the limestone was exactly where it was supposed to be according to InterOil’s geological model, proving their geological model. This is so significant because this was a problem in a couple of previous wells (notably Elk2 and Elk4), and the main, in fact, the only argument the shorts had against InterOil. This has taken out the the one big remaining risk.

3) It is not surprising therefore, that the short count is way down. It used to be 11M not so long ago, we’re down to just over 3M. Much of that happened before Antelope hit the limestone, but they apparently felt that the writing was on the wall. And they are right, for a change..

4) Not only was the limestone were it was supposed to be, proving InterOil’s geological model and removing the one major remaining risk from the equation, gas appeared when drilling just meters into the limestone. It does contain gas. How much, we will see sooner rather than later, but the early signs are VERY promising.

5) One of those early signs, apart from already encountering 15MMcf/d gas flows so early in drilling the limestone (this will only increase as is testified by Elk1 and Elk4 results history), is the presence of very visible matrix porosity (which is significantly higher than fracture porosity. It will result in much higher resource estimates. This was another argument the sorts (in casu a couple of Ross Smith reports) thought they had on their side, but this was already proven wrong at Elk2 and Elk4, and now again. Ross Smith bites the dust twice, first with the geological model, and second with the supposed absence of matrix porosity.

6) Things could easily get better still if the reef (having the highest known porosity) is found which is predicted by the geological model. Since that model turns out to be correct, the chances of this have increased as well.

7) Having two record flowing wells in excess of 100MMcf/d (which is really phenomenal, considering the size of the pipes used in these wells), and now having a third discovery which proves the geological model and the extent of the Elk/Antelope structure, and proving (once again) the existence of matrix porosity adds up to enough gas to support a two train LNG facility. There is just no other way to interpret the (above) facts. The proven extent of the structure and proven matrix porosity make the Elk/Antelope structure a monster.

8) We know that the existence of a lot of gas in the ground, even if it is clearly enough of supporting a two train LNG facility, is no guarantee that such a facility will be build. However, we have put forward some arguments in favour of this, based on the economics of the Elk/Antelope structure, which you can read here. On most relevant dimensions (exploration and labour cost), it is just way cheaper than much, if not indeed all of the competition in the region.

9) The economics is compelling (and could become even much more compelling if there is indeed a reef). We know from normally reliable sources that negotiations with an Asian offtaker are more or less complete. Apparently, some disagreement remains over pricing. Even in Asia, were LNG is in short supply, have prices fallen a significant amount (in the order of 40%), but one has to keep in mind that negotiations are for long-term deliveries (decades) from 2014 onwards, present price fluctuations should have little, if any, influence. However, it seems the case that a negotiating partner is trying to exploit the present LNG price weakness in its favour. We do not expect this to be a major stumbling block, but we cannot guarantee this, negotiations have their own logic and dynamics. In any case, we know that the figures they are negotiating about are in the billions and will take care of financing of the LNG facility.

10) What’s more, there are more deals and events nearby (at least one of these rather imminent, so we understand) which should give the sorry stock price a boost:

• A deal with the PNG government for their stake in the LNG project (and sharing the cost, which will be something like a billion dollars)
• Two third party resource assessments are almost ready (they are likely to wait for more on Antelope1) for offical filing although the general public might have a view only when the year-end result are publicized
• A deal with a party interested in drilling the many unexplored (or underexplored) parts of InterOil’s gigantic (almost) 9 million acres, with many promising drilling sites. By using multiple rigs, such a deal will dramatically speed up the exploration, and could easily lead to more finds, although this is not guaranteed, of course.

In conclusion, why anyone would want to be short at this time is beyond us, and looking at the number of shares shorted, even the shorts themselves seem to distinctly gettng cold feet. There is virtually no downside, proving enough resources are there should be a formality and a matter of time, and together with the refinery and retail business this alone should warrant MUCH higher stockprices. Then we have the upside of those deals.

What the downside is supposed to be, we don’t see much, if any. Only a technical correction or another major lurch downward of global markets could spoil things a bit, but this can only be temporary. The world needs energy, especially clean energy, simple as that. Those that can deliver this at competitive rates are in the drivers seat, even in today’s global mess, as there are parties compelled to look beyond that and secure supplies far into the future, and they can afford to pay.