A few comments from us
1) There is gas enough
- That much seems clear, after Antelope1 discovered a very large vertical pay zone, with excellent porosity and permeability. Even old nemesis Ross Smith had to agree, and make a rather embarrassing about face
- Note that what will come out of the reserve requirements might be different from IOC’s own estimates. The latter will probably include a little more of what they think they will be able to find next, based on seismics and core samples, while the former will be skewed towards what can be proved now.
- 3Tcf seems to be the minimum present (IOC’s estimate is 3-11Tcf), value 3Tcf at $1.50 per Mcf and one ends up close to triple digits
- Raymond James used 3T at 75 cent to end up with a NAV of $60 per share, but the risking factor would be taken out by an independent reserve report (if it has not been taken out already by Antelope1), hence our $1.50 per Mcf price, which is also in tune with comparable deals in the region.
2) The deliverability of the gas is excellent
- Earlier wells already established this through record low flow rates, but Antelope1 seems of another magnitude altogether (although that might not completely be reflected in the upcoming flow test, as the flowrates are so high that this becomes quite risky)
- Antelope1 does have 10 times the vertical pay zone compared to Elk4, porosity is way higher, and they’re going to do the test with a 7 inch tube, instead of the 4 inch at Elk4.
3) The quality of the gas is excellent
- Very low on CO2 and H2S contaminates. Elk4 gas had no H2S and 3-6% CO2, the latter does not need to be stripped out after dehydrating the gas, it can be done at the LNG facility
- The cleaner the gas, the less expensive treatment it needs
- Compare this with, for instance, Australian coal seam gas, and the differences are quite significant. The Japanese do not even want to use Australian coal seam gas because of the low heat content
4) InterOil’s gas resource is very competitive
- This is simple: enough gas plus excellent quality and deliverability equals competitiveness
- Only few wells need to be drilled to supply enough gas to an LNG facility, making it much cheaper than the thousands of wells required in Australian coal seam gas projects (and these wells have to be treated as well, making them even more expensive and risky to the environment)
- Adding the much higher labour and regulation cost in Australia, we don’t see how these projects will be able to compete, yet they derived large sums of investment dollars, which is only one reason we’re not worried about the LNG project’s chances. It is just way too compelling
- Compare it, for instance, to OilSearch. Its wells are much less favourably located (in the highlands), much further from the prospective LNG facility, and all its wells together do not deliver the gas of just two InterOil wells (Elk1&4, leaving aside the probably much bigger Antelope1). Yet they have a partner in Exxon. Another reason to be optimistic for the LNG project.
- Another piece of good news is that there probably is oil in Elk/Antelope. CISRO, an independent Australian engineering bureau, apparently argued that there is evidence the gas comes from an oil system.
- Oil can migrate quite a bit, so the problem is finding it.
- It also complicates the liquids stripping plant idea, if oil is found, that idea becomes less attractive, basically because it will be superseded by an even more attractive proposition: oil, combined with a refinery functioning with a large amount of excess capacity..
5) Liquids stripping?
- Decision apparently deferred to after Antelope2, in search for oil
- However, we still do not know whether there are actually enough liquids. The 18bb/Mcf found in Elk4 seems on the edge, and there is, as of yet, no data available on liquids content of Antelope1 (but this should be remedied shortly)
- The liquids stripping can be done in the field, through decompression. The problem is what to do with the gas. Flaring doesn’t seem an option (too wasteful), putting the gas back into the wells needs rather expensive compression equipment. However, the latter can also be used to pipe the gas through the pipeline, once it’s there, so it’s at least partly a necessary investment, we understand.
- InterOil just made preliminary Q4 figures public, and these weren’t pretty due to a $52 million write down on inventories, hardly a surprise due to the crashing energy prices
- However, these are non-cash items and they were compensated (at least half) by hedging profits (in Januari these will be followed by more hedging profits).
- There is almost certainly enough gas, and due to the quality of the resource and the low cost and rather open environment, there are bound to be interested parties, even in the present barren climate (but it’s investment for 2014 onwards, so this has less of a bearing than many people seem to think)
- The jury is still out on the oil and the liquids
- Our biggest worry: Mulacek not cutting an offtake deal because he doesn’t like the terms, as negotiating partners might think they have increased leverage because of the economic climate. It’s hard to judge on this, because we are not privvy to every detail of negotiations. There are other deals he can do though (farm-out, selling a stake in Elk/Antelope), and money has come in from the government participation, so there is no immediate cash problem, but the stock would gain enormous credibility if an offtake agreement was concluded that would take care of much of the LNG facility financing
- Such a deal will be much more likely after the reserve evaluation of two independent engineering bureaus though, which will be done within two months after Antelope1 is concluded (shortly), we understand