Some thoughts on InterOil’s progress

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

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.

4) Oil?

  • 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.

6) Profits?

  • 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).

7) Conclusions

  1. 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)
  2. The jury is still out on the oil and the liquids
  3. 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
  4. 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

14 thoughts on “Some thoughts on InterOil’s progress”

  2. As Jim stated this is a very well laid out summary of IOC as of Feb 23/09.

    Unfortunately from a stock price perspective and the current markets I don’t see much of a change over the next 6-8 weeks. The DST tests and flaring of the well, with a potential PNG government signing of the LNG facility should take the stock up in the short term.

    Problem then becomes no juicy news for 4-6 weeks until IOC reports their year end and reserve #’s. This likely means that the market will slowly bring the stock price down again.

    Same thing happens after the reserve reports come out, we should see a nice price increase, but then there isn’t any major news until Antelope 2 hits. Once again a couple of months for this nasty market to offset the share price increase.

    The only X-factor in all this is if some off take agreements are signed. I hope I am wrong, but I am feeling strongly that we won’t see a strong run in share value until June.

    In any event, once again I would like to thank you for your efforts STP!!

    p.s. Phil, if you are reading this, please please please buy another rig and get simultaneous drill site exploration.

  4. Jim, first off this is all my personal opinion and assumptions, so don’t treat my thoughts as expert.

    There are two reasons why I feel we won’t see an agressive share price rise until June: The absolutely brutal world economy and the still high short interest in this company .

    There are three significant events in the next 6-8 weeks that should have positive effect on the share price: The DST tests, the immenient signing with the PNG government and then the reporting of the reserves on the books.

    Unfortunately in a market like this, this news can only sustain the price for so long and when the shorts start chipping away, it is my belief the price will inevitably lose 50% of its gains from the news. Historically, this happened after ElK 4 and again after Antelope 1.

    I am hoping by June that the market will be starting its recovery phase, the shorts will give up with reserves on the books and a LNG agreement and then Antelope 2 hits the outer edge of the structure along with a couple off take agreements .

    With that all being said I still think the share price should be close to 30 by June, but when my expectation is 300 this is a relatively small gain. I am hoping that end of June the climb to 300 gets much more agressive.

    Sorry for being so long winded.

  5. Darcy,

    I hope you don’t mind me asking but where has the figure of 300 come from? I remember reading that if the reserves were in the region of 8-10 tcf then the share price ought to be 270 but always thought this was a pipe dream.

    I can’t help but wonder where it might end, unfortunately i’m not at all qualified to speculate.

  6. Thanks Darcy. you speak well. With the three events you spell out and an off take agreement or two I think Mar/April we are in the 30’s again…Maybe higher. The Mer sale of part of the LNG plant helps cause we can extrapolate out the LNG plant value from those sale dollars. Further a sale of a portion of Elk say 2.5% for a nice sum defined as $3-400 mill would help the most. Thats cash takes away most IOC negative arguements.I think that last part is June/July I would imagine..Your $300 target seems agreesive but delighful if reached. I see $60 as a real achievable price target when we sell part of Elk for a nice sum…If the offtakes have cash associated with them then we move higher quicker.Offtakes with $100 mill or more is what IOC needs..Might be a dream there.

  7. Good thoughts Jim, appreciate the banter, it makes me think!

    Anyways, I would like to clarify that I don’t see 300 by end of this year but hopefully in the next 30 months. Of course my bullish nature on this stock is most likely skewing my targets.

    In any event, from STP’s post: http://shareholdersunite.com/2008/09/27/interoil-valuation-update-things-can-only-get-better/ the professor arrives at a value of $320 with 12 T’s and 1.7 Mcf. The circulating rumors from the company are 11T’s with reserve reports around 4-6 Ts. This is all without Antelope 2 and Mule Deer.

    Assuming the company seismics are now accurate, and they should be very close with them after nailing Antelope 1, then there is a high likely hood that Antelope 2 and Mule Deer also produces natural gas. This should easily get us above 12 Ts. Also at the end of this year all 3 Ps of gas can be put on the books.

    Also, this estimate doesn’t include condensates and the chance they finally find oil in the Antelope structure *whispers a small prayer*.

    And finally, Phil is no idiot, so the rumors of 1.5 per mcf is a ridiculously cheap price. I expect there will be something in the contracts that bump this value up when the price of oil recovers.

    So, you take at least 12 Ts by the end of Antelope 2 and Mule Deer *I am hoping 15*, condensates income and potentially oil and I don’t see any reason why 300 isn’t attainable in 30 months.

    Just my 2 cents. Thanx STP for letting us use your blog as our own personally forum!!

  8. Darcy, much better that you explained all this.Hmm. Today Press release was great. condensate revenue in 2010 and LNG in 48-60 months from 2010. All sounds super. Deals to come. I agree with most of what you say.It agrees with my secret sources…We need cash flow to get to those lofty levels. That would require not just condensates revenue but stripping plant revenue…I can’t see much above $100 in the next year and that requires Antelope 2 to hit and the sale of part of Elk for a tidy sum…The stripping plant has numbers like $200 mill a year in EBITA associated with it..Heck lets just get to $30 right now huh..

  9. We all no how to get there: sign a major on with a plan to fast track more drilling. Knowing the endless supply of money and prospects and the size of the field we’d be at $50 before Antelope-2 is finished. Without that it’s show me the money!!!!!!!!!!

  10. Rory I agree with you. IOC needs reserves, then deals for Big bucks. A farm out agreement works,off take works, sale of MER position works,strategic signing works.So many things they could do to pump up the ptice. The Reuters story was a good start to disclosure.. I think the Japanese will feel pressured to do something with IOC now, feeling the presure if they do not IOC will sign with a European..

  11. From what I am being told is basically the following.. ( again timing issues ) 1) By the time we get done drilling Antelope 2 and the Mule/deer structures we will have enough LNG for 4 trains. 2) Enough condensate from the stripping plant to earn 1 billion in revenue. 3) To get big players involved we will see a 3 or 5 to 1 split. 4) Big players know they are playing a dangerous game waiting for verification or farm-out agreement. Hoping to time it right “vs” the above, afraid of market etc… 5) 14 bigs trying to get involved with IOC. Our time. Good Luck to all.

  12. It’s too big and (especially) too good a resource to be ignored for much longer, even in a terrible market like this.

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