Oil at Antelope-1 Side-track; Results Tentative, but an Important Datapoint
Analyst(s): Pavel Molchanov

• InterOil has reported the recovery of oil (and oil emulsion) from the Antelope-1 side-track. Initial lab readings indicate that the oil has an API gravity of 44 degrees – that is to say, it is light oil, which of course is always preferable. The amount of oil recovered thus far was small, and following discussions with management, we would underscore that these results are still highly preliminary. That said, we look at the news as quite encouraging.
• The discovery of a commercial oil leg in the Elk/Antelope structure – if confirmed by subsequent testing – would enable far more rapid generation of cash flow relative to the field’s gas resource. Pending the construction of a pipeline longer term, the oil could be shipped by barge to the company’s own refinery.
• Recall, in the past InterOil had observed oil shows in some of its wells (for example, Black Bass). However, we believe that this is the first time there was sufficient pressure in the wellbore for actual oil recovery – hence the significance of today’s news. The oil came during a drill stem test (DST) from an interval of 7,809 feet to the current total depth (TD) at 7,930 feet. Work on the side-track continues. The next step is for the company to more fully analyze the height of the apparent oil column in order to assess the level of commerciality.
• An important point to underscore is that our risked NAV/share of $55.93 (detailed in our March 30 comment) – nearly twice the current share price – gives credit only for natural gas and condensate resource based on the year-end 2008 independent reserve report. The NAV does not give any credit for prospective oil resource, so any such resource represents pure option value – the proverbial “icing on the cake”. Based on the limited data thus far, it is too early to determine whether oil quantities are commercial, so we are not changing our NAV assumptions at this time.
• Following the release of InterOil’s first-ever independent reserve report, here are the near-term (3- to 6-month) catalysts that we foresee. Over the next several weeks, we expect to get additional data from the Antelope-1 side-track, providing further clarity not only on the oil potential but also the high condensate levels encountered in the Elk and Antelope fault blocks, including the prospects of a liquids stripping facility.
• After the side-track is wrapped up, the rig is set to move to drill Antelope-2 nearby, with drilling there likely to extend well into the summer if not early fall. Finally, an asset monetization transaction remains on the agenda, though of course, there is no firm timeline for it. Following a multi-phased transaction, we believe InterOil would have sufficient capital to fund further exploratory and development drilling operations for the next several years. We reiterate our Strong Buy rating.