Raymond James update on InterOil May 8

Well worth a read..

  • In its latest operational update, InterOil announced the results from a drill-stem test (DST) performed on the second sidetrack at Antelope-1. During the test, performed over a 170 foot (or 50 meter) interval in the lower portion of the reservoir, the company recovered surges of between 25 to 100 Bbls of condensate per MMcf of natural gas. The key point is that this represents a hefty increase from the 13 Bbls/MMcf ratio yielded during the company’s record flow test at Antelope-1 in March, as well as above the 18 Bbls/MMcf ratio experienced during the testing of Elk-4. While the existence of a commercial oil leg remains uncertain, the presence of richer hydrocarbons recovered over the tested interval lends further support to the potential development of a liquids stripping facility.
  • At this point, InterOil has decided to case the well in order to isolate the 1,968 feet (600 meters) of gas pay behind pipe ahead of further testing. While third-party analysis of the condensate and pressure data continues to progress, the company plans on moving forward with additional testing of the lower section of the reservoir. As before, we see it as absolutely crucial for the company to fully assess the lower section – however long it may take – before signing any partnership agreement, since the presence of condensate (and, even better, crude oil) would directly and materially influence deal valuation. After fully wrapping up testing at Antelope-1 – which we expect no earlier than the end of this month – InterOil plans to move the rig to the Antelope-2 location, with drilling there looking to stretch well into 3Q09 if not 4Q09. Longer term, the company’s goal is to acquire one or even two new rigs, enabling multiple wells to be drilled simultaneously.
  • While it’s too early to quantify the financial impact of the higher condensate ratio, it is intuitive that the higher ratio bodes well for asset value, particularly within the context of the ongoing strategic partnership discussions. We would point out that our risked NAV/share of $55.93 includes only modest credit for condensate based on the year-end 2008 reserve report – 33 MMBbls vs. 1.9 Tcf (both figures on a net basis) at the midpoint of the reserve range, which equates to a ratio of 17 Bbls/MMcf. This is near the low end of the 25-100 Bbls/MMcf implied by the latest DST.
  • Following the release of InterOil’s first-ever independent reserve report, here are the near-term (three-to-six month) catalysts that we foresee. Over the next several weeks, we expect to get additional testing data from Antelope-1, providing further clarity not only on the oil potential but also the high condensate levels, including the prospects of a liquids stripping facility. This will be followed by the drilling of Antelope-2. Of course, an asset monetization transaction remains on the agenda, though naturally, there is no firm timeline for it. That said, we think the process (ultimately involving multiple partners) should wrap up by year-end, with initial announcements made as early as this summer. 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.

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