What do these financiers know?

Recently, InterOil was able not only to convert a debenture, but place a private investment at a couple of big investors (one very well known). The conditions surprised even the optimists, like ourselves:

• In a credit restrained environment, this exploration company was able to sell above the current market price.
• And this all happened even without any sweetners, like warrants.

The stock price, unsurprisingly, rallied quite strongly on the news. These investors have been given a peep into the future, and they liked what they saw. We can’t blame them, our most comprehensive write-up of what that future could entail is here.

Here, we will concentrate on one of these possibilities, the commercial recovery of oil. It really is quite simple. By now, we know that there is oil under the gas at Antelope. Less well known is that neither Elk1, nor Elk4, the previous two successful wells have been drilled to sufficient depth, although there were traces of oil at Elk4.

At present, investors seem to already have arrived at the conclusion that Antelope1 will not produce commercial quantities of oil. Although that conclusion is perhaps a little premature still (drilling and testing is still ongoing), it seems the most likely one so far.

However, oil is there, it just happens to be (at least so far) in rock that isn’t very permeable, that is, the oil doesn’t flow. Now, this offers several interesting future possibilities:

• Is it possible, by treatment (fracturing, horizontal drilling, acidifying, etc.), to get the rock flowing? It might seem a good place here to remind people that Elk3 was supposed to be horizontal drilling from Elk2, in search of oil.
• Since there is oil, what are the chances that they will find it at a spot with more generous rock?

That last point especially could be surprising. Talk of revisiting Elk4 has already surfaced, and other excellent opportunities are downdip Antelope wells. It might take time, but the financiers who bought the shares in the private placement have provided patient capital, and their act is likely to lead to a significantly speeded up exploration program, in the form of one or two more rigs.

Even if oil can’t be recovered from Antelope1 (as it now looks like), the odds are that it will be recoverable somewhere else, at locations where the permeable rock is deeper situated. Hence, there is, or at least should be something of an oil premium in the stock price, although we have a feeling that this isn’t fully factored in yet.