The devil is in the details, that’s why we have highlighted it…

• InterOil Corp. (IOC/$31.78/Strong Buy): Additional Oil Recovered at Antelope-1, Production Testing to Follow. In its latest drilling update at the second side-track of Antelope-1, InterOil announced the recovery of additional oil volumes over a 105 foot (32 meter) open hole section. The company was unable to perform a drill stem test (DST) in a lower section due to a failure in the downhole valve, and is now planning on completing the well in order to conduct a long-term production test.
• While the increased potential oil leg (now at 276 feet) is another incremental positive, we believe that the true “stock moving event” will come from the production test – which will better determine the commerciality of its find.
• Having reached a total depth of 8,170 feet (2,490 meters), the next step for InterOil is to conduct a full-blown production test on Antelope-1. The objective of this long-term production test is two-fold: confirm the gas-to-condensate ratio and provide a better assessment of the potential oil leg. Of note, extensive production testing should take several months. In the meantime, the company is planning on moving the rig to the Antelope-2 drilling location, with a targeted spud date near the end of July. Alongside testing for additional oil and condensate at this prospect, the company’s primary objective at Antelope-2 is to delineate the southern extension of the reef.
• In other news, InterOil disclosed the results from an additional third-party reserve engineering firm (Houston-based Knowledge Reservoir) during its annual meeting today – with the estimated “mid-case” (P50) gross resource potential coming in at 6.7 Tcfe. Recall, the company’s first-ever independent reserve report, completed by GLJ Petroleum Consultants as of year-end 2008, placed a mid-case gross resource estimate for the Elk/Antelope field at 2.9 Tcfe and a high case of 5.3 Tcfe. While we will continue to use GLJ’s figures in our NAV, the new numbers from Knowledge Reservoir provide yet another source of potential upside to our current risked NAV estimate of $53.82 per share.
• Net net, the increased estimate of the potential oil leg from this latest drilling update helps offset the fact that limited porosity continues to restrain the oil flow rate at this location. We believe that more meaningful flow rate data will be gleaned from the upcoming production testing. The “big picture”, as before, is that 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. Given the time it will take to run the production test, move the rig and start drilling Antelope-2, we would stress that newsflow over the next two to three months is likely to be slim – barring any LNG partnership announcements, of course. We reiterate our Strong Buy rating.