Raymond James update on InterOil, June 19

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.

9 thoughts on “Raymond James update on InterOil, June 19”

  1. Anyone know how long to complete a well like this or more about this mentioned production test. How long for that?

  2. Too many unknowns. It could take anywhere from a couple weeks to a month. I expect the rig will move off within a week or two. Then you will have the usual….Tanks,flowlines, electric…etc. Then factor in weather, jungle…

  3. Why haven’t we had any 3rd party reports on the gas at Antelope? Prior to the last 6-8 weeks that’s where the excitement lay.

  4. Nick you have a third party report today. Page 22 presentation. Knowledge Reservoir says P-50 or proven and probable 6.7 T’s..IOC will not update till Mar 2010 as all other NG and OIl do once a year.

  5. Ken — How do you know that IOC will not update till Mar 2010 as all other NG and OIL do once a year? Announced at meeting?

    Will IOC make more details known about the Knowledge Reservoir estimate?

  6. Lexi. several reasons for 2010. Thats convention in the oil and NG biz. One and most important is cost!!Very expensive.Further cause lender loans of those amounts and they get reset once a year. The analyst heard that from IOC. The Knowledge Reservoir thingie is enough though.

  7. Rory,How would a view of the models results affect your or others desire to invest in IOC?Look at the big picture.How much NG do they have ?,we now know at least 6.7 T’s.Thats a lot of NG!!Thats worth $1 per mcf just on the NG still in the ground its worth $6.7 Billion and use the 55.66% ownership and you get $3 Billion net to IOC NG alone. Then focus on the monetization plans.They have timelines for their deals. How does viewing a model effect how many T’s or when that NG gets monetized??Add in oil/ng condensates and maybe oil production could be meaningful also.Exxon is spending $600 million on their facility and IOC has most of that in place already. IOC assets at the port are worth $1 Billion.Part of that the refinery will get lots of use during Exxons construction period..

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