Those stripping economics…

IOC: Operational Update Highlights Liquids Stripping Economics
Analyst(s): Pavel Molchanov

• After wrapping up drilling at Antelope-1 last month, InterOil provided a comprehensive technical review of its results from the well this morning. The forward plan at Antelope-1 is to conduct a long-term production test, lasting upwards of six months, in order to obtain additional data from the reservoir. In the meantime, the company is in the process of moving its rig to the Antelope-2 location, with a targeted spud date still near the end of this month. Of note, an updated resource estimate for the overall structure is expected to follow the completion of Antelope-2. Alongside the incremental data gathered through its upcoming drilling, InterOil is set to acquire additional seismic in order to further delineate the Elk/Antelope structure.
• With much of the drilling discussion essentially summarizing previously disclosed information, the incremental highlight of the presentation came via the positive findings from the initial condensate stripping project feasibility study. The study was conducted by EDG Consulting Engineers, an international engineering consulting firm. Digging into the numbers, the study found the optimal production rate at 400 MMcf/d for the proposed stripping facility, which would generate an estimated condensate yield of 22.4 Bbls per MMcf of gas. Under this design, and a $90/Bbl condensate price, the project would generate a net present value (discounted at 10%) of over $700 million and a payout of two years from start of production. We would point out that the economics are still attractive under even a $50/Bbl oil price scenario, generating an NPV of roughly $200 million. Moreover, it would appear that InterOil could still make the project economics appealing with much lower condensate recovery levels (obviously depending on oil prices). While a firm decision has yet to be made in terms of moving ahead with the project, if the project gets sanctioned around year-end 2009, the company’s timeline points to 2H 2011 start-up of production – three to four years before the LNG plant is expected to come online.
• With regard to the LNG partnership talks, the company laid out the planned pro forma ownership structure but remains tight-lipped (and understandably so) about the details of the bidding process, including the anticipated timeline. To recap, InterOil is looking to farm out a total interest of 35% in the project. The proposed structure would be made up of four strategic partners (each with a 2.5% interest) plus a single industry partner (with 25%) that would most likely bring LNG industry expertise to the table.
• While this update didn’t have quite the “bang” that some investors may have hoped for in terms of new information about the LNG partnership, we would underscore that it is unrealistic to expect the company to disclose details of sensitive negotiations in the middle of the process. Furthermore, we are encouraged by the economics surrounding the initial condensate stripping project feasibility study. The company continues to progress along its asset monetization timeline, and we anticipate announcements by year-end. Following a multi-phased transaction, we believe InterOil would have sufficient capital to fund further exploration and development drilling for the next several years. We reiterate our Strong Buy rating.