Funny stuff, this..
- Base their NAV ($48) on a pre Antelope1 proven (P1) resource figure from GLJ, while
- Antelop1 has more than 10x the vertical payzone, with much higher porosity than the previous (Elk) wells
- Now Antelope2 has already proved the extention of the reef (super high porosity)
- They acknowledge the possibility of producing oil from this well (if not, it’s a matter of time before a spot will be found from which to produce the oil, in our opinion)
- They do not even acknowledge the possibility of liquids stripping.
In short, Raymond James analysts have become very backwards looking, as we have argued when commenting their last report a couple of weeks before. Anyway, here is the report:
♦ In its latest drilling update on the Antelope-2 appraisal well, InterOil announced the completion of its first drill stem test (DST) in the upper section of the reservoir. The well tested at a rate of 14.1 MMcf/d, but as is commonly the case when conducting a DST, we would shy away from extrapolating any definitive onclusions from this rate given the significant choke on the well. The test also yielded condensate levels of 16.5 Bbls/MMcf, broadly consistent with flow tests at Elk-4 (18 Bbls/MMcf) and Antelope-1 (13 Bbls/MMcf) and essentially in-line with what we are running through our NAV analysis (based on yearend 2008 proved reserves). Prior to the DST, the company obtained core samples of a 118-foot portion of the reservoir, which indicated “very good” porosity levels.
♦ The primary takeaway from the DST and core sample is that Antelope-2 has, in fact, encountered the same reefal structure present in Antelope-1 and at a level 345 feet higher than initially expected. This is certainly an incremental positive, as it de-risks the potential of the well coming up “dry”. We would attribute the stock’s gains today to this de-risking, along with the language regarding the porosity levels.
♦ Looking ahead, the company plans to take the well down to the base of the gas reservoir, potentially performing additional DSTs along the way, at which point it will then conduct a full flow test (anticipated in late October/early November). This flow test should give better indications into the overall deliverability of the reservoir. InterOil then plans on casing the well before drilling ahead to test the potential oil leg. We believe it is realistic for these steps to be wrapped up by the end of the year.
♦ As InterOil moves into its next growth phase, balancing exploration with commercialization efforts, there will undoubtedly be more milestones to come – as evidenced by this latest drilling report from Antelope-2. In fact, we readily acknowledge that the confirmation of a commercial oil leg could lead to meaningful upstream earnings in the relatively near term versus the extensive timeline set forth for the proposed LNG facility – with first production not expected until at least late 2014. That said, the pending execution risks inherent in the company’s monetization efforts of its significant gas resource base, combined with the hefty recent gains in the stock – now sitting above our NAV estimate of $48.58 – keep us on the sidelines for the time being. We maintain our Market Perform rating.