Some thoughts about InterOil’s DST news

Thinking out loud..

1) De-risking.
That term was used in today’s two research updates from Morgan Stanley and Raymond James. Why?

  • The resource is now proven to extent 2.25 miles to the south
  • It’s a good 300 feet higher as well, which could mean, as CEO Mulacek argued, an even bigger resource as more of it turns out to be above water (it dips to the south, as well as the east and the west, so if it is higher than expected at some place it could mean more of it is above the water contact)
  • It very much looks like the reef, with very high porosity, has been confirmed
  • Interesting as well is the liquids number from the very top of the resource. Not the place you’d find the highest numbers (liquids increase with depth), so that bodes well for the prospective liquids stripping plant as well.

This boils down to a near certain 10Tcf (P2) type of resource, with very substantial benefits (extended reef therefore excellent deliverability, liquids production no seems very likely for early cash-flow, even more beneficial as InterOil operates a refinery).

In short, this resource is too large and too good to be ignored by the Oil & Gas majors and other interested parties (like Asian utilities). It’s a much higher quality resource than almost any other under development in the region. InterOil will be able to do deals. We think this really put a floor under the stock price, the ‘binary outcome’ that Morgan Stanley talked about a month ago now seems like a very remote possibility indeed.

2) Upside.
An already excellent situation can basically only get better:

  • The next milestone is when we get the size of the vertical pay-zone. If it is anywhere near the 2000+ feet of net payzone of Antelope1, it means jackpot. Remember that the payzone of the Elk wells (pretty good wells already) were only a fraction (less than 1/10!) of the vertical size of Antelope1
  • Next will be the open flow test. Anything above 100Mmcf/d will be very good. Anything approaching Antelope1 384Mmcf/d will be excellent. It also depends a little on the equipment they’re using.
  • Next, the liquids and/or deliverable oil. Horizontal drilling equipment has arrived to drill out south if the more porous rock is still to high to produce the oil. Even if not from this well, the odds seem high that they will, in the end, find the right spot to produce the oil.
  • Liquids stripping seems very likely, and this could be a deal that will be announced relatively soon after the completion of drilling and testing Antelope2
  • Of course, there remain a number of other possible deals. It seems inevitable that the resource is worth a lot more after today, so oil majors will be keen to participate, and Asian utilities will be keen for offtake agreements.
  • The resource also seems too good for the PNG government to keep stalling the LNG project agreement, but that might depend more on progress in the other (Exxon/OilSearch led) projedt. Anyway, that is just a matter of time.
  • We don’t have to remind you that soon a second rig will be operating, and there is more to drill in Elk/Antelope, as well as a host of other promising structures on InterOil’s license area.
  • With the alltime high having been comprehensively taken out, bar the occasional cooling off, there are no technical reasons for the stock price to stall. There are already rumors of two other major brokers coming out with reports. And there is no lack of prospective catalyst.. (oilprices and short covering could also very well be supportive of the stock price)

It should be a fun couple of months..

6 thoughts on “Some thoughts about InterOil’s DST news”

  1. Ahhh professor, these posts are like my security blanket, they make me feel very smug and secure with my IOC investment.

    In my mind the biggest pps catalyst before end of year is signing one or more of the off take agreements. If we can get anything close to the Nippon 3.6% 800 million agreement from last year, we are looking close to an implied market cap 10 times our current pps.

    Now just imagine commercial oil in the 250 million barrel range or a NG price of $16/mcf. It is almost difficult to wrap your mind around how big this thing could end up being. Whew!

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