How long will it take for them to update… InterOil Corp. (IOC/$55.90/Market Perform):
- In perhaps its shortest press release ever, InterOil announced that its Antelope-2 well flowed at 705 MMcf/d of gas and 11,200 bpd of condensate (a total of 129,000 Boe/d). This is nearly double the analogous flow rate of Antelope-1 in March, which was 382 MMcf/d and 5,000 bpd (a total of 69,000 Boe/d). Also of note, the condensate ratio increased from 13.1 Bbls/MMcf to 15.9 Bbls/MMcf. All of these datapoints came from the full production test conducted on Antelope-2’s upper zone. The company stated that the flow rate set a world record, and we have no disagreement with that assessment.
- Many of InterOil’s announcements in the past have been, shall we say, on the technical side. This is not one of them. The numbers in this case speak for themselves. To state the obvious: These results are extremely bullish, and they certainly bode well for the updated resource estimates that are likely to be released in February/March of next year. Recall, our current “de facto” proved NAV of $49.52/share is based on the low end of the year-end 2008 resource estimates. While it’s unclear precisely how much “credit” the third-party reserve engineers will give InterOil for these latest results in the year-end 2009 report, the y/y increase in the resource is likely to be very significant.
- InterOil’s next step is to drill through the base of the gas column into the more condensate-rich zone, including the potential oil leg. The extensive testing of the liquids zone is a critical aspect of understanding the value of the reservoir, particularly with regard to the proposed liquids-stripping project. In terms of timing, we believe it is possible for initial testing of this bottom section of the reservoir to be wrapped up by the end of the year, though it could spill over into 1Q10.
- With IOC shares set to gap up this morning – and understandably so – we readily acknowledge that our downgrade on September 21 (at a share price of $41.69) turned out to be premature. Given the obvious magnitude of the resource base at Elk/Antelope, it’s safe to say that the LNG project’s monetization and political risks have diminished vs. our prior expectations. In other words, any concerns about the project on the part of prospective LNG partners and any remaining skeptics within the PNG government are likely to be alleviated by these latest results.
- That said, we believe it remains essential for investors to recognize that execution risks have not disappeared. These include substantial operational and timing risks as the upstream assets and the LNG plant are developed over the next five-plus years. First LNG production is not expected until at least late 2014, and completion of such large-scale projects has historically tended to get pushed out. Though greatly impressed by the latest well results, we maintain our Market Perform rating.