The latest from RJ…
IOC: Antelope-2 DST Update Trips Up Shares
- InterOil announced the results of its second drill stem test (DST) on Antelope-2, and while we believe the data itself was neutral-to-positive, some investors went running for the hills–shares were down more than 10% intra-day at one point. This latest drilling update comes just over a month after the initial record-setting flow test at Antelope-2.
- We believe it’s likely that the relatively lengthy lead time between these updates played a role in driving up investor expectations (e.g. regarding the potential oil leg) and, as such, the relatively narrow range of data points provided today could be driving the negative reaction.
- Another area of potential investor letdown could be the reported stabilized flow rate of 11 MMcf/d – far below the world record rate of 705 MMcf/d reported in early December. In actuality, that sort of reaction would amount to a clear misunderstanding, as the choke placed on the well makes the two figures incomparable. Lastly, the reference to an “impassable ledge” may have led some investors to translate this into an operational setback. However, this issue merely limited the company’s ability to fully case a 338-foot open hole section in which the DST was performed and should have no real operational consequences going forward.
- After sifting through those perceived negative issues, we believe that this drilling update was in fact a (marginally) net positive. Specifically, the company reported a condensate/gas ratio of 20.7 Bbls per MMcf, an uptick from the 15.9 Bbls/MMcf figure disclosed from its initial DST conducted at the top of the reservoir in Antelope-2 and also up from the 13.1 Bbls/MMcf at Antelope-1.
- While positive in that it further underpins the company’s liquid stripping plans (and in fact would suggest potentially better project economics), this data point was not particularly overwhelming given that it has been well-established to this point that the condensate/gas ratio should increase toward the bottom of the reservoir. Recall, increasing the ratio by just 5 Bbls/MMcf from the levels utilized in the feasibility study conducted last year (which also assumes an $90/Bbl oil price) would increase the project net present value to as high as $1 billion, showing the strong leverage the project has to the level of the condensate yield.
- The company plans to conduct one more DST in the lower zone, before drilling deeper into the potential oil leg. The current game plan also includes a horizontal lateral within the oil leg. While no specific timeline was given for the additional testing, we think that it is likely to take several months (into the spring).
- After hitting on essentially all cylinders over the past few months, the fairly neutral drilling update in the face of apparently inflated market expectations has led to profit-taking in the shares today. We would reiterate that while operations remain on track, the execution risks associated with the story 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. While recognizing the longer-term valuation upside, we maintain our Market Perform rating.