InterOil's Giant Gas Blowout

Another natural gas post. Read this... it's a whopper...

InterOil (IOC) is a Canadian integrated (exploration assets, refinery, near distribution monopoly) located in Papua New Guinea [PNG]. After having struck two earlier profusely flowing natural gas and liquids wells (flowing at 102 and 105MMcf/d respectively), they hit an absolute killer with Antelope1, which
flowed at a whopping 382MMcf/d.

According to Seeking Alpha,

• 382MMcf/d with the pipe only 30% open for safety reasons, and the log indicated that the permeability at the top did not allow the lower section of the reservoir to contribute to the flow test. That is, all the gas just came from the top 12% of the reservoir.

• 5000bb/d in condensates.

• 792 meters (2300ft) of net pay zone, which is more than three times the size of the biggest American well (650ft), and the gas / water contact has not even been determined yet.

• The largest calculated absolute open flow [CAOF] at 17.7 Billion cubic feet of natural gas per day.

• 8.4% average porosity.

• From the seismics, the Antelope field is 14 x 7 kilometres.

That's BIG. She continues...

Just three wells flow 600MMcf/d, more than enough to supply the daily needs of an LNG facility. This is roughly equivalent to the daily productivity of Southwestern Energy (SWN), enterprise value of 10.5 billion. It is larger than the daily production of Ultra Petroleum (UPL), enterprise value of roughly $6 billion. The record-breaking well by itself has larger daily production than the entire corporation of Range Resources, enterprise value $7.3 billion.

And all that with just three wells, with seismics indicating plenty of potential left for more. This leads to another important point, how InterOil’s location and quality of its resource provides it with a large cost advantage over most competitors for the most lucrative LNG market in the world, Asia Pacific.

Reserve Reports

These might not provide much ‘wow’ factor either, as these reports tend to concentrate on what can be proven now, not on how much more there might very well be (according to seismics), so they have a conservative bias and are
unlikely to come close to the numbers going around on the boards (6-12Tcf) or InterOil (11Tcf).

Valuation

Raymond James in a recent research report used two valuation methods, a net asset valuation [NAV], and comparing it with similar deals.

For the NAV exercise, they used the following assumptions: 6.9Tcf of gas , 60% working interest, 50% risk factor, $0.75/Mcf multiple, very conservative in the light of “Asia’s premium priced (typically $10+/Mcf) LNG market and valuations in the depressed U.S. gas market (typically $1.50 to $2/Mcf) and 69MMBbls of condensates at $10 per barrel and risked the same way.

They arrive at a NAV of $55.52 per share, roughly 2.5 times current prices, with substantial upside to both the amount of gas, its valuation, and reducing the risk factor (with independent reserve reports).

Perhaps even more interesting was Raymond James comparing a possible InterOil deal with Nippon Oil buying AGL’s 3.6% stake in the PNG exploration interest and LNG facility planned by OilSearch and Exxon, for $800 million last December.

Arguing InterOil’s assets are comparable to those for sale in the above transaction, a 25% stake would fetch $5+ billion and put the enterprise value at a whopping $22 billion. All this suggests that, longer-term, this stock can only move in one way, and that is up.

- Brewskie