Markets

InterOil Readies Antelope-1 Site for Drilling

By David Phillips

Updated on: October 13, 2008 / 10:57 AM EDT / MoneyWatch

The Company: InterOil Corporation, a Canadian energy company with operations in Papua New Guinea.
The Filing: FORM 6-K filed with the SEC on August 13, 2008.
The Finding: InterOil said the Antelope-1 rig site location is complete and drilling will commence in the next few days, targeting a limestone reef porosity zone intersecting in the Elk-4, a well that yielded a gas flow rate of 105 million standard cubic feet and approximately 2,000 barrels of condensate per day in a previous test, a record-high gas flow rate for Papua New Guinea. Discovery of a second well that confirms commercial gas reserves is critical to a proposed liquefied natural gas project in Papua New Guinea with the government.

The Upshot: InterOil is a shareholder in a joint venture established to construct Papua New Guinea's first liquefied natural gas (LNG) plant on a site adjacent to the company's refinery in Port Moresby. The LNG plant is predicated on at least a substantial portion of the gas being supplied to it from InterOil's Elk/Antelope complex, with construction of the plant and pipeline linking the plant to Elk/Antelope. One well, however, does not make for a reliable estimate of larger field reserves. Work on two prior well sites, Elk-1 drilled in 2006 and Elk-2 spudded in 2007, was suspended due to limited gas flow rates.

At June 30, 2008, InterOil did not have any oil or gas reserves or resources, or working interests in any producing oil and gas wells and therefore did not record oil and gas sales revenue during the first-half 2008. The Elk-4 structure hydrocarbons are being evaluated and are not currently classified as proven or probable reserves or resources under definitions adopted by the United States or Canadian regulatory authorities.

To date, income and cash flow are derived almost totally from midstream refinery activities, comprised of a 32,500 barrel per day crude distillation facility producing diesel, jet fuel and gasoline for the domestic Papua New Guinea market.

In the event that the viability of the LNG project is established, the company will be required to raise "substantial amounts" of financing for the Elk field development and delivery of gas to the LNG project. Preparatory costs, exploratory drilling, and appraisal testing capital expenditures totaled $29.1 million for the first six-months 2008.

In addition, under an indirect participation agreement entered into in February 2005, InterOil is obliged to spend up to $125 million to drill a minimum of eight exploration wells. As of June 30, management estimated that a further $46.4 million was required to drill an additional four wells (to fulfill this commitment).

The balance sheet at June 30, 2008, reflects a company barely getting by. Cash used by operating activities was $25.7 million in the first half 2008. Long-term debt is 1.2 times stockholder equity (and the company can barely cover the interest on its long-term debt with operating profits). InterOil did, however, file a shelf prospectus in July that should enable the company to access, from time to time, up to $200 million in debt and/or equity financing.

The Question(s): Will Antelope-1 yield proof of sufficient gas reserves to guarantee the LNG project? Given illiquid credit conditions, will InterOil be able to secure additional capital when needed?