29
Jan

Elk & Interoil – Third Time’s A Charm?

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This is a bet. A bet that the third time is a charm. Interoil (IOC) has found gas, a lot of gas, in Papua New Guinea. The question is, is it enough gas (multiple TCF) to justify an LNG facility. The company thinks so. As does their banker Merrill Lynch and an analyst at Piper who has a $65 price target. A third well on the ELK structure is currently turning to the right in an effort to answer that question. The well definitely has make or break potential for the stock. A stud gives you a quick trip to $30; a dud an ugly fall to $10.

A little history is in order:

The ELK area contains multiple high porosity limestones with an excellent shale seal.  The map below shows their activity to date in this relatively undrilled region.

elk-map.jpg

 

The Discovery Well, ELK 1:

Initial results announced: October 2006

This was 6,500 foot test that encountered a 4,000- foot hydrocarbon column in the Mendi and Puri fractured limestones.

  • Had some down hole issues (swelling and sloughing) early on which probably explains the heavy duty casing program on the current well, the Elk 4.
  • Encountered very high pressure gas below 5,000 feet.
  • Production test: 7" pipe flowed at 50 MMcfgpd with 2,000 psi. Calculated actual open flow rate was 150 MMcfgpd.

 

ELK 2 - The first appraisal well - October 2, 2007.

  • A quote from the company:

"the Elk 2 appraisal well has confirmed conductive fractures, porosity and deliverability and a larger rock volume and better than anticipated reservoir quality , which indicated increased potential gas resource in the Elk structure."

  • They logged 663 net feet of pay with an average porosity of 4.5%
  • Drill stem test (DST) indicated high permeability in two limestone: the Mendi and the Puri.
  • These are the kinds of words and figures you would want to hear about an appraisal well.

Then they said this: The well was drilled to a TD (total depth) of 10,922 feet. The gas water contact may be at 7,596 feet but highest known water recovered in the well was at 8,777 feet and that everything above that level was tight with only small amounts of gas produced and no liquids.

And they did not production test the well from the deeper, high porosity limestones.

They then said they were suspending the well for possible future re entry and moving the rig to the Elk 4 location. Shares immediately fell 24%.

The Stock's Reaction Wasn't Pretty

ioc-chart.jpgclick to expand.

ELK 4: The Next Big Event:

As Elk 4 is much closer to the discovery well than Elk 2 and has been drilling for several weeks now we should expect the well to encounter pay zones much earlier than in the Elk 2. Preliminary results on their Elk 4 well should be out around month end. These results could and include length of hydrocarbon column and log data (gas saturation, and potentially porosity and permeability depending on what kind of logs they run).

 

Major Holders: Institutional owners hold 47% of the company. The top 5 hold 25%.

ioc-holders.jpg

Note the fourth name down on the list is BP Capital, T Boone Pickens' outfit. They took their position in August after seeing the results of the Elk 2 well. T Boone also owns about two million shares personally.

High Squeeze Potential: 11 mm shares short out of 30 mm outstanding. That's over 1/3 short and would take 18 days to cover given their average volume.

 

9 Responses to “Elk & Interoil – Third Time’s A Charm?”

  1. 1
    zman Says:

    Phil at Philstockworld.com came up with a long and hedged play for those of you who like to get a little more complex. I plan on adding a put to my recently purchased call just in case the well is a dryhole.

    Phil’s Plays:

    Long I would go with the Jan ’10 $25s at $6.90, selling the June $25s
    for $3.05. It’s hard to get burned on this unless the stock flies up to
    $35, in which case you would owe your caller $10 but your call would be
    $10 in the money and you only paid $3.85 for it with 18 months to go.

    As a hedged play I like 10 (example) June $17.50s for $5.55, selling 6
    March $20 calls for $2.92 and buying 7 March $17.50 puts for $2.35. If
    the stock goes up, you have a $2.50 advantage over the caller and 4
    naked positions that will get the full benefit of the move but we’ve
    eliminated the downside as you have quite a bit of free protection and,
    of course, your caller would expire worthless meaning the 7 March puts
    will be adequate to protect the June position.

    I am staying away from Febs under the assumption that something will
    happen before then.

  2. 2
    TTupp Says:

    what strategies are those? i cant decipher the first one is like a diagonal time spread or something, and the second one is super exotic– is this a named strategy z? (the second trade…

  3. 3
    TTupp Says:

    so is elk 1 producing? or are they waiting to see if the area is economical so they can get it out of there by ship, otherwise it wouldn’t be worth it unless they could make gas wells tightly spaced throughout the find. im a beginner at gas but is int that how they do it as opposed to oil where they can pump more from one well

    im not that familiar with gas as much as i am oil, but that is a pretty big well correct? 150,000 cuft/day right, i don’t know if i read it correctly/ is it bigger than average? like that apc well in the gulf- doesn’t 1 billion. im kinda lost about relative sizes.

  4. 4
    TTupp Says:

    so is that antelope 2 location next on the list for drilling? and what are all the green lines running through the area of interest (orange shaded area)? sorry for all the questions, but i will never learn about this stuff unless i do, or go to petroleum engineering school, work for an oil co, or if i was an ex energy analyst…. 😉

  5. 5
    jy Says:

    ttup- The green lines are locations of seismic lines, some of which they show in their presentations. Seismic lines are sonic profiles of the subsurface used to map structure and stratigraphy of the subsurface.

  6. 6
    TTupp Says:

    thanks jy for your response to my IOC question

  7. 7
    zman Says:

    Thanks JY, just saw your response and T’s questions:

    Right, the green lines are 2d (two-dimensional) seismic lines. Like a snapshot of what’s under the ground right there. From the convergence of three lines it appears they tried to drill the crest of the structure (think underground mountain shape) with the ELK 1.

    The Elk2 well “stepped out” a distance to “appraise” the “areal extent” of the structure. In other words they drilled “down dip” to try and see how big the prospect is. The second well found the targeted limestones but at a much lower depth and at that depth they were water saturated. In a reservoir gas is on top, then oil, then water since gas is lighter than oil which is lighter than water.

    Elk 1 is not producing as they are still in the evaluation stage and I don’t think there is much of a local market yet to sell it into. The idea is to find enough gas , what we call stranded gas, to justify an LNG facility.

    Those strategies are Phil’s and he’s a saavy option guy … as far as names for them go, I don’t know.

  8. 8
    Nicky Says:

    3 weeks of bearish data for energy now and still it doesn’t fall.

  9. 9
    zman Says:

    Nicky – try the next post over – the Wednesday post.

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