InterOil Corporation: On the Eve of Transformation

Evan Calio – Morgan Stanley

November 15, 2013 7:28 AM GMT

We believe IOC trades at a steep discount to its NAV and the impending asset monetization should crystallize value. With a Major partner, full funding, and an active & highly prospective exploration program, IOC is on the eve of a transformation. Resuming at Overweight, $105 PT.

Re-rating story. We expect IOC could have a Major LNG partner by year-end, based on its recent disclosure. For the first time in its history, we believe it will have a clear path to significant upstream cash flows, be partnered with one of the major energy companies, globally, possess a fully funded balance sheet, and be active in its highly prospective exploration program. We see near-term and longer-term upside driven by:

(1) Undervalued resource. We believe IOC trades at a steep discount to its NAV and an asset sale would help close that gap. We estimate a deal range of $1.00-1.25/Mcfe (NPV) for a portion of IOC’s resource vs. $0.71/Mcfe implied in shares with no value for exploration. We estimate a $1.50/Mcfe ($1.25NPV) price supports an 18+% IRR for PNGLNG train 3, giving us confidence IOC could achieve our $1/Mcfe (NPV) assumption. The first gas sale should create a key path for monetizing remaining Elk/Antelope, Triceratops, and exploration prospect resource. We value remaining gas at $0.70-1.00/Mcfe based on time to market;

(2) Resource credibility. A deal would answer a key question that has faced IOC on its resource size, value, and monetization potential, via partnership with a Super Major that has LNG experience;

(3) Expansion potential. A partnership would likely seek to build additional trains, as exploration/appraisal adds resource. Additional LNG trains have higher IRRs;

(4) Funded and high impact exploration. IOC has a leading exploration position in highly prospective PNG acreage. IOC expects to run 3-4 exploration rigs in 2014 with over 57 leads/prospects across ~3.0MM net acres and delineation of Triceratops.

I hope he's correct about the street view. If so, squeeze will be as big as a Gorgon cost blow-out.

Morgan Stanley is (was) one of the investment bankers for "THE DEAL". They had to suspend coverage of IOC stock during deal talks. It looks like the deal is done, or at least Morgan Stanley's part.

That is certainly quite a "Street View" analysis. It kind of makes those naysayers over at Yahoo and IV credible representatives of the marketplace...BUT WRONG. Has Warren always wanted a piece of IOC and decided acquisition of XOM the way to do so? LOL.

Isn't it funny Art and Calio should have called it the 'Yahoo View'. Where else does he pick up those arguments? Think Tilson calls him and makes those arguments? Don't think so. Not even Bonkie, Sussman, Mspieks or other 'Street Viewers' can argue any of these 'Street View' arguments with a straight face today. Maybe that is why they are mute.

The only argument they have at this point appears to be hoping for a partner announcement delay so Hession can then be argued to be a liar with no credibility, just like how Phil was demonized. I'm not happy he clearly stated by Y/E if they hadn't chosen a partner as of 11/13 but he did. Dynamics between ultiple SM's and 100's of billions of revenue can always take a surprising turn.

To further support your point, I find it interesting the report comes out on the 15th......3 days after the cc. Analysts are typically more timely issuing reports.