Post-Deal, What Is The Value Of InterOil?

[Petrovale]

http://seekingalpha.com/article/1182891-...urce=yahoo

Much of the current debate regarding InterOil (IOC) centers on whether or not the Company will consummate a deal resulting in the partial sell-down of IOC's Elk/Antelope resource. I previously presented my case detailing why it is extremely likely a sell-down deal will be announced in March 2013. This analysis assumes the deal is announced and explores what the value of InterOil will be immediately upon the announcement of the sell-down transaction.

Three variables need to be considered in order to properly value InterOil post-transaction. Assumptions need to be made for (1) total number of trillion of cubic feet equivalent (Tcfe) contained across ALL of InterOil's resources and its 40 prospects (2) the average price per million of cubic feet ($/Mcf) the gas will be sold at (3) the time horizon used for discounting to arrive at a net present value. Let's examine each of these in turn.

InterOil's Resource Portfolio

Elk/Antelope - The most recent GLJ report's "best" estimate of Elk/Antelope is 9.4 Tcfe. This report reflects data through December 31, 2011. Since the last report date, Antelope 3 was drilled. The results from Antelope 3 clearly show the E/A reservoir is contiguous. Antelope 3's hydrocarbon column height is humongous at 2,301 feet, which is 530 feet thicker than Antelope 2 and 81 feet thicker than Antelope 1. The feet of net pay, net-to-gross ratios and average porosity all compared favorably to GLJ's 2011 year-end E/A reservoir model. To be conservative, let's assume A3's strong results will cause GLJ's 2012 year-end reservoir analysis to grow only slightly and estimates E/A to contain 10.0 Tcfe.

Triceratops - A preliminary assessment performed in 2011 indicated Triceratops contains 4.9 Tcfe. For comparison, recall the first certified contingent estimate of E/A at year-end 2009 was only 3.8 Tcfe. It jumped to 9.1 Tcfe year-end 2010 and then to 9.4 Tcfe year-end 2011. Further seismic analysis and drilling results on Triceratops during 2012 led Morgan Stanley's analyst Evan Calio to conclude Triceratops's area under closure could be 2x Elk/Antelope's (Morgan Stanley's June 18, 2012 research note on InterOil). Although in the early stages of appraisal, an initial resource estimate of the Triceratops field will be included in GLJ's 2012 year-end resource estimate. My conversations with Dave Holland (head IOC geologist) lead me to conclude that Triceratops will ultimately have at least an equal amount of gas and liquids as E/A....and possibly quite a bit more. Let's assume another 10.0 Tcfe for Triceratops. [Read on here]

[freddiekingman]

great stuff Petrovale...we go up today.

[jft310]

Treasure Hunter states $1.50 range in the first deal and a blended rate of all deals at $2.50-3.00 per mcf with $200 million upfront with more payments as IOC makes progress on the project. Seems quite fair and the price expectations are quite remarkable I am sure to some shorts..$200 plus per share.We shall see.

[TxPm]

Great article. I disagree with a few things 1) I think he needs to use a higher discount rate for the discounted cash flow model bc 8.2% for a stock with a Beta of 1.2 is way to low. It should be roughly 10-14%. 2) I think that IOC will receive a higher bid than $1.50 (I'm expecting close to $2) and 3) I believe we will see more cash upfront. From the PRE deal we received roughly $116Mil upfront and the PRE deal pales in comparison to this deal in size. I'm expecting $400-$500Mil upfront with the rest overtime

Once again great article and even using a higher discount rate of 10-14% one can still see IOC is dramatically undervalued and has enormous potential

[Petrovale]

TxPm, perhaps Treasure Hunter is a modest man...

[TxPm]

Petro,

I have no problem with that and am not saying his predictions are wrong or invalid I simply am a little more "aggressive" in my predictions. One thing I will say is if he is modest he should have used a more modest discount rate but that's ok. Like I said it's a fantastic article and does a great job showing the readers of SA the unbelievable opportunity in IOC

[Palm]

Great article from Treasure Hunter. A couple of comments:

1. He states, "The next prospects to be drilled are Wahoo/Mako and Tuna. The Wahoo build-up is large (approximately 7.5km to 8 km in strike length) and preliminary mapping suggests the Wahoo/Mako trend may have a structural closure of approximately 18,039 acres (73 sq. kilometers). Both seismic and airborne gravity and magnetic data indicates Tuna contains reefal properties. Locations have been selected for drilling both prospects. These two prospects are located between Elk/Antelope and Triceratops. Hence, Tuna and Wahoo/Mako must be prospective for being reefs since they are between two known reefs." Just to clarify, the Wahoo/Make and Tuna prospects are not between EA and TRI; they are located to the south of EA but are believed to be part of "the string of pearls"; reefal buildups which appear to run right through the heart of IOC's PPLs/PRL.

2. I think that some of the assumptions are conservative, but that's OK. I'd much rather be a bit low on expectations and have them exceeded than the other way around. We are way too familiar with disappointments.

3. The point he makes about the quality of IOC's resource can hardly be emphasized enough. These finds are all onshore, as he states, the quality is very high (To the point that it will meet the very high standards of Japan's power plants WITHOUT needing additives like CSG does) and the liquids are very rich. IOC in its presentation yesterday mentioned, "Minimal pre-LNG processing requirements" (slide 6), which is very important. High quality gas requires less cost in plants and fewer processes in treatment; big carrots for potential partners as well as the State of PNG. PNG is reported to be planning on taking some or all of its gas "in-kind", which means out of the CSP. They will save immensely in the cost of treated gas to feed any power plant(s) and hospitals, schools, businesses, etc.

The clock is ticking and Treasure Hunter has given us added reasons to expect a nice near term and long term return.