Morgan Stanley this AM

[jdeo1969]

InterOil Corp. (IOC)

Overweight, $85 Price Target

Transformation Continues: New Leadership + Deal Value + Return of Exploration = Upside

Well-positioned. The value implied in the TOT agreement, based upon current & certified Best case resource, plus risked exploration value and refining value drives our $107 NAV and $85/sh price target. Upon closing, the TOT deal provides IOC with significant liquidity to accelerate exploration and fund its remaining 30% interest in the LNG project (+debt). We expect the LNG interest will accrete value as the multi-year path to LNG is traversed/de-risked: the $0.79/mcfe (NPV) paid by TOT (Best Case resource) has potential to accrete to ~$2/mcfe when the project commences (4- 5 yrs).

Significant potential value in the Total agreement. We expect the Total agreement will close in 1Q14 and it has four primary elements of consideration (1) a payment on closing of $613MM (estimate 60% net to IOC); (2) a resource payment determined after 3 appraisal wells expected by 1Q15 where we expect a range of $2-4.1 Bn based on 6.5-9.9Tcfe of resource (60% net to IOC); (3) $212MM at certain LNG milestones (60% net to IOC); and (4) potential payment of $100MM for each 1T cfe over 1T cfe discovered from 1 exploration well in PRL15 (60% net). Closing is conditioned upon: IOC’s acquisition of PacLNG interest in PRL15 and PNG gov’t approval. Recent share price weakness related NAV dilution fears from the PacLNG acquisition, yet IOC has stated they expect the economics of this deal to flow through to PacLNG and we interpret that as PacLNG gets ~40% of the consideration, based upon the exact % interest they are selling.

Back to the drill bit. In 2014, we expect: (1) 3-6 exploration wells, including Triceratops, with the first set of 3 well results in 2Q14; (2) potential TOT deal consideration upside from exploration (“exploration bonus&rdquo(the alternative nomenclature for Big Horn, the PRL15 exploration well, as “Antelope Deep” implies that the prospect could possibly be a down-dip extension of Antelope and could drive higher value (resource payment calculation vs. exploration bonus); (3) appraisal well results to help define the resource range (2H14).

Key Catalysts in 2014

  

PacLNG deal and TOT deal closure (1Q14). Exploration results from 3 wells in 2Q14. Carried PRL15 appraisal results in 2H14.

Good luck longs

[jft310]

Very conservative report
MGT on Friday stated they had signed the fourth IOC rig for use this year. A Hedgie reports that Total has shipped 2 rigs to PNG for their
drilling obligation. Hedgie reporter has an excellent track record.

[TxPm]

No offense to Calio & Co but it appears to me ever since they lost the IB fee they have become a little bitter....40% to PACLNG will not happen in my opinion and this $85 PO is crap and Calio knows it...knowing how these firms work I fully expect an updated (and raised) PO once the SD is completed and the IPI buyout is complete

[jdeo1969]

I agree completely JFT, it is conservative but bullish.

[jft310]

Tx I suggest all use the term minority interest which best reflects both parties PACLNG with no LNG plant for them and IPI.
There is no way these minority interest get 40% of anything. PACLNG doesnt have an LNG plant and the drilling partners cant afford a cash call for an LNG plant build out. Sorry you couldn't deliver Exxon Calio.

[arthurbell]

No offense to Calio & Co but it appears to me ever since they lost the IB fee they have become a little bitter....40% to PACLNG will not happen in my opinion and this $85 PO is crap and Calio knows it...knowing how these firms work I fully expect an updated (and raised) PO once the SD is completed and the IPI buyout is complete

40% !  I am no math or english professor but last I checked these folks owned less than 25% of of the gas!  This sounds like downright fearmongering to me!   Where do they find these analysts!!??

[ltinvest]

While this report appears flawed, I have a different takeaway. Pricing in very conservative variables and not yet giving credit to soon to be drilled wells, Calio still comes up with over a $100 NAV and $85 price target. Yet, we are trading just over $50. It reinforces the absurdity of our current pps and the disconnect that exists.

Positive drilling results in exploration wells and delineation wells with increase the NAV and reduce the discount between NAV and the price target.

[jdeo1969]

Thanks ltinvest. You just stated what i was lacking the ability to convey eloquently myself. It is conservative in my opinion, but 85 is certainly higher than $51.

[ltinvest]

Thanks jdeo for posting. Raymond James also calculates a $100+ NAV. Some consistency in current NAV with lots of wells to be drilled this year!

Then we're on to FID and LNG cash flow valuations.

[jft310]

Thanks jdeo for posting. Raymond James also calculates a $100+ NAV. Some consistency in current NAV with lots of wells to be drilled this year! Then we're on to FID and LNG cash flow valuations.

Jed Clampet profile pic is great. Not sure when you added it but it's a terrific symbol.