Morgan Stanley this AM

[Thylacine-2]

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

Most of the discussion on this board has discussed "Antelope Deep" in terms of it being a deeper formation than Antelope, a separate "elephant" below Antelope, not a down-dip extension of Antelope.  I intertpreted page 18 in the recent slides for the Macquerie presentation as showing Antelope Deep as a deeper and separate formation.

How are we to take the Morgan Stanley statement above?  Does it reflect information MS received from IOC?

[Tusker]

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

Most of the discussion on this board has discussed "Antelope Deep" in terms of it being a deeper formation than Antelope, a separate "elephant" below Antelope, not a down-dip extension of Antelope.  I intertpreted page 18 in the recent slides for the Macquerie presentation as showing Antelope Deep as a deeper and separate formation.

How are we to take the Morgan Stanley statement above?  Does it reflect information MS received from IOC?

So, the stage is being set for a drama.  Very much look forward to the curtains rolling back for this one. A trilogy of sorts.  Spud date comming to a BB near you.

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[jdeo1969]

Can you please elaborate tusker?

[jft310]

Let's state the obvious why did Hession change the name to Antelope Deep vs Bighorn .?

There is a taped LNG conference where Henry Aldorf former International President of Marathon

spoke. On that recorded session Aldorf clearly states he thought with 30 years experience that

E/A contained 12-16 T's .

So why would anyone be surprised with Hessions connection implication with his name change.?

A link to that Aldorf interview was posted on these pages.

[Palm]

I think this comment is what it is; a reflection of what management feels is a POSSIBILITY based on the extensive data and combined knowledge and experience. They have reason to believe that there's something substantial there and it COULD be in communication with Ant. For this reason they were able to have the clause included in the SPA that IF there is the defined communication, there is a higher reward. If not, we get $100 million for every T above 1T, which is still unheard of; being paid for undiscovered resources. They have not stated what % chance they feel there is, so since this is exploration we should assign a low probability to it, but not say we know more than them and there is a 0% chance. I believe that is what Tusker is eluding to; the stage is being set for this "drama". Is there anything there? If so, is it in communication with Ant? If so, it could get us a nicer payday.

[Thylacine-2]

Pet, what do you make of page 18 of the slides for the recent Macquerie presentation? Is that a fault across the southern end of Antelope? If so, is Antelope Deep only the area to the south of the fault or could it extend to the north underneath Antelope? Can you estimate the vertical separation between Antelope and Antelope Deep from the slide, if they are separate formations? Is Antelope Deep the "Elephant"? :-)

[jdeo1969]

Thank you Palm. I was incorrectly reading more into it.

Good luck longs

[Palm]

The Antelope Deep structure is not something new to IOC management I don't believe. It could just be that with more seismics it has become more interesting. Back in January, 2010 IOC was drilling Ant 2 and good old Joshua Kalinoe got all excited when there were some oil shows in the formation mud and blabbed to the media. IOC was forced to say something. All they ever said was that they would be looking at data to see if there really was anything of commercial quantity, etc. Interestingly this comment came out in an industry publication from a conversation with Phil:

"InterOil Corp.’s Antelope-2 vertical natural gas well in Papua New Guinea’s remote Gulf Province bounded to a world record Dec. 1, 2009, testing at a rate of 705 MMcf/d and 11,200 bc/d. The well obliterated the previous record for a vertical gas well, also set by InterOil with its Antelope-1. That well tested at 382 MMcf/d and 5,000 barrels of condensate per day, earning recognition from Guinness World Records. But this latest test may not tell the whole story of the play’s potential. InterOil, a public independent based in The Woodlands, Texas, and Cairns, Australia, plan to drill the well 1,100 ft (335 m) deeper to test potential for an oil leg in a deeper formation. The company may also drill its first horizontal leg from the Antelope-2 vertical hole. InterOil is developing the large Antelope structure, which also contains reef facies."

We all know that instead of drilling the 1,100 feet deeper (I believe), they turned and did the horizontal extension which went further than was expected and helped deliniate the structure further. I don't see or remember any further discussions on that deeper structure until now, and of course the talk of oil in Ant (as we know it) stopped. Others may have more info or better memories, but there is a renewed interest by management of what Ant Deep might be and what it might contain.

[jdeo1969]

Palm,

If the Antelope Deep structure is "below" Antelope, and they overlap, for lack of a better way top put things, would it still be considered "connected" in terms of the SPA? I am looking for a simple definition of that term I guess. In geological, or industry terms, what exactly qualifies as connected? Obviously this makes a big difference in terms of dollars to IOC.

Thank you sir.

[Palm]

Jdeo, the term from the SPA is "pressure communication" and is defined as

"Pressure Communication means with respect to any accumulation of petroleum, that:
(a) such an accumulation has petroleum bearing sediments which are in direct and continuous petroleum contact with the Elk Field or Antelope Field as necessary;
(b) such an accumulation belongs to the same petroleum pressure regime as the Elk Field or Antelope Field with which it is in such direct and continuous petroleum contact; and
© the composition of the petroleum of such accumulation is consistent with the composition of the petroleum of the Elk Field or Antelope Field, as applicable, with which it is in such direct and continuous petroleum contact."

As others have said it seems difficult to imagine that Antelope Deep could qualify if it's below and separate from Ant. It's really impossible to "know" which structure(s) they think may qualify under this definition. Could be a "just in case" clause. But for some reason they are very interested in Ant Deep again.