Morgan Stanley

[Gator]

May 24, 2013
InterOil Corporation
XOM Partnership Potential
Today, IOC announced it entered into exclusive
negotiations with XOM. A partnership could
provide significant liquidity (gas sale vs.
development JV), de-risk IOC’s resource and
provide resource and project credibility.
Deal on the horizon. The 1.5 year sell-down is
approaching a conclusion as IOC announced it has entered
into exclusive negotiations with Exxon for the sale of gas
that will underpin a 3rd LNG train at XOM’s Konebada site
(new Port Moresby). XOM will carry IOC’s cost to drill
additional delineation wells in Elk Antelope to determine
XOM’s interest in PRL 15. Further, IOC will have the option
to pursue development of a second LNG train in Gulf
Province (likely 3.8TCFE) with XOM. Gas supporting the
Gulf train will either source from PRL 15 and/or Triceratops,
based upon results of Elk Antelope delineation drilling and
further Triceratops exploration (with PRE).
SuperMajor credibility. If a deal occurs after protracted
due diligence and negotiations, a partnership with Exxon,
one of the largest upstream operators in the world and the
largest operator in PNG, could dispel prevalent resource
and execution skepticism, in our view. With a new CEO
and the potential for a new XOM partnership, we believe
IOC could become a mainstream energy company with
clear parallels to Oil Search.
Significant liquidity event. The contemplated gas sale
vs. an LNG JV, could provide IOC with significant liquidity to
fund shareholder distributions, additional exploration and
future developments. Based upon the size of XOM’s
existing LNG trains under construction in PNG
(3.45MMTPA), we believe at least 4Tcfe of dry gas could be
sold by IOC to XOM. Terms are not final and exclusive
negotiations continue with price per mcfe and payments
structure necessary to value the sale (NPV). It is unclear
whether condensate volumes, which will be stripped in the
field as XOM pipes dry gas from the Hides for the PNGLNG
project, could be included in a sale. The 2C condensate
estimate for Elk/Antelope is 143MM bbls or 61MMbbls,
proportionally allocated in a 4Tcfe sale. This is an
additional element of consideration or potential value.