Morgan Stanley this AM

[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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