Morgan Stanley

[Gator]

August 13, 2014

InterOil Corporation

Appraisal & Exploration Ahead

The largest medium-term catalyst, Antelope 4 & 5,

are on track to spud in 3Q14. The pair can unlock

~$400MM-$2,500MM in resource payments from

TOT ($1,890MM MS base case) and advance LNG

monetization. Active exploration provides additional

upside potential.

Antelope appraisals on track for 2H14-1Q15.

IOC reported that the two

well pads and camps for high-impact Antelope-4 & 5 appraisal wells are

complete. The pair of wells will test the southern and western extents of the

field, respectively. Both are set to spud in 3Q14 with guidance to take 90 days

to TD. Results should arrive by EOY2014, though could slip into 2015 if rigs

encounter difficulties penetrating Orubadi similar to those witnessed by the

trio of 1H14 wildcats. Antelope 4 & 5 are the most material planned wells for

IOC as they will define the resource and payment due from Total where

estimates range from 5-12 Tcfe of gas. Antelope-6 could follow in 1Q15 (if

required to prove up the acreage).

1H14 wildcats’ results delayed due to slower drilling.

Drilling at Bobcat-1

(PPL476, spud 3/5/14) and Raptor-1 (PPL 475, spud 3/24/14) continues, with

the former approaching TD. Drilling of both wells has been slowed significantly

beyond the original expected 90 days, likely proportionately lifting IOC’s

$50MM gross well cost estimate (per). Management flagged the challenge of

drilling through Orubadi seal, which because of its ductile tectonically active

nature allows a wellbore to change shape. This forces the use of heavyweight

drilling mud which provides support, but slows drilling. The shallower Bobcat-

1, which is on-trend with Elk-Triceratops, is nearing TD. Raptor, testing a new

synonymous trend west of Elk-Antelope, appears to be further away from

delivering a result. Earlier on 7/14/14, IOC reported that the third well spud in

March, Wahoo-1 (PPL474) was suspended due to higher than expected

pressure prior to entering a predicted reservoir zone. IOC is currently

reviewing the option to restart the well (which has not been P&Aed).

Disposals fortify the balance sheet.

Following receipt of $526MM from the

downstream sale and successful refinancing and 2x upsizing of its debt facility

to $300MM (at LIBOR+5%), IOC has $885MM in total liquidity on its balance

sheet ($568MM of unrestricted cash). This is well in excess of combination of

$250-300MM expected 18mo drilling and G&A cash outlay and $70MM in

convertible notes due for redemption in 11/15 ($95/sh strike). We note that

IOC repurchased $41MM of own shares (under a $50MM authorization

announced 7/21/14), ostensibly to offset the convertibles’ dilutive effect

(versus a statement on intrinsic value of stock).

Valuation & risks.

Our $85 PT equates to 0.8x our risked NAV, which

extrapolates the Total deal value to remaining PRL 15 resource and adds risked

value for exploration. Risks include project delays, exploration failure and

geopolitical risks.

Full PDF report

[Getitrt2]

Thanks, Gator

[jft310]

See the Morgan comments in Aug about Bobcat nearing TD. How's that fit with the Sept 30 release ? Different sources for sure but????

[Palm]

I think terminology is getting crossed up. There's a difference between total depth and target depth. IOC has said they are nearing target depth recently which is top of reservoir. Anyone else seeing this?

[Stavros]

TD has always meant the final total depth which was defined by InterOil as follows when they spud the wells:

Upon Spudding on March 5, 2014, IOC stated that the Bobcat drilling was expected to take 90 days with a planned total vertical depth of 3,134 metres

Upon Spudding on March 28, 2014, IOC stated that the Raptor drilling was expected to take 90 days with a planned total vertical depth of 4,500 metres

To avoid controversy would be very easy to my opinion.

IOC should inform shareholders the current depth of each well, the types of rock formations encountered and expected, the expected timings for results (interim and final) and the expected final costs.

This is our money that InterOil is using to drill these buggers, and we should be given appropriate updates on how our money was/will be deployed in order to decide whether to hold our investment or sell and move on.

[Tree]

I think terminology is getting crossed up. There's a difference between total depth and target depth. IOC has said they are nearing target depth recently which is top of reservoir. Anyone else seeing this?

Appears TD is hole bottom AND possibly reservoir top.

But then again, this could be 'Phil speak', anyone have that dictionary??

Per Schlumberger:

(there is no such thing as 'target depth':

Search Results

Searched for "target depth" in Term Name (0 result(s) found)

No Results Returned

total depth

1. n. [Drilling]

The end of the well, measured by the length of pipe required to reach the bottom.

Alternate Form: TD

See: bottomhole static temperature, contract depth, gas show, survey

2. n. [Drilling]

The bottom of a particular hole section, where drilling is stopped, logs are run and casing is cemented before starting the next, smaller diameter hole section.

An online Petroleum dictionary defines the acronym TD as:

1) Total Depth

2) True Depth

3) Target Depth

[jft310]

Tree- if TD is hole bottom or possibly reservoir top those do not fit with the Sept 30 disclosure .
Curious for sure . Appears someone made a mistake . One would think the company would know more . But???

[Tree]

TD has always meant the final total depth which was defined by InterOil as follows when they spud the wells: Upon Spudding on March 5, 2014, IOC stated that the Bobcat drilling was expected to take 90 days with a planned total vertical depth of 3,134 metres Upon Spudding on March 28, 2014, IOC stated that the Raptor drilling was expected to take 90 days with a planned total vertical depth of 4,500 metres To avoid controversy would be very easy to my opinion. IOC should inform shareholders the current depth of each well, the types of rock formations encountered and expected, the expected timings for results (interim and final) and the expected final costs. This is our money that InterOil is using to drill these buggers, and we should be given appropriate updates on how our money was/will be deployed in order to decide whether to hold our investment or sell and move on.

No, IOC did not define TD as total depth.

They stated 'a planned total vertical depth' which is pre-drill estimate of targeted hole bottom.

TD can be different than TVD (total vertical depth = true vertical depth) as it can apply to current depth of a drilling program.

true vertical depth

Diagram of measured depth and total depth 1 of 1 1. n. [Drilling] The vertical distance from a point in the well (usually the current or final depth) to a point at the surface, usually the elevation of the rotary kellybushing (RKB). This is one of two primary depth measurements used by the drillers, the other being measured depth. TVD is important in determining bottomhole pressures, which are caused in part by the hydrostatic head of fluid in the wellbore. For this calculation, measured depth is irrelevant and TVD must be used. For most other operations, the driller is interested in the length of the hole or how much pipe will fit into the hole. For those measurements, measured depth, not TVD, is used. While the drilling crewshould be careful to designate which measurement they are referring to, if no designation is used, they are usually referring to measured depth. Note that measured depth, due to intentional or unintentional curves in the wellbore, is always longer than true vertical depth. Alternate Form: TVD

[Stavros]

The Company knows the current depths and can inform shareholders of same. Not doing so is foolish because it causes the uncertainties we are seeing.

Planned total vertical depths are in the public domain:

+ Bobcat planned total vertical depth of 3,134 metres

+ Raptor planned total vertical depth of 4,500 metres

[Tree]

Tree- if TD is hole bottom or possibly reservoir top those do not fit with the Sept 30 disclosure . Curious for sure . Appears someone made a mistake . One would think the company would know more . But???

From the Sept 30 Update:

Read and Re-read the Update.

IOC did not introduce a 'TD' into the discussion, they stated 'Target Zone'.

It is accurate to state that on 9/30/14 update IOC was at TD in raptor and were atop the Target Zone and were prepping to enter on their way to planned TVD.

As Stavros stated, they know the present depths  of these wells and have not disclosed those depths to us.  Present zone top depths can tell us early indications of pay volumes.  Maybe that's why it's a secret.

RAPTOR-1, PPL 475  InterOil is preparing to set seven-inch casing in the Raptor-1 well in PPL 475 in the Gulf  Province of Papua New Guinea. The casing point is slightly above the Kapau Limestone  target zone, and is in line with the well program.  At this stage, calcimetry, temperature and background hydrocarbon concentrations are  similar to those experienced before InterOil entered the Antelope reservoir. The significance  of these preliminary indications can be determined only by further drilling and logging.  Raptor-1 is about 12km west of InterOil’s multi-trillion cubic feet Elk-Antelope gas field.  InterOil holds a 65.208174% interest in Raptor-1 and is operator. Pacific Rubiales Energy  Corp. (TSXRE; BVCREC; BOVESPAREB) has a 12.903226% interest in the well and  minority interests hold 21.8886%.

There is a mistake and Morgan made the mistake.

Morgan errantly used 'TD' and should have used 'TVD' in this report.

IOC's presser states 'Total Vertical Depth' which is a pre-drill estimate.

TD can define a present well depth, a target depth and ultimately it can define the depth of hole bottom as drilling is complete.

RAPTOR-1, PPL 475 
InterOil is preparing to set seven-inch casing in the Raptor-1 well in PPL 475 in the Gulf 
Province of Papua New Guinea. The casing point is slightly above the Kapau Limestone 
target zone, and is in line with the well program. 
At this stage, calcimetry, temperature and background hydrocarbon concentrations are 
similar to those experienced before InterOil entered the Antelope reservoir. The significance 
of these preliminary indications can be determined only by further drilling and logging. 
Raptor-1 is about 12km west of InterOil’s multi-trillion cubic feet Elk-Antelope gas field. 
InterOil holds a 65.208174% interest in Raptor-1 and is operator. Pacific Rubiales Energy 
Corp. (TSXRE; BVCREC; BOVESPAREB) has a 12.903226% interest in the well and 
minority interests hold 21.8886%.