For the sake of completeness..

(IOC:NYSE) Strong Buy 1

• InterOil Corp. (www.interoil.com) is an oil and gas company with operations in Papua New Guinea (PNG). InterOil is building a fully integrated energy business with four distinct components: upstream, refining, liquefied natural gas (LNG), and downstream. The company operates PNG’s only commercial refinery and owns a network of retail and wholesale distribution outlets while pursuing an exploration program.
• Current Price $34.10 (5/28/2009 ) 10-day ADV 612,200
• 52-Week Range $41.62-$8.90 Div. Yield 0.0%
• Mkt. Cap (mil.) $1504 BV (03/09) $6.42
• Non-GAAP EPS: FY=Dec 2008A $(0.63) P/E Ratios (Non-GAAP) Suitability HR 2009E 0.18 2009E 189.4x Debt/Total Cap. 43% 2010E 0.22 2010E 155.0x NAV/Share $56.57

IOC: Latest DST Suggests Oil Leg of at Least 89 Feet; Drilling Deeper

• Following its initial announcement (on April 6) of oil being recovered from the Antelope-1 side-track, InterOil’s latest operational update sheds additional light on the obvious question many investors are asking: “How much oil is there?” To be clear, based on the limited data thus far, it is too early to quantify the oil resource, and thus it remains unclear whether the quantities are commercial. But the latest report provides an important datapoint: The oil leg, i.e. the interval from which oil (with minimal gas) has been recovered, appears to be at least 89 feet in height. To ascertain whether it extends even deeper – and also to seek a zone of better porosity – the company is now drilling deeper, which means work on Antelope-1 is likely to continue into mid-June if not later.

• The operational update gives the results of the two latest drill stem tests (DSTs) from the second side-track. DST #12, performed over an interval from 7,700 to 7,881 feet, recovered gas, condensate and oil over the 180-foot open hole section. More importantly, the company then performed DST #13 over an interval from 7,792 to 7,881 feet to isolate the oil zone from the gas-bearing zone. DST #13, completed just yesterday, recovered oil and very little gas from this 89-foot interval. The oil had 35 degree API gravity – that is to say, it is light oil.

• Following discussions with management, we would underscore – as we did on April 6 – that the amount of oil recovered thus far was small, and these results are still preliminary. The rock in this particular location and this particular interval appears fairly tight, i.e. the porosity is limited. Thus, the company’s plan to drill deeper is important not only from the standpoint of better assessing the height of the oil column but also in order to locate a zone of better porosity. Specifically, the plan is to drill an additional 148 feet and then perform another DST. Additional zones of interest may also warrant further drilling and testing depending on the results of the next DST.

• We are encouraged by these results. The “big picture”, as before, is that the discovery of a commercial oil leg in the Elk/Antelope structure – if confirmed by subsequent testing – would enable far more rapid generation of cash flow relative to the field’s gas resource. Pending the construction of a pipeline longer term, the oil could be shipped by barge to the company’s own refinery. An important point to underscore is that our risked NAV/share of $56.57 – 66% above the current share price – gives credit only for natural gas and condensate resource based on the year-end 2008 independent reserve report. The NAV does not give any credit for prospective oil resource, so any such resource represents pure option value – the proverbial “icing on the cake.” We reiterate our Strong Buy rating.