More than doubling it’s NAV…

• What do back-to-back record flow rates, a higher structural intersection, and a better condensate ratio get you?  Answer: A more than doubling of our “de facto” proved NAV estimate to $110/share.  InterOil has released the year-end 2009 independent resource report (done by GLJ Petroleum Consultants, same firm as last year) for the Elk/Antelope field – the midpoint of which lays out a gross resource estimate of 9.1 Tcfe, more than double the year-end 2008 figure of 3.8 Tcfe, and 30+% higher than the 6.8 Tcfe figure posted by Knowledge Reservoir (another reservoir engineering firm) in June 2009.  This figure is also 18% higher than our December “guesstimate” of 7.7 Tcfe.  The condensate-to-gas ratio rises from 17.4 to 19.1 Bbls per MMcf.
• In light of the positive results at Antelope-1 and 2 throughout 2009, it’s not surprising to see the healthy uptick in the resource estimate or condensate levels.  In fact, the updated low end resource estimate jumped above the prior year’s high case. Based on our estimate of upstream capital spent during 2009, the implied gross resource replacement cost (using only the low end resource adds) comes out to a mere $0.11/Boe; how about that for low-cost?  Obviously, we’re being a little facetious given the $5+ billion future price tag of the LNG plant, but still, the numbers look very good. 
• As we’ve detailed in the past, our “de facto” proved NAV estimate of $110/share (up from $50 as of year-end 2008) reflects strictly the low end of the resource range.  On top of this figure, we calculate risked upside of $15/share, taking total company NAV to a stout $125 (up from $86 previously). While the numbers obviously highlight the magnitude of InterOil’s resource base, this remains far from an apples-to-apples comparison to traditional E&P stocks. In particular, the valuation multiples we assign to InterOil’s gas and condensate are inherently speculative “guesstimates” until the company completes a monetization transaction. 
• This updated resource report represents another feather in the cap for InterOil as it moves towards monetization of the Elk/Antelope field – namely, putting pen to paper with regard to its LNG partnership agreement. As InterOil moves into its next growth phase, balancing exploration with commercialization efforts, there will undoubtedly be more operational milestones to come.
• We readily acknowledge that the confirmation of a commercial oil leg could lead to meaningful upstream earnings in the relatively near term versus the extensive timeline set forth for the proposed LNG facility – with first production not expected until at least late 2014.
• On the other hand, there are obvious execution risks in a “well watching story,” as exhibited by the retracement in the shares since the start of the year.  While recognizing the longer-term valuation upside, we believe it remains essential for investors to recognize that the operational and timing risks as the upstream assets and the LNG plant are developed over the next five-plus years have not disappeared. We maintain our Market Perform rating.