Monness Crespi Hart & Co on InterOil

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IOC: Company Update

Interoil Corporation (IOC – Buy – $61.74): Interoil announced the signing of a Heads of Agreement (HOA) for the sale of one million tons per year of LNG to Noble Clean Fuels Limited, a wholly owned subsidiary of Noble Group Limited. We look upon this off-take agreement as the first of what should be several binding contracts, most of which have been under serious negotiation for several years. We continue to anticipate the most important contracts (FID) for construction of a condensate stripping plant with Mitsui and LNG export facilities with World Energy and Samsung will be consummated before year end. In our opinion, finalizing these contracts should result in a triple digit price for the IOC common shares which we continue to recommend for accumulation.

The HOA with Noble Clean Fuels calls for the sale of one million tons per year for ten years beginning in 2014. Other details and particularly selling prices have not been made available, pending binding agreements which should be concluded by year end or sooner. As reported in numerous trade publications, recent LNG contracts in the Pacific basin have been based on a delivered price of $14-$15 per MCF which implies a potentially hefty stream of revenues and cash flow for Interoil.

The Noble Group is a market leader in the global supply chain for agriculture, industrial and energy products. The company’s global network encompasses 150 offices and plant locations in 38 countries and five continents. The company is involved in ship management, trade finance, coal mining, processing soy beans, and operating sugar/ethanol plants. The company handles huge volumes of merchandise which in the first quarter of 2011 amounted to more than 50 million metric tons. During this quarter, revenues were reported at $20 billion in US currency with operating income at $504 million and a net profit of $203 million. The company has 6.4 billion shares outstanding that trade for about $1.80 per share on the Singapore stock exchange. The total market cap is about $13 billion and the latest debt ratio was reported at 48%.

Over the last week or so there have been several developments that bode well for Interoil. On August 1, Sir Rabbie Namaliu, former PNG Prime Minister and former Energy Minister joined Interoil’s PNG Advisory Board. Sir Rabbie, along with others, will be working to bring the Gulf LNG project to fruition. On the same day, Mr. Peter O’Neill was voted in by the PNG parliament as the new acting Prime Minister. Mr. O’Neill is strongly pro-development and a firm backer of the LNG projects underway in PNG. Mr. O’Neill also appears to be the strongest candidate to win the next election for Prime Minister which is scheduled for 2012.

Finally, the new relationship with the Noble Group should open major new market potentials for Interoil. Noble is a major coal supplier throughout Southeast Asia and will probably become a key factor in the LNG market. With air pollution becoming a problem in many parts of Southeast Asia, it seems logical to expect that some coal burning electrical generating facilities will have to convert to cleaner fuels sometime in the future and further bolster the local LNG market.