Below the latest R James Equity Research Report concerning IOC...

Below the latest R James Equity Research Report concerning IOC prepared by P Molchanov. The last sentence, namely that IOC is “…committed to pursuing a stand-alone LNG project…” may mean that EWC’s 2-3mtpa modular lng plant is still part of IOC overall strategic planning.

RJ" Shares Still Trade Below deal comps-remains significant upside in the stock"
Raymond James on IOC "Two Months Since IOC-XOM Exclusivity, Shares Still Trade Below Deal Comps- there remains significant upside in the stock based on the fundamentals of the resource base"

Subject: FW: Two Months Since IOC-XOM Exclusivity, Shares Still Trade Below Deal Comps
Raymond James Equity Research


InterOil Corp. - Outperform 2;
Companies Mentioned - IOC, XOM

IOC: Two Months Since IOC-XOM Exclusivity, Shares Still Trade Below Deal Comps

Analyst(s): Pavel Molchanov
[Industry Classification: Energy/Exploration and Production]

* It has been exactly two months since May 24, when InterOil formally revealed that it is in exclusive negotiations with Exxon about a resource selldown. The main point we want to underscore in this research note is that today does not represent a deadline of any kind for finalizing a deal. Neither InterOil nor Exxon have made any promises about concluding their talks within 60 days, and we remain of the view that InterOil's management is doing exactly the right thing by not self-imposing deadlines. Likewise, we will continue to stay away from making any predictions about timing.

* As far as reasons for why the InterOil-Exxon selldown discussions are not being concluded instantly, here are two readily apparent reasons. First, while Exxon is operator of the PNG LNG project, it is not the sole owner, which means there naturally are internal conversations taking place between Exxon, Oil Search and the other partners in regard to the deal terms for buying a portion of InterOil's gas resource. Second, the Papua New Guinea government is involved in the process, and as all of us know, dealing with bureaucrats and politicians - in any country - tends to prolong any discussion.

* To recap what we wrote at the time of the original exclusivity announcement, there are three major questions that have yet to be answered (in addition to the lack of clarity on the timing for an announcement). First, how much of the resource will be monetized? As a general premise, in these kinds of transactions, the "big brother" (Exxon in this case) tends to want to purchase more of the resource, and the smaller partner tends to want to keep more for its own use. Exxon has indicated that around 4 Tcf (~40% of the Elk/Antelope resource) would be sufficient to support the third train for the PNG LNG project, but of course that number is not set in stone. Second, what will be the multiple ($ per Mcf) in the resource selldown? For context, IOC shares are currently trading at approximately $0.75/Mcf on a 1P basis, a 40% discount to the five-year regional transaction average of around $1.25/Mcf. (This is not our prediction of how much InterOil will receive for its gas - it's just a historical observation.) In our view, there remains significant upside in the stock based on the fundamentals of the resource base. Third, will InterOil move forward with development of its own LNG project using its retained gas? The government would presumably be supportive of such a project, in order to avoid the creation of a de facto LNG monopoly in the country, but until the Exxon transaction is finalized, InterOil will not be in a position to spell out its long-term strategy. In our initial conversation (on July 11) with newly hired CEO Michael Hession, he confirmed that the company is committed to pursuing a stand-alone LNG project, but the details have yet to be specified.