Highlights from First Call Note

IOC: Options Galore, When Will One Be Exercised?

BUY; Current Price, $46.13; Target Price, $53.00





From Oil to LNG to Condensate, Options for InterOil Abound.Interestingly, according to Yahoo!

Finance, open call option interest for InterOil shares for November 2009 through January 2010

expiration number 89,138 contracts. Not that we have a great deal of knowledge on the relationship

between open call option interest and shares outstanding or trading volume, but we think this is fairly

high option interest for a stock with 44.6 million shares outstanding that trades on average about

683,000 per day. It’s doubtful that such high options coverage is unreflective of the almost binary

functions that define InterOil’s exposure to substantial upside potential (and, maybe downside risk) from

its ongoing pursuit of high-impact LNG, condensate, and crude oil projects.



Condensate Stripping Facility Estimated to Be Worth Between $10 and $33 Per Share.As

currently modeled, with a 50% probability of completion, a 12 bbl per Mmcfe of natural gas production

rate, and a positive contribution of about an incremental $0.95/Mmbtu of natural gas produced, we

estimate that InterOil’s planned condensate project is worth about $10/IOC share. However, if we step

up the condensate production rate to 16 bbls and assign 100% probability of project completion, we

estimate the condensate facility is worth $28 per IOC share.



LNG Facility Optionality Gets Silly.Despite a multi-billion capital call on InterOil to construct its

planned LNG facility, were the facility to function as we estimate, complete with InterOil supplying all of

the required natural gas feedstock, we estimate IOC shares would be worth $146 each. Our current

valuation reflects a 75% probability of project success as we have it modeled.



Crude Oil and Refinery “Options” Reflect Minimal Comparative Value for Now.We harbor no

expectations for crude oil production in our $53 target price. While we remain quite impressed with the

very efficient operations of InterOil’s refinery, we estimate that it is worth about $10 a share.



Strategic Partner, Financing Would “Exercise” an Option.Inking a strategic partner with

substantial financial backing for the LNG facility and securing financing for a condensate stripping facility

would represent substantial upside potential for our IOC target price. Either of these events would

represent a substantial de-risking of a large component of InterOil’s future cash flow.



Results for Q309 Were Quite Good.Entirely reflective of the quality of InterOil’s refining and

marketing operations, 3Q09 EPS and CFPS of $0.18 and $0.29 exceeded our expectations for $0.09

and $0.29, respectively. Refined product sales totaled 154.9 million liters versus our estimate of 134.0

million liters. Midstream processing ran at 1,573 Mbo versus our 1,504 Mbo estimate. Improved volumes

and the prospective resulting margin improvement lead us to increase our 2010 EPS and CFPS

estimates to $0.47 and $1.53, respectively, from $0.19 and $1.19.



Price Target Increases to $53.On the basis of stronger-than-expected refining operations and a

stronger balance sheet, we increased our target price $7 per IOC share to $53. We base our $53 price

target on a long-term DCF model that assumes a 75% success factor for IOC’s LNG project. We

discount these probability weighted cash flows by a 10.3% weighted average cost of capital while

assigning the company a 3% terminal growth rate. We maintain our BUY rating.




Please click on the attached link or PDF for the full report.