ioc_bnp sept 2010

BNP Paribas Securities Asia research is available on Thomson One, Bloomberg, TheMarkets.com, Factset and on http://equities.bnpparibas.com. Please contact your salesperson for authorisation. Please see the important notice on the inside back cover.

TARGET USD90.64 PRIOR TP N/A InterOil IOC US CLOSE USD64.08

BUY ASIA / OIL & GAS UP/DOWNSIDE +41.4%

The niche LNG player InterOil is best value in the space - reserves are at a discount. A re-rating will come from InterOil's move to integrate operations.. Challenges lie ahead, but management is very strong. Cheapest reserves in Asia; TP of USD90.64 suggests 41% upside. A niche LNG player We initiate InterOil with a BUY and NPV-based TP of USD90.64. InterOil is a niche LNG player based in Papua New Guinea (PNG), producing both liquids and natural gas, as well as running PNGs only refinery. The company is transforming itself into an integrated oil and LNG producer. Unlike its peers, the company has fought tooth and nail, refusing to sell out to an IOC to fund the capital-intensive LNG project. Management is eager to maintain maximum equity in its robust gas reserves, which it found through pioneering exploration. Management is taking advantage of a lull in LNG construction and is making a deal with the liquefaction facility construction company to operate a tolling facility, meaning no upfront capex for InterOil, and a toll paid only out of revenue.

Not just producing, but transforming InterOil currently produces and refines crude and condensate. The gas that it currently produces is re-injected into wells to maintain pressure. The company will be expanding its condensate operations, and soon will be running an LNG facility in Southern PNG. These moves will mark the companys formal shift to an integrated player, and should generate the cash flow required to continue its successful exploration program. The move to full integration in both liquids and gas is key to cash flows and to a potential stock price re-rating.

Valuation and risks InterOil fits in with our larger Asia LNG view. We believe that the companys timing in bringing its LNG project on-line will fit well with the China and regional changes mentioned in this report. We find that due to execution risk, reserves here are highly discounted. We believe that the discount is much greater than what the company would pay should it need to sell out to the neighbouring Exxon-Mobil-Oil Search LNG project. We value the company by NPV of reserves and arrive at a fair value of USD90/share. Our key commodity assumptions are long-term crude prices of USD90/bbl and long-term, natural-gas prices of USD10/mmbtu. We apply a WACC of 15% to discount the cash flows being generated from the companys certified reserves of 1,520m boe (8.1 tcf gas/156.5m bbls of condensates). Savvy management and cheap reserves in stock-price terms underpin our BUY recommendation.

HOW WE DIFFER FROM THE STREET

BNP Consensus % Diff

Target Price (USD) 90.64 102.50 (11.6)

EPS 2010 (USD) 0.51 0.26 96.2

EPS 2011 (USD) 0.51 0.27 88.9

Positive Neutral Negative Market Recs. 2 0 0

KEY STOCK DATA

YE Dec (USD 1000) 2010E 2011E 2012E

Revenue 883,049 1,096,981

1,207,725

Rec. net profit 20,192 20,388 11,420

Recurring EPS (USD) 0.51 0.51 0.29

Prior rec. EPS (USD) - - -

Chg. In EPS est. (%) N/A N/A N/A

EPS growth (%) (33.7) 1.0 (44.0)

Recurring P/E (x) 126.6 125.4 223.9 Dividend yield (%) 0.0 0.0 0.0

EV/EBITDA (x) 54.4 47.3 56.2

Price/book (x) 5.5 5.3 5.2

Net debt/Equity (0.4) 75.3 224.0

ROE (%) 4.5 4.3 2.3

20

40

60

80

Sep-09 Dec-09 Mar-10 Jun-10 Sep-10

(USD)

(2)

48

98

148

(%)InterOilRel to S&P 500 INDEX

Share price performance 1 Month 3 Month 12 Month

Absolute (%) (6.1) 10.8 104.3

Relative to country (%) (9.9) 9.1 97.5

Next results October 2010 Mkt cap (USD m) 2,557

3m avg daily turnover (USD m) 33.6

Free float (%) 77

Major shareholder Wells Capital Management Inc (11%)

12m high/low (USD) 83.70/31.91

3m historic vol. (%) 58.5

ADR ticker -

ADR closing price (USD) -

Sources: Bloomberg consensus; BNP Paribas estimates

ADR TICKER: IOC US INITIATION

Bradley Way

+86 10 6561 1118 ext [email protected]

Kunal Agrawal +65 6210 1953

[email protected]

20 September 2010PREPARED BY BNP PARIBAS SECURITIES ASIA THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. IMPORTANT DISCLOSURES CAN BE FOUND IN THE DISCLOSURES APPENDIX.

BRADLEY WAY INTEROIL 20 SEPTEMBER 2010

2 BNP PARIBAS

Contents

1) Who is InterOil?........................................................................................................................................................................... 3

2) Bios of select management ........................................................................................................................................................ 6 H. Wayne Hamal General Manager Exploration & Production ......................................................................................... 6 Robert Andrew Mitchell Head of Liquid Niugini Gas Ltd................................................................................................... 6 Henry Aldorf President of Pacific LNG and Director of Liquid Niugini Gas Ltd ................................................................. 6

3) Why is this an important play for investors to note?............................................................................................................... 7

4) Valuation ...................................................................................................................................................................................... 8 The Risk Experts............................................................................................................................................................... 10

5) P&L, Balance Sheet and Cash Flow ........................................................................................................................................ 11

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3 BNP PARIBAS

Who is InterOil? InterOil is a PNG-based explorer with production of crude and condensate. A refinery and a liquefaction facility for LNG sales are under way. They are a developing a vertically integrated energy business, with Petroleum licenses covering 3.9m acres, a 36 kbd-capacity refinery as well as retail and distribution facilities for refined fuels. The company has plans to construct its LNG facility near its refinery in Port Moresby, PNG.

Exhibit 1: InterOils Exploration Acreage

Source: Company Presentation

Exhibit 2: Participating Interests Upstream Exhibit 3: Participating Interests Midstream LNG

Investor Group20%

Petromin23%

InterOil57%

Pacific LNG48%

InterOil52%

Sources: Company Presentation; BNP Paribas Sources: Company Presentation; BNP Paribas


4 BNP PARIBAS

Interoil has the largest exploration acreage in PNG, and boasts prolific reserves. We note that with very encouraging fiscal terms in PNG, and large untapped reserves, the potential for NPV enhancement in this highly prospective play is tremendous.

The companys success started in the Elk/Antelope fields, where the company found both petroleum and natural gas. Adjacent fields show high potential, and the company continues to explore in these areas.

A summary of reserves and production in key assets can be found below:

Exhibit 4: Reserve Profile Exhibit 5: Reserve Mix

0

200

400

600

800

1,000

1,200

1,400

1,600

2010 2014 2018 2022 2026 2030 2034 2038

Condensate reserves Gas reserves(m boe)

0102030405060708090

100

2010 2014 2018 2022 2026 2030 2034 2038

Condensate reserves Gas reserves(%)

Source: BNP Paribas estimates Source: BNP Paribas estimates

Exhibit 6: Production Profile Exhibit 7: Production Mix

020406080

100120140160180200

2010 2014 2018 2022 2026 2030 2034 2038

Condensate Gas('000 boe/d)

0

10

20

30

40

50

60

70

80

90

100

2013 2018 2023 2028 2033 2038

Condensate Gas(%)



5 BNP PARIBAS

Exhibit 8: EBIT Contribution

(500)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2010 2011 2012 2013 2014 2015

Upstream + LNG EBIT Refinery EBIT(USD m)

Source: BNP Paribas estimates

Key to InterOils success is its strong management team, who has found prolific reserves in difficult terrain, and now faces the challenges of achieving integration without the typical route of selling down significant equity at low prices to an oil major to fund capex. Below are snapshots of key management:


6 BNP PARIBAS

Bios of select management H. Wayne Hamal General Manager Exploration & Production H. Wayne Hamal joined InterOil in 2005 as Senior Drilling and Engineering Manager prior to taking on the role of GM E&P in 2008. From 2002 to 2005, Mr Hamal was employed by Marathon Oil Co as Joint Venture Manager, Equatorial Guinea, where he worked directly with production operations and major projects and on all communication with the State government and joint-interest partners. From 1987 to 2002, Mr Hamal was employed by CMS Oil & Gas Co where from 1999 to 2002 he held the position of Production Manager, Equatorial Guinea. Mr Hamal holds a Bachelor of Science degree in Petroleum Engineering from the Colorado School of Mines.

Robert Andrew Mitchell Head of Liquid Niugini Gas Ltd Andrew Mitchell joined InterOil in 2009 and is the manager of major projects in the company. Mr Mitchell is responsible for initially directing the condensate stripping project for E&P business unit and the LNG project for the midstream business unit. The condensate project is a major focus of InterOils corporate growth strategy and is key to the development of the Elk/Antelope field. Prior to joining InterOil, Mr Mitchell was a Senior Project Manager with Husky Energy. Mr Mitchell was also employed with the Marathon Oil company for over 28 years where he held global, project-leadership roles covering all aspects of project development, with specialization in GTL and LNG technology.

Henry Aldorf President of Pacific LNG and Director of Liquid Niugini Gas Ltd Henry Aldorf has 37 years of experience in the petroleum and chemicals industry, the last nine of which have been with Marathon International. In addition to his most recent role with Marathon, leading Worldwide Business Development, including Upstream Commercial Strategy and Negotiations, Mr Aldorf held the position of Senior Vice President International Business Development, Senior Vice-President West Africa, Middle East and Asia Business Development, and Senior Vice-President West Africa Business Development and Integrated Gas Director EG LNG Co. During his tenure, Marathon grew from a company with 8,000 BOEPD to 176,000 BOEPD and the market capitalization increased from USD5b to USD25b. Mr Aldorf is reunited with former Marathon team members, Mr Andy Mitchell and Mr Wayne Hamal, both currently with Liquid Niugini Gas and InterOil, responsible for designing, partnering, and executing the Equitorial Guinea (EGLNG) LNG plant construction in the shortest time ever for an LNG project.


7 BNP PARIBAS

Why is this an important play for investors to note? The first issue pertains to our top-down view of natural gas in Asia. As detailed in the industry section of this report, we believe that large increases in consumption of natural gas in China (driving outgoing LNG purchases), along with significant upward movement in the marginal cost of supply (MCOS) in China, should support companies selling LNG in the near- to mid-terms. Following this by about 5 years, we should see Chinas MCOS halve, as significant quantities of shale and CBM come on-line. As such we have a sweet spot or a good time to be marketing a train of LNG, and a bad time as determined by volume and MCOS conditions of the regions marginal buyers

So were looking for a player marketing LNG during the sweet spot, where the quantity sold during the sweet spot relative to the consolidated company is significant. InterOil ticks these boxes. Were also looking for an operator who is going to net a significant amount per BOE. PNG ticks this box, in offering very relaxed fiscal terms.

The PSC (Production Sharing Contract) terms require: All licences in Papua New Guinea are governed by concession terms. State take

comprises royalty, corporate tax and a development levy.

Development Levy is charged at a rate of 2% of the wellhead value of all petroleum produced from Petroleum Development Licences (PDL) in PNG.

Royalty is charged at the rate of 2.00% of the "wellhead value. In conjunction with the development levy, the PDL licensee will still be liable to pay a royalty payment.

Tax Rate amendments in the tax structure announced in the 2003 PNG Budget. The Guinean Government announced a reduction in the Corporate Tax Rate for new oil and gas developments from 45% to 30% for all Petroleum-Prospecting Licences (PPL) issued within the period from 1 January 2003 to 31 December 2007, while the PDL must be issued before 31 December 2017.

Furthermore, InterOil is building its facilities during an industry lull when costs are lower. The company is also finding interesting ways to finance these capital-intensive plans the company has an option to offer Mitsui [8031 JP, Not rated] an option to convert Mitsuis USD550m investment (50:50 JV. Mistsui would bring in USD275m as equity and another USD275m as debt financing to InterOil to fund the project capex) in the condensate stripping plant to a 2.5% equity in the projects upstream assets. If Mistui chooses to exercise the option, InterOil will own 100% of the condensate stripping plant, without having to invest a single dollar to the plant capex. Also, at the time of InterOils proposed equity farm-out at the end of 2010, Mistui also holds a right to exercise an additional 2.5% equity option in the upstream assets at the same price as the farm-out deal pricing. We believe the equity farm-out along with an optional 2.5% equity offer to Mitsui will help InterOil raise significant cash to fund its upstream exploration and development programme.

With the above-mentioned issues addressed according to our investment criteria, we now take into account execution risk. InterOil has made significant hires to ensure that these projects go ahead. One of the key hires made was H Wayne Hamal. Hamal is General Manager of InterOils Exploration and Production business segment and joined the company in 2005 as Senior Drilling and Engineering Manager prior to taking on the role of GM E&P in 2008. Prior to joining InterOil, and from 2002, Hamal was employed by Marathon Oil Co as Joint Venture Manager, Equatorial Guinea, where he worked directly with production operations and major projects and on all communications with the State government and joint interest partners. From 1987 to 2002 Wayne was employed by CMS Oil & Gas Co where from 1999 to 2002 he held the position, Production Manager, Equatorial Guinea.

Mr Hamal is known in the industry for his project management skills. The two key issues going forward will likely be Hamals success in getting these projects off the ground, and the success of exercising the above-mentioned options with the contractors involved, in order to trim capex.


8 BNP PARIBAS

Valuation We initiate with a BUY recommendation, and a target price of USD90.64/share. Our target price is based on an NPV of the companys reserves, and to address issues of risk, we have employed a hefty WACC of 15%. We still find 48% upside potential to the stock from current levels. We understand that investors will discount risk to reach the stage where facilities are running, but we see significant potential in managements plans. We also note that the projects that IOC is proposing have several milestones (e.g., finalizing plans with Mitsui for the condensate-stripper payment) where confirmation of success should move the company forward toward fair value in a step- wise fashion.

Our key modelling assumptions are as follows:

We assume condensate reserves of 156.5m bbls and natural gas reserves of 8.18 tcf. Our reserve estimates are based on the base case estimate of certified reserves by GLJ Petroleum Consultants Ltd.

The base-case reserve estimates are 21% lower than the best-case estimates and 32% higher than the worst-case estimates.

We believe the upstream development of these reserves would cost about USD690m (in 2010 terms) through 2010-14 as the company would need to drill about 12 development wells and supporting infrastructure.

For the LNG project, we expect a capex requirement of about USD6.6b through 2010-14 for two fixed LNG trains of 4m tonnes each.

However, InterOil is currently in negotiations for bringing in an LNG partner which will own and operate a floating LNG terminal with 3.0m-3.5m tonnes capacity. In return, InterOil will look to offer the LNG operator about 10-20% of LNG production on a fob basis. We currently factor this in our assumptions, and believe the execution of such a deal would significantly reduce the project capex requirements and also substantially reduce the time to market the upstream gas.

We build a DCF model to value the company, based on the following assumptions:

LNG production life through 2014-34 based on current reserve estimates. A very high cost of equity of 34% incorporating the project risks involved. Cost of debt of 10%, again higher than industry average. As such, a WACC of 15%.

Exhibit 9: NPV Summary Exhibit 10: NPV Sensitivity Cash flows Total remaining company cash flows (USD m) 51,919

Total remaining government cash flows (USD m) 31,264

Total remaining cash flows (USD m) 83,183 Company CFs as a % of total (%) 62.4 NPV Net present value (USD m) 6,257

Net present value - attributable to InterOil (USD m) 3,616

Shares outstanding (m) 39.9

NPV/share (USD) 90.64 Discount rate (%) 15.0

InterOil implied value per share (USD/share) Change (%) 10% increase in gas price estimates 106.80 18

10% increase in LT crude price est. 94.20 4

BNPP base case NPV 90.64 1ppt increase in WACC 79.80 (12)

1ppt decrease in WACC 103.00 14


Exhibit 11: Capex Sensitivity for LNG Facility InterOil implied value per share USD/share Change (%) 10% increase in capex/tonne 86.95 (4)

10% decrease in capex/tonne 94.32 4

BNPP base case NPV 90.64 Source: BNP Paribas estimates


9 BNP PARIBAS

From this we derive a fair value of the company of USD90.64/share, yielding 41% upside potential. While we note risks in getting these prolific reserves to market, we believe that this is well taken into account in current stock prices, and we see robust management and significant chances for success. InterOil is one of our 3 top picks in natural gas in the region.


10 BNP PARIBAS

InterOil Implied Value per share (USD/share) Increase (%) 10ppt increase in gas price estimates 106.80 18

10ppt increase in LT crude price est. 94.20 4

BNPP base case NPV 90.64

Key Earnings Drivers & Sensitivity 10% increase in our gas price estimate leads to an 18%

upside to the implied NPV per share.

10% increase in our crude price estimate leads to a 4% upside to the implied NPV per share.


Inter Oil and OECD World Crude Oil Price FOB Spot Brent USD (3M and 6M Realised-Vol)

Regression Inter Oil Rel to S&P 500 INDEX

0

50

100

150

200

250

Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

(%)

InterOil - 3M Realised - VolInterOil - 6M Realised - VolOECD World Crude Oil Price FOB Spot Brent USD - 3M Realised - VolOECD World Crude Oil Price FOB Spot Brent USD - 6M Realised - Vol

Sources: Bloomberg; BNP Paribas

9

19

29

39

49

59

69

79

642 842 1042 1242 1442S&P 500 INDEX

Inte

rOil

InterOil = 47 + -0.01 * SPX IndexR Square = 0.0302 Regression based on 261 observations of 5 years weekly data. Please refer to Appendix 1 for the explanation of R-square Sources: Bloomberg; BNP Paribas

Long/Short Chart The Risk Experts

InterOil - Oil Search

-2s

-1s

Mean

+1s

+2s

0.52

2.52

4.52

6.52

8.52

10.52

12.52

14.52

Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10

(x)

The Risk Experts Our starting point for this page is a recognition of the

macro factors that can have a significant impact on stock-price performance, sometimes independently of bottom-up factors.

With our Risk Expert page, we identify the key macro risks that can impact stock performance.

This analysis enhances the fundamental work laid out in the rest of this report, giving investors yet another resource to use in their decision-making process.



11 BNP PARIBAS

F I N A N C I A L S T A T E M E N T S

InterOil Profit and Loss (USD 1000) Year Ending Dec 2008A 2009A 2010E 2011E 2012ERevenue 915,579 688,479 883,049 1,096,981 1,207,725Cost of sales ex depreciation (888,623) (601,983) (792,605) (992,734) (1,092,575)Gross profit ex depreciation 26,956 86,496 90,444 104,247 115,150Other operating income 4,148 4,579 4,579 4,579 4,579Operating costs (43,746) (42,531) (48,011) (50,968) (61,152)Operating EBITDA (12,642) 48,544 47,013 57,859 58,577Depreciation (14,143) (14,322) (5,256) (5,913) (6,242)Goodwill amortisation 0 0 0 0 0Operating EBIT (26,785) 34,222 41,757 51,946 52,335Net financing costs 3,943 (14,861) (5,578) (13,074) (20,382)Associates 0 0 0 0 0Recurring non operating income 0 0 0 0 0Non recurring items 11,127 (24,346) 0 0 0Profit before tax (11,714) (4,985) 36,178 38,872 31,954Tax (82) 11,076 (15,986) (18,484) (20,533)Profit after tax (11,796) 6,091 20,192 20,388 11,420Minority interests 0 0 0 0 0Preferred dividends 0 0 0 0 0Other items 0 0 0 0 0Reported net profit (11,796) 6,091 20,192 20,388 11,420Non recurring items & goodwill (net) (11,127) 24,346 0 0 0Recurring net profit (22,923) 30,437 20,192 20,388 11,420

Per share (USD) Recurring EPS * (0.57) 0.76 0.51 0.51 0.29Reported EPS (0.30) 0.15 0.51 0.51 0.29DPS 0.00 0.00 0.00 0.00 0.00

Growth Revenue (%) 46.4 (24.8) 28.3 24.2 10.1Operating EBITDA (%) (356.6) (484.0) (3.2) 23.1 1.2Operating EBIT (%) 230.8 (227.8) 22.0 24.4 0.8Recurring EPS (%) (33.1) (232.8) (33.7) 1.0 (44.0)Reported EPS (%) (59.2) (151.6) 231.5 1.0 (44.0)

Operating performance Gross margin inc depreciation (%) 1.4 10.5 9.6 9.0 9.0Operating EBITDA margin (%) (1.4) 7.1 5.3 5.3 4.9Operating EBIT margin (%) (2.9) 5.0 4.7 4.7 4.3Net margin (%) (2.5) 4.4 2.3 1.9 0.9Effective tax rate (%) - - 44.2 47.6 64.3Dividend payout on recurring profit (%) - 0.0 0.0 0.0 0.0Interest cover (x) - 2.3 7.5 4.0 2.6Inventory days 34.0 46.4 27.9 21.0 22.2Debtor days 21.1 27.6 28.8 25.6 21.9Creditor days 28.5 41.7 38.9 47.9 52.9Operating ROIC (%) (7.1) 8.0 8.8 7.7 4.2Operating ROIC WACC (%) - - - - -ROIC (%) (7.1) 7.7 8.3 7.4 4.1ROIC WACC (%) - - - - -ROE (%) (14.2) 9.1 4.5 4.3 2.3ROA (%) (4.8) 7.4 3.9 3.4 1.9* Pre exceptional, pre-goodwill and fully diluted

Sources: InterOil; BNP Paribas estimates

The company currently generates earnings from its refining business


12 BNP PARIBAS

InterOil Cash Flow (USD 1000) Year Ending Dec 2008A 2009A 2010E 2011E 2012ERecurring net profit (22,923) 30,437 20,192 20,388 11,420Depreciation 14,143 14,322 5,256 5,913 6,242Associates & minorities 0 0 0 0 0Other non-cash items 11,127 (24,346) 0 0 0Recurring cash flow 2,346 20,413 25,448 26,301 17,662Change in working capital 13,241 24,096 51,940 32,081 14,499Capex - maintenance (63,891) (91,788) 0 0 0Capex new investment (5,172) (11,783) (69,000) (523,500) (875,160)Free cash flow to equity (53,476) (59,063) 8,388 (465,118) (842,999)Net acquisitions & disposals 0 0 0 0 0Dividends paid 0 0 0 0 0Non recurring cash flows 21,672 18,004 0 100,000 100,000Net cash flow (31,804) (41,059) 8,388 (365,118) (742,999)Equity finance 0 0 0 0 0Debt finance 18,071 (53,166) 4,711 396,312 694,801Movement in cash (13,733) (94,225) 13,098 31,194 (48,198)Per share (USD) Recurring cash flow per share 0.06 0.51 0.64 0.66 0.44FCF to equity per share (1.34) (1.48) 0.21 (11.66) (21.13)Balance Sheet (USD 1000) Year Ending Dec 2008A 2009A 2010E 2011E 2012EWorking capital assets 187,912 161,625 159,746 169,130 169,801Working capital liabilities (146,940) (83,999) (134,060) (275,525) (390,695)Net working capital 40,972 77,626 25,686 (106,395) (220,894)Tangible fixed assets 351,600 393,530 457,274 974,861 1,843,780Operating invested capital 392,571 471,156 482,961 868,466 1,622,886Goodwill 0 6,626 6,626 6,626 6,626Other intangible assets 0 0 0 0 0Investments 0 0 0 0 0Other assets 3,361 23,523 23,523 23,523 23,523Invested capital 395,932 501,305 513,110 898,615 1,653,035Cash & equivalents (48,971) (46,450) (59,548) (90,742) (42,544)Short term debt 9,540 9,540 9,540 9,540 9,540Long term debt * 117,405 43,589 48,300 444,612 1,139,413Net debt 77,975 6,679 (1,708) 363,410 1,106,409Deferred tax 0 0 0 0 0Other liabilities 73,326 39,573 39,573 39,573 39,573Total equity 227,134 441,976 462,168 482,556 493,976Minority interests 0 0 0 0 0Invested capital 395,932 501,305 513,110 898,615 1,653,035* includes convertibles and preferred stock which is being treated as debt

Per share (USD) Book value per share 5.69 11.08 11.58 12.09 12.38Tangible book value per share 5.69 10.91 11.42 11.93 12.21Financial strength Net debt/equity (%) 34.3 1.5 (0.4) 75.3 224.0Net debt/total assets (%) 13.2 1.1 (0.2) 28.7 53.0Current ratio (x) 1.5 2.2 1.5 0.9 0.5CF interest cover (x) - (2.2) 14.9 5.5 2.6Valuation 2008A 2009A 2010E 2011E 2012ERecurring P/E (x) * neg 84.0 126.6 125.4 223.9Recurring P/E @ target price (x) * neg 118.8 179.1 177.4 316.7Reported P/E (x) neg 419.8 126.6 125.4 223.9Dividend yield (%) 0.0 0.0 0.0 0.0 0.0P/CF (x) 1,089.7 125.3 100.5 97.2 144.8P/FCF (x) (47.8) (43.3) 304.8 (5.5) (3.0)Price/book (x) 11.3 5.8 5.5 5.3 5.2Price/tangible book (x) 11.3 5.9 5.6 5.4 5.2EV/EBITDA (x) ** (212.0) 53.5 54.4 47.3 56.2EV/EBITDA @ target price (x) ** (295.9) 75.4 77.0 65.6 74.3EV/invested capital (x) 6.7 5.1 5.0 3.2 2.2* Pre exceptional, pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non-operating income

Sources: InterOil; BNP Paribas estimates

The company plans to run an LNG facility in southern PNG, enabling it to generate cash to sustain its successful exploration program


13 BNP PARIBAS

NOTES


14 BNP PARIBAS

NOTES


15 BNP PARIBAS

D I S C L A I M E R S & D I S C L O S U R E S

ANALYST(S) Bradley Way, BNP Paribas Securities (Asia) Ltd, Beijing Representative Office, +86 10 6561 1118 ext 1215, [email protected]. Kunal Agrawal, BNP Paribas Securities (Singapore) Pte Ltd, Co. Reg. No. 199801966C, +65 6210 1953, [email protected]. This report was produced by a member company of the BNP Paribas Group (Group)1. This report is for the use of intended recipients only and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without our prior written consent. By accepting this report, the recipient agrees to be bound by the terms and limitations set out herein. The information contained in this report has been obtained from public sources believed to be reliable and the opinions contained herein are expressions of belief based on such information. No representation or warranty, express or implied, is made that such information or opinions is accurate, complete or verified and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investments. Information and opinions contained in this report are published for reference of the recipients and are not to be relied upon as authoritative or without the recipients own independent verification or taken in substitution for the exercise of judgement by the recipient. All opinions contained herein constitute the views of the analyst(s) named in this report, they are subject to change without notice and are not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in this report. Any reference to past performance should not be taken as an indication of future performance. No member company of the Group accepts any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. The analyst(s) named in this report certifies that (i) all views expressed in this report accurately reflect the personal views of the analyst(s) with regard to any and all of the subject securities and companies mentioned in this report and (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed herein. This report is prepared for professional investors and is being distributed in Hong Kong by BNP Paribas Securities (Asia) Limited to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent. BNP Paribas Securities (Asia) Limited, a subsidiary of BNP Paribas, is regulated by the Securities and Futures Commission for the conduct of dealing in securities, advising on securities and providing automated trading services. This report is being distributed in the United Kingdom by BNP Paribas London Branch to persons who are not private customers as defined under U.K. securities regulations. BNP Paribas London Branch, a branch of BNP Paribas, is regulated by the Financial Services Authority for the conduct of its designated investment business in the U.K. This report may be distributed in the United States by BNP PARIBAS SECURITIES ASIA or by BNP Paribas Securities Corp. Where this report has been distributed by BNP PARIBAS SECURITIES ASIA it is intended for distribution in the United States only to major institutional investors (as such term is defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) and is not intended for the use of any person or entity that is not a major institutional investor. Where this report has been distributed by BNP Paribas Securities Corp, a U.S. broker dealer, it will have been reviewed by a FINRA S16 qualified registered supervisory analyst or a S24 qualified and authorized person, in accordance with FINRA requirements concerning third party affiliated research. All U.S. institutional investors receiving this report should effect transactions in securities discussed in the report through BNP Paribas Securities Corp. BNP Paribas Securities Corp. is a member of the New York Stock Exchange, the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation. Reproduction, distribution or publication of this report in any other places or to persons to whom such distribution or publication is not permitted under the applicable laws or regulations of such places is strictly prohibited. Information on Taiwan listed stocks is distributed in Taiwan by BNP Paribas Securities (Taiwan) Co., Ltd. Distribution or publication of this report in any other places to persons which are not permitted under the applicable laws or regulations of such places is strictly prohibited. 1 No portion of this report was prepared by BNP Paribas Securities Corp personnel. Disclosure and Analyst Cert i f ication For a complete set of required disclosures relating to the companies that are the subject of this report, please mail a request to BNP Paribas Compliance Department, 787 Seventh Avenue, New York, NY 10019. BNP Paribas represents that: Within the next three months, BNPP or its affiliates may receive or seek compensation in connection with an investment banking relationship with one or more of the companies referenced herein. The analyst(s) named in this report certifies that (i) all views expressed in this report accurately reflect the personal view of the analyst(s) with regard to any and all of the subject securities and companies mentioned in this report; (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, relate to the specific recommendation or views expressed herein; and (iii) BNPP is not aware of any other actual or material conflicts of interest concerning any of the subject securities and companies referenced herein as of the time of publication of the research report. A detailed discussion of the valuation methodologies used to derive our target prices and the risks that could impede their achievement for stocks recommended in the report is available on request from the analyst(s) named in this report. Recommendation structure All share prices are as at market close on 16 September 2010 unless otherwise stated. Stock recommendations are based on absolute upside (downside), which we define as (target price* - current price) / current price. If the upside is 10% or more, the recommendation is BUY. If the downside is 10% or more, the recommendation is REDUCE. For stocks where the upside or downside is less than 10%, the recommendation is HOLD. In addition, we have key buy and key sell lists in each market, which are our most commercial and/or actionable BUY and REDUCE calls and are limited to at most five key buys and five key sells in each market at any point in time. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation. *In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value. Rating distr ibut ion (as at 17 September 2010) Out of 481 rated stocks in the BNP Paribas coverage universe, 297 have BUY ratings, 133 are rated HOLD and 51 are rated REDUCE. Within these rating categories, 4.04% of the BUY-rated companies either currently are or have been BNP Paribas clients in the past 12 months, 4.51% of the HOLD-rated companies are or have been clients in the past 12 months, and 9.80% of the REDUCE-rated companies are or have been clients in the past 12 months. Should you require additional information please contact the relevant BNP Paribas research team or the author(s) of this report. 2010 BNP Paribas Group

HONG KONG BNP Paribas Securities (Asia) Ltd 63/F, Two International Finance Centre 8 Finance Street, Central Hong Kong SAR China Tel (852) 2825 1888 Fax (852) 2845 9411

BEIJING

Beijing Representative Office Unit 1618, South Tower Beijing Kerry Centre 1 Guang Hua Road, Chao Yang District Beijing 100020, China Tel (86 10) 6561 1118 Fax (86 10) 6561 2228

SHANGHAI BANGKOK (In cooperation with BNP Paribas) Thanachart Securities Public Co Ltd 28/F, Unit A1 Siam Tower Building 989 Rama 1 Road, Patumwan Bangkok 10330 Thailand Tel (66 2) 617 4900 Fax (66 2) 658 1470

KUALA LUMPUR BNP Paribas Capital (Malaysia) Sdn. Bhd. Suite 21.03 Level 21 Menara Dion 27 Jalan Sultan Ismail 50250 Kuala Lumpur Malaysia Tel (60 3) 2050 9928 Fax (60 3) 2070 0298

SEOUL BNP Paribas Securities Korea Co Ltd 22/F, Taepyeongno Building 310 Taepyeongno 2-ga Jung-gu, Seoul 100-767 Korea Tel (82 2) 2125 0500 Fax (82 2) 2125 0593

SINGAPORE BNP Paribas Securities (Singapore) Pte Ltd (Co. Reg. No. 199801966C) 20 Collyer Quay #08-01 Tung Centre Singapore 049319 Tel (65) 6210 1288 Fax (65) 6210 1980

TAIPEI BNP Paribas Securities (Taiwan) Co Ltd

NEW YORK BNP Paribas The Equitable Tower 787 Seventh Avenue New York NY 10019, USA Tel (1 212) 841 3800 Fax (1 212) 841 3810

BASEL BNP Paribas Aeschengraben 26 CH 4002 Basel Switzerland Tel (41 61) 276 5555 Fax (41 61) 276 5514

FRANKFURT BNP Paribas Mainzer Landstrasse 16 60325 Frankfurt Germany Tel (49 69) 7193 6637 Fax (49 69) 7193 2520

GENEVA BNP Paribas 2 Place de Hollande 1211 Geneva 11 Switzerland Tel (41 22) 787 7377 Fax (41 22) 787 8020

LONDON BNP Paribas 10 Harewood Avenue London NW1 6AA UK Tel (44 20) 7595 2000 Fax (44 20) 7595 2555

LYON BNP Paribas Equities France Socit de Bourse 3 rue de L Arbre Sec 69001 Lyon France Tel (33 4) 7210 4001 Fax (33 4) 7210 4029

MADRID BNP Paribas SA, sucursal en Espana Hermanos Becquer 3 PO Box 50784 28006 Madrid Spain Tel (34 91) 745 9000 Fax (34 91) 745 8888

MILAN BNP Paribas Equities Italia SIM SpA Piazza San Fedele, 2 20121 Milan Italy Tel (39 02) 72 47 1 Fax (39 02) 72 47 6562

PARIS BNP Paribas Equities France Socit de Bourse 20 boulevard des Italiens 75009 Paris France Tel (33 1) 4014 9673 Fax (33 1) 4014 0066

ZURICH BNP Paribas Talstrasse 41 8022 Zurich Switzerland Tel (41 1) 229 6891 Fax (41 1) 267 6813

MANAMA BNP Paribas Bahrain PO Box 5253 Manama Bahrain Tel (973) 53 3978 Fax (973) 53 1237

www.equities.bnpparibas.com

BNP Paribas Equities (Asia) Ltd

TOKYO BNP Paribas Securities (Japan) Ltd GranTokyo North Tower 1-9-1 Marunouchi, Chiyoda-Ku Tokyo 100-6740 Japan Tel (81 3) 6377 2000 Fax (81 3) 5218 5970

MUMBAI BNP Paribas Securities India Pvt Ltd 6/F, Poonam ChambersB-Wing, Shivsagar EstateDr Annie Beasant Road, WorliMumbai 400 018 India Tel (91 22) 6628 2300 Fax (91 22) 6628 2455

BNP Paribas Equities (Asia) Ltd Shanghai Representative Office Room 2630, 26/F Shanghai World Financial Center 100 Century Avenue Shanghai 200120, China Tel (86 21) 6096 9000 Fax (86 21) 6096 9018

JAKARTA PT BNP Paribas Securities Indonesia Grand Indonesia, Menara BCA, JI. M.H. Thamrin No. 1Jakarta 10 0 Indonesia Tel (62 21) 2358 6586 Fax (62 21) 2358 7587

35/F

31

72 F, Taipei 101 No. 7 Xin Yi Road, Sec. 5 Taipei, Taiwan (886 2) 8729 7000

Fax (886 2) 8101 2168Tel

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ioc_bnp sept 2010

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