latest re png from ms

Morgan Stanley latest update re PNG.

Morgan Stanley today
July 25, 2011

InterOil Corporation

Pieces Fall-ing into Place

We believe IOC will outperform this Fall as IOC

approaches finalization for its LNG development by

year-end, enters gas off-take agreements, and

commences the first high impact potential exploration well

since company-maker Antelope.

Finalization of resource development and the return

of high impact exploration will begin to de-risk our

$225/share NAV. We believe much of IOC?s stock price

volatility since January 2010 can be attributed to: (1)

delay and change in IOC?s natural gas and condensate

development plans, (2) skepticism regarding IOC?s

monetization decisions, and (3) lack of exploration

catalysts. The stock?s volatility has been amplified by

market volatility, early-stage development variation, and

the often-polarizing nature of this stock. We believe

these elements will be largely addressed in 2H11 and

IOC will breakout of its recent trading range that has

been established since discovery of Antelope that

established IOC?s resource.

Expect project?s value to become de-risked. We

believe IOC?s choices of floating (FLNG) and modular

mid-sized plants to liquefy its gas and the choice of

partners in FLEX LNG and EWC will de-risk as these

applications become more main-stream, gas off-takes

are signed, and partner Mitsui reaches final investment

decision, a key milestone (FID). As larger scale plants

continue to witness cost inflation, we expect both

modular mid-sized LNG and FLNG, with material cost

advantages, will gain industry traction. FID in late 2011

by Mitsui and likely expansion of their role

commensurate with a larger CSP plant, will materially

improve IOC?s project credibility and valuation. Mitsui

involvement in 8 LNG projects globally and hands-on

project due diligence since 2009 is more meaningful

than Wall Street?s or a competitor?s assessment.

Exploration matters: IOC discovered 9.36Tcfe of gas

equivalent resource through the drill-bit, which helped

drive the stock from the low $30s to mid-$80s in less

than 4 months. IOC will spud its next high-impact

potential target, Triceretops-2, in 3Q11 with results by

year-end. Success could meaningfully add to our NAV.