Energy: Exploration & Production

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InterOil Corporation (NYSE:IOC) Changes Are in the Air: Reiterate BUY and $115 Price Target News

cmcdougall@westlakesecurities.com 512.314.0707 April 24, 2013

W. Chris McDougall, CFA

The CEO of InterOil Corporation (IOC or the Company), Mr. Phil Mulacek, is retiring effective at April 30, 2013. Chairman of the Board, Mr. Gaylen Byker, will assume the interim CEO role. The Company is conducting a search for permanent replacement.

Analysis
We view this news as an overall positive move. Exit of CEO makes it more likely that we see a sale of the entire Company or a higher proportion of the resource base. o We believe that given Mr. Mulaceks entrepreneurial personality, he would want to continue holding on to control of the resource and execute a development plan that sold the minimum percentage of the resource. o We believe that some other members of the management team, Board of Directors and investor base are more risk averse and would like to sell a greater percentage of the resource base and/or the entire company. While Mr. Mulacek is a great entrepreneur and deserves a lot of credit for taking the company this far, a different skill set is needed to take the Company to the next level. That required skill set will also be different depending on the development model chosen. o Announcing this transition prior to finalizing a deal clears the way with partners that had past conflicts with Mr. Mulacek. We believe the transition was announced prior to a deal being executed so that it was clear to all bidders that the board would make the final decision without undue influence from the CEO. o It is possible that a bad relationship developed between Mr. Mulacek and one of the bidding groups during the past several years as InterOil defended attempts by other players to develop resources that InterOil had discovered. While we would have preferred that this announcement accompanied a finalized agreement, it is understandable that this transition could be a prerequisite to moving forward on one or more paths. o If the Company was simply working with one bidder, it would be easy to make a CEO transition part of an announced deal. However, there could be a situation that the Company is working with some bidders that would be more comfortable having the transition announced ahead of a deal. We acknowledge that this does introduce some uncertainty for shareholders until a deal is announced. While the timing of this CEO transition is a bit surprising, we are encouraged once we consider some other recent data points detailed in subsequent sections.

Pacific Rubiales Analyst Day

Pacific Rubiales (TSX:PRE, Market Cap:$6.4 Billion) mentioned on its recent analyst day that there is a possibility of monetizing its PNG assets sooner than originally thought. o This could mean that PRE is going to sell part or all of its stake as part of a transaction by another player buying InterOil or that the development of Triceratops resource is going to happen faster than PREs original plan of ~5 years. The former would be consistent with somebody acquiring the InterOil. The latter is consistent with IOC selling the gas into Exxons Project. o PRE has invested $116 MM of cash and another ~$230 MM of future drilling carry for 10% of Triceratops/PPL 237. o While much of the investment is refundable, it is only out of oil & gas revenues. Thus, PRE loses its investment if IOC resources are not real. Therefore, we believe PRE conducted substantial due diligence prior to making this investment. o Pacific Rubiales has moved up and expanded the drilling schedule for Triceratops/PPL 237 with one well in 2Q13 and two additional wells by the end of 2013. Pacific Rubiales has also moved included 7 wells in PNG for its 2014 plans. o PRE is also undertaking a regional LNG project with a leased Floating Liquefaction Unit from Exmar (ENXTBR:EXM)

LNG 17 Exhibition and Conference

The LNG 17 is a very large Global LNG conference/exhibition, which we attended in Houston last week. We believe there is a strong LNG demand across Asia, driven by economic growth, increased electrification and fuel switching. Coal-to-natural gas fuel switching is driven by emissions/ease of handling in the case of coal. Diesel-to-natural gas fuel switching is driven primarily by cost with additional emissions benefits. In spite of the belief in the investment community that we are awash in LNG supply, conversations with some LNG buyers indicated that it was still a sellers market. (FuelFix Article) Many booths showed models of modular and/or floating LNG projects including large projects such as Shells Prelude and smaller projects such as the facility being provided by Examar for Pacific Rubiales. Many utilized Chart Industries (NASDAQ:GTLS) cold boxes and the Siemens process similar to the original modular development plan involving Energy World Corporation (ASX:EWC). For Institutional Accounts Only Refer to page 3 for Select Potential Risks and a Discussion of our Price Target Methodology Refer to page 4 for Ratings Definitions, Certifications and Disclosures

InterOil Corporation: Equity Research

Indonesian Gas Demand Implications

Indonesia is seeing the same energy demand growth as the other Asian economies, but its situation is exasperated by the depletion of its large Arun gas field, which has underpinned Pacific Basin supply for the last 25 years with ~12 mmtpa of export capacity at its peak. Pertamina is the 100% state owned oil and gas company of Indonesia. It has ~$70 billion of revenue and ~5.7 billion of EBITDA (Source: Capital IQ) Pertamina recently announced a firm date for converting its major EXPORT terminal connected to the Arun Gas Field into an IMPORT terminal with a targeted project completion date of November 2014. (Upstream: Pertamina sets Arun LNG date) Pertamina has an overall plan of utilizing small regasification and power generation facilities to provide gas and electricity to many of its cities. (press release) o This electrification plan is particularly logical, since Indonesia is a collection of islands with much of the population concentrated its coasts. Pertamina is clearly looking for additional resources to meet Indonesian demand and has made a number of outside investments as illustrated by the following quotes from Pertaminas most recent annual report. (2011) o The Board of Commissioners has stressed the importance of Pertamina investing primarily in high-impact projects, those able to provide significant additional revenue, so that profit targets for the next 5 years [of] Rp 49.3 trillion [~$5.1 Billion] can be achieved. (page 48) o Priority work programs of the Company in 2012 include, among others, to accelerate inorganic growth of oil and gas reserves through Merger & Acquisition initiatives at home and abroad(page 62) We would be very surprised if Pertamina is not evaluating the InterOil resource as one company in a bidding consortium of 1-3 other companies. o The representative at the Pertamina booth was clearly familiar with the proposed InterOil project and had generally positive commentary on the size and quality of the resource. o The geology of the Elk/Antelope and Triceratops gas fields is thought by InterOil to be similar to the Arun gas field and would fit with Pertaminas experience base. Pertamina could bring idle equipment from its Arun export terminal that would reduce the construction time and cost of a project. o The Arun LNG facility has six existing LNG trains with a total output of 12.5 mmtpa. A possible utilization for the idle liquefaction section of the trains could be to move the trains to the site of the InterOil project, which we speculate could save significant time waiting on backordered capital equipment and some cost. o This would be a project of similar scope to a 1 million ton per year methanol plant that is currently being relocated from the southern tip of Chile to the Louisiana Gulf Coast. That project has reported a cost savings of ~30%, but more importantly decreased the construction time by 2 years. o Relocating the liquefaction components from Indonesia to Papua New Guinea would be a much shorter journey than Southern Chile to Louisiana. o While we believe it is a long shot that the ultimate development plan involves relocating major components, we thought it worth highlighting the possibility. Pertamina has talked generally considered relocating the equipment to a variety of projects. (Upstream)

For Institutional Accounts Only Refer to page 4 for Ratings Definitions, Certifications and Disclosures

InterOil Corporation: Equity Research

Price Target and Methodology

Generally, we developed our $115 price target by performing a discounted cash flow analysis to arrive at a Net Present Value for a one or two train LNG facility based on the Elk and Antelope Gas fields. Then, we multiplied the NPV of each scenario by an assumed probability of achieving that scenario. We assumed a 60% probability of achieving a one train project with ~5 Tcf of gas, a 30% probability of achieving a two train project with ~10 Tcf of gas and a 10% probability of not commercializing Elk/Antelope and receiving a nominal value for the remainder of the assets. The one train and two train scenarios contributed ~$53 and ~$62 to our price target, respectively. We relied on managements project cost expectations for the capital cost. Other major assumptions include a 12% project cost of capital and a $14/MMBTU LNG price. In the event that the PNG government purchases an additional 27.5% of the gas, we assumed the purchase price is inline with the Company and PNG government press releases stating that it will be at a market price. Risks to achieving the price target include but are not limited to those discussed below.

Select Potential Risks

Closing an Agreement Selling Interest in Elk/Antelope Fields to Finance an LNG Project o Will require commercial agreement with partner(s) and approval of chosen partners by local government. Commodity Price Risk o The Company intends to extract and sell liquefied natural gas and condensate. These product prices are volatile. o The Company is exposes to changes in the value of this inventory due to fluctuations in the price of crude oil and associated products. Quality and Quantity of Gas and Condensate Resources o There is disagreement among investors and even industry experts on the quality and quantity of InterOils gas reservoirs. o While some investors/industry experts are excited by the large flow rates, well logs and other data, others question why the Company has not performed a multi-week or multi-month flow test. o InterOil does not have proved reserves rather it has certified contingent resources. o The Company has hired an outside consultant to perform a resource evaluation per Canadian regulations. These resource evaluations are generally higher than reserve estimates and provide more flexibility in the evaluation. Financing Risk o The Company will need fresh capital to execute its plan. While the Company hopes to receive much of this capital from an asset sale, there is no guarantee. o The Company continued equity and/or debt financing to execute its growth plan. There is no guarantee that it will be able to obtain it at reasonable rates or at all. Weather Risk o Weather can prohibit the Company from constructing/operating its facilities, destroy the Companys equipment, and/or cause an environmental liability. Papua New Guinea (PNG) is well known for its frequent and heavy rain. Transportation Risk o The Company could lose the ability to transport its products to sales points due to pipeline or other outages. Permitting Risk o The Company could be denied operating, exploration, and /or development permits for a wide variety of reasons. o IOC must negotiate the LNG project agreement with the PNG Government. Fulfilling License Obligations o The Company has a number of license obligations including completing certain activities such as drilling wells or collecting seismic by certain dates. If the Company does not fulfill its obligations, it could lose the associated license. o The Company has a few license obligations due at the end of March 2013. It has mentioned on its conference calls that it is working with the PNG authorities to align its work activities toward the development activities. o While there is no guarantee, we believe the Company will be successful in realigning its obligations, since it fulfills the PNG governments goal of commercializing the Gulf LNG project. Construction Cost / Operating Cost / Service Cost Increases o The Company is exposed to third party service providers who can change their pricing and availability. Exchange Rate Risk o The Company operates in Papua New Guinea. Its functional currency is USD, and it does business in a variety of currencies. Developing Country Risk o The vast majority of IOCs operations are in Papua New Guinea, which is a developing country. Developing countries typically have a higher degree of political, fiscal, and societal uncertainty. Hedging / Counterparty Risk o The Company engages in contracts with a variety of counterparties, who could default with limited recourse. Production Outages o The Company could have production outages for a variety of reasons. The financial effects of these production outages could be exasperated if they occur when commodity prices are high, such that the Company would have to settle its hedges by paying cash when it does not have product to sell at the high prices. Variable Rate Debt o The Companys interest expense could increase based on a variety of factors. Environmental Liabilities o The Company operates in or owns a wide variety of operations which could have an environmental liability.

For Institutional Accounts Only Refer to page 4 for Ratings Definitions, Certifications and Disclosures

InterOil Corporation: Equity Research

Rating Definitions, Certifications and Disclosures

Equity Recommendation Definition Summary
BUY Buy the securities(y), viewed as attractively valued from a risk/return standpoint. HOLD Hold the securities, viewed as fairly valued. SELL Sell the securities, viewed as fully valued or overvalued. Westlake Securities Ratings Percentages As of April 23, 2013 BUY 71% (5 recommendations) HOLD 29% (2 recommendation) SELL 0% Percentage of Banking Clients Within Each Ratings Category As of April 23, 2013 0% 0% 0%

InterOil Corporation, Rating and Price Target History as of 4/23/2013

Source: Bloomberg

Initiate with Buy Price Target of $115/share (12 month) 3/13/2013

Figure 1: InterOil Corporation, Stock Price Chart

RISK DISCLOSURE STATEMENT: The securities(y) discussed in this report are speculative and may not be appropriate for all investors. These securities should not be purchased by an investor unless the investor understands the risks including interest rate, liquidity, event, and bankruptcy associated with such securities. These risks could adversely impact expected returns and/or result in substantial loss. Information in this report has been obtained from public sources and is believed to be accurate and reliable. However Westlake Securities cannot guarantee the accuracy and/or completeness of any information obtained from such sources. Any opinions expressed in this report reflect our opinion at the time and are subject to change. Our opinion to buy or sell such securities may not be appropriate for a particular investor. This report is solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell the subject securities. With questions about information provided in this report, investors should contact their investment representative before making any investment in the securities. Also, investments in such securities could have unique tax implications, including original issue discount, investors should consult with their tax advisor if necessary before the investment. ANALYST CERTIFICATION: I, W. Chris McDougall, CFA, certify that the opinions expressed in this research accurately reflect my personal opinions about the subject securities and/or issuer. I also certify that no part of my compensation was, is, or will be directly, or indirectly, related to the specific opinions or views expressed by me in this report. COMPANY CERTIFICATION: The analyst(s) that prepared this report does not have an interest in the securities of the subject company. Westlake Securities has not and will not own the securities discussed in this report. The costs and expenses associated with this research report, including the compensation of the analyst that prepared this report, are paid out from the total revenues of Westlake Securities, a portion of which is generated through investment banking activities. There are no material conflicts of interests in this research report. The analyst principally responsible for the preparation of this report did not receive compensation that is based upon (along with other factors) Westlake Securities investment banking revenues. In the past 12 months, Westlake Securities did not manage co-manage a public offering for the subject company. The research analyst responsible for this report does not serve as an officer, director or advisory board member of the subject company. OTHER DISCLOSURES: Westlake Securities prohibits the redistribution of this report to third parties via the Internet or otherwise and accepts no liability from such actions of third parties in this respect. This report is for institutional accounts only. Westlake Securities, LLC is a broker/dealer, member of FINRA & SIPC.

For Institutional Accounts Only Refer to page 4 for Ratings Definitions, Certifications and Disclosures