The stock of controversial energy firm InterOil (IOC) rose yesterday on a Platts‘ story that the company may be close to signing a partnership with a Japanese company.Such a partnership might allow InterOil (IOC) to begin to actually exploit the energy resources it believes it has found in Papua New Guinea.
Not surprisingly, however, IOC’s critics suggest that the Platts story was planted by the company in an attempt to keep hopes alive. They also note that the deals described in the Platts story won’t help the company build a major liquid natural gas plant, which is the only way it will be able to derive real value from the finds.
Platts’ LNG Daily reports, according to “sources close to the matter,” that InterOil “reached a preliminary agreement” with a “Japanese partner” for a liquids stripping project, an alliance that would be a precursor to the company’s planned $7 billion liquid natural gas development.
The article is short on specifics:
InterOil and its partners are in “final negotiations” to select a partner, “as there are several Japanese companies that have expressed interest in becoming partners in the condensate and the LNG project,” said the source, declining to elaborate.
If true, such a partnership would add needed cash and credibility to the company’s attempts to build its operations and exploit the “world record” energy reserves it has long claimed. Another potential partner is Indian gas company Gail, which is in talks to buy a stake in InterOil, according to Upstream.
But critics — especially short-sellers — say the developments hold little weight.
Felon-turned-fraud-investigator Barry Minkow, who holds short positions on IOC, says even if the Japan and Gail partnerships happen, it’s not nearly enough:
Building an LNG [plant], which is what would have to occur in order to monetise natural gas in PNG has a price tag of some six billion dollars … So this alleged interest by the state owned company from India falls far short of what InterOil would have to receive in order to obtain profitability.
Minkow, along with other shorts and critics, have maintained that InterOil doesn’t even have the reserves it claims, rendering any partnership irrelevant.
Thomas Belesis, CEO of John Thomas Financial, an InterOil booster who also has a checked regulatory history, dismisses the critics.
“These are short sellers who have been out there since the beginning,” says Belesis. “They bet on companies failing — they manufacture preposterous stories to try and spook investors. And they profit from that.”
The reason they are trying to manufacturing stories is that they are down on their position over $100 million dollars. Because InterOil over the last 12 months is up more than 400%. They discovered two of the largest gas wells in the world. Two! They’re drilling on five million acres of land in Papua New Guinea. George Soros has taken a 10% stake, Morgan Stanley has recommended the company. They have a $120 price target. Goldman Sachs — you’re talking about the most influential and smartest people in the financial community that have been to Papua New Guinea to witness phenomenal situations.
Indeed, bold-faced names like Soros Fund Management and Morgan Stanley believe in the company.
Most recently, a March 29 Morgan Stanley report again dismissed InterOil’s critics. Titled “Mischaracterization of the Investment Debate: Stock Set to Outperform in April“, the note’s “investment conclusion” says:
The primary investment debate concerning IOC is whether they will be able to execute their upstream sell-down and enter into an LNG and condensate agreement on attractive terms. We believe that the relative attractiveness of IOC’s assets will attract partners at attractive prices and that these partnerships will transform the company and unlock its asset value. Negative media claims, as highlighted on Friday, mischaracterize the investment debate, in our view. As per previous negative claims (inability to discover hydrocarbons in PNG or sufficient resource to support LNG trains), we believe these recent negative claims will be disproven.
What’s new: Late last week, a confluence of negative reports triggered a 12% sell-off in IOC’s shares into the March quarter-end, a more vulnerable period for funds. These reports written by entities with a disclosed short interest focus on a plaintiff’s 2009 legal filings (not new) involving the CEO and cite statements made in a late 2009 bankruptcy filing (not new). We believe these claims were taken out of context and do not represent a material risk to IOC or change our views on the stock. The irony is that last week other news flow, with two major LNG deals being completed in Australia, was actually supportive of IOC. We continue to expect either a condensate or LNG deal in April/May: either event would challenge the position of “doubters.”
What’s really new: Australasian LNG environment remains supportive. Recent transactions provide positive momentum on both Asian interest and pricing, with Shell/PetroChina acquiring the remaining shares of Arrow Energy for $0.87/mcf and CNOOC agreeing to purchase 3.6 mmtpa for 20 years for approximately 10.75/mcf to $21.75/mcf, depending on crude prices. We view Australian CBM precedent transactions as close to a 60% discount to IOC’s offering due to higher LNG costs, a higher tax regime and no liquids content.
For more, read excerpts of the InterOil investigation we published here.
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