Today, we published excerpts from a new investigation of the controversial energy company InterOil (IOC).The often nasty debate over the company’s claims of natural gas and oil findings in Papua New Guinea has been going on for years. So it’s worthwhile to get a rundown of who believes what and why.
First, InterOil certainly has several big name supporters.
Soros Fund Management counts IOC as one of its largest holdings ($214.4 million) as of December 31, 2009 and other financial backers have included Merrill Lynch, Morgan Stanley, Goldman Sachs, Wells Fargo and T. Boone Pickens, according to a 2007 New York Times InterOil profile.
A report from Morgan Stanley from September 2009, “InterOil Corporation: Major Transformation Going Unnoticed; Overweight” says this:
Unnoticed positive exploration and development story creates a buying opportunity. We expect the gap between improving fundamentals and the stock price to close as the new story is understood. We have investigated alleged negative claims, visited every IOC well-site in PNG, conducted due diligence, and analysed the financials. We expect significant share price appreciation once the market begins to see evidence of transformation led by potential 2009 catalysts: success at Antelope-2 and a sell-down of IOC’s project interest.
Sham Gad of Gad Capital Management says investing in IOC may be an “act of faith,” but that it has “vast potential:”
InterOil today has the strongest balance sheet in the company’s history, with 11% debt to total capital and $70 million in cash against $52 million in secured loans. Within the next five years, the company expects to be producing more than 80 million barrels a year in oil and natural-gas equivalents.
If InterOil’s two main fields prove even half as potentially productive, its EV of $3 billion looks vastly undervalued, given its refining business, low costs, in addition to the other prospective fields, which could add much more potential supply.
And, then, there are IOC’s many critics.
Analyst Gary Dvorchak, writing on TheStreet.com, says the InterOil story will “end in scandal and losses:”
InterOil is valued at $3 billion, mostly because of suspicious gas and oil reserve estimates in its principal plays in Papua New Guinea. The company’s exploration and production effort has resulted in no production, despite years of breathless press releases, and most of the supposed “reserves” are even questionable as to their existence or commercial viability.
Let’s look at the red flags that should cause any investor to run for the hills: a lack of results relative to the valuation, suspicious claims on reserves, suspicious behaviour of management and the association of known suspicious characters.
InterOil has ‘undiscovered resources’ and calling a field ‘world class’ isn’t the same thing as actually knowing how much of a natural resource exists there. InterOil is capitalising on the confusion between undiscovered resources (which are unknown quantities) and discovered resources. And the victims are the investors who falsely believe that InterOil has known quantities of natural gas, when in fact they do not.
Minkow has an entire website — www.internooil.com — devoted to taking down the company. It includes a commissioned geologist’s report that allegedly shows “InterOil uses hype and smoke-and-mirrors techniques to bilk investors out of hundreds of millions of dollars.” To be fair, Minkow is also paid for his research and often takes short positions in the companies he trashes.
Another felon-turned-fraud-investigator, Sam Antar, says InterOil’s stock is boosted by a manipulation scheme involving InterOil, John Thomas Financial, and Clarion Finanz AG:
I believe that InterOil with the assistance of Clarion Finanz concealed John Thomas Financial’s involvement in helping it raise $95 million through a private placement of convertible debt securities. Clarion Finanz acted as a buffer between InterOil and John Thomas Financial to help InterOil hide John Thomas Financial’s role in raising funds. Afterwards, InterOil filed false and misleading reports with the Securities and Exchange Commission in an effort to conceal John Thomas Financial’s role in helping the company raise $95 million in convertible debt.
(Thomas Belesis, CEO of John Thomas, told us in a recent interview that Antar is a liar and an “idiot.”)
Besides the technical back-and-forth, the debate has sometimes gotten nasty.
Minkow released emails from late 2009 apparently from Susuve Laumaea, Senior Manager for Media Relations at InterOil that, among other things, said:
“You are a scum of the earth, a creepy-crawlie who should have been locked away and the key thrown away too so that you rot away like the dung heap you are. You are a coward of the highest order, and you have a known short position, and you send lies out hoping to profit on the chance that your lies can manipulate share volatility down and deceive good shareholders. I can’t use you as crocodile feed because you are too poisonous … those alligators will die eating you, cooked or uncooked.”
Read excerpts of the InterOil investigation we published here.
Disclaimer: As we’ve noted, we’re confident in the analytical abilities of the person who conducted the research, but, importantly, we cannot, and are not, vouching for the veracity of any of the conclusions or facts in the report. We present the author’s findings as a conversation-starter, in the hope that you, our readers, will help us sort fact from fiction. We also look forward to hearing the response from InterOil.
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