The wheels seem to be coming off Shia Laboeuf’s top pick — oil exploration company InterOil (IOC). The stock is now down 40%+ from its recent peak, and the company’s latest press release today hasn’t helped matters.
InterOil’s Operations Continue to Make Progress
When the market sees a non-announcement like that, the interpretation is usually “the company is trying to say something, anything to bolster confidence and stop the stock’s collapse.” And that certainly seems to be the interpretation today.
The two specific data points the company announced in the release, moreover, aren’t particularly encouraging.
Here’s the first:
InterOil has received the first payment from Mitsui to fund the Front End-Engineering and Design (FEED) of its proposed joint venture condensate stripping plant.
That’s positive, in a way, but it’s also expected. Also, the word “payment” creates a misleading impression of the Mitsui transaction. As we noted when InterOil first announced its deal with Mitsui, what Mitsui is essentially doing is lending InterOil money to continue to move forward with its plans for a possible plant. If InterOil eventually actually builds the plant, then Mitsui’s loan will be converted into an unspecified amount of equity in the project. If the plant is not built, however, InterOil will have to pay the money back. So, for now, this “payment” is best viewed as a loan.
The second item in the press release is this:
The Antelope-2 horizontal well has achieved its 1,000-foot (305 meter) objective.
This refers to a horizontal test well the company has been working on to better establish the size and prospects of the oil-and-gas resource it has discovered. The results of this test were first due in March, then in April. And now, at the end of May, as the details in the press release explain, the test hole has apparently met some initial distance objective–but the drilling will continue and the actual test results are still a ways away:
InterOil has completed its objective of drilling horizontally ~1,000 feet (305 meters) in the Antelope-2 well and onsite activities are currently drilling ahead. To date, InterOil has drilled 1,040 horizontal feet (317 meters) outside the 5 ½ inch casing. InterOil believes that the well bore stability and drilling conditions warrant further extension of the horizontal section. The Company intends to drill as far as possible with the current drill bit assembly. Logging and well testing will begin promptly following completion of the horizontal section. The horizontal well is designed to determine the condensate-to-gas ratio at the bottom of the reservoir. This ratio will assist InterOil in the final FEED design of the proposed condensate stripping plant.
Now, a sceptic would suggest that one reason you might keep drilling after you “complete your objective” is because you haven’t yet found what you are hoping to find. So some of the stock’s reaction to this latest press release may be additional concern that the Antelope test won’t reveal results that are as promising as the company expects.
In any event, the farther the stock drops, the more dilution existing shareholders will have to take if/when InterOil decides to raise more cash through additional equity issuance. The market therefore continues to await the results of that test….
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