We don’t like the price action in IOC. What explantations are there?
1) Drilling results are disappointing. We’re quite sure this cannot be the case. InterOil needs to perform a DST test (and usually more than one), and they have not performed any yet. They’re not even done drilling.
2) The negotiations with Merrill Lynch to refinance the outstanding loan are not going smooth. This is a possibility we wrote about yesterday. It’s possible that Merrill could play hardball because alternative finance might not be immediately available at the best terms for IOC, we argued. But we think it’s unlikely there would be a major break-up. Both companies stand to win enormously from the LNG facility. A bit of brinkmanship is to be expected in these kind of negotiations, perhaps.
3) Most likely, it’s the market perception of something going wrong. Drilling results are delayed. There is no news about the Merrill loan, this could lead to investors getting cold feet, and shorts taking advantage. Although it’s published with a couple of weeks delay, the latest short count has gone up by a million.
As ever, if you’re long, hedge.