Here is a little fact that one might think about over the weekend. InterOil has to find $70M by Monday. They themselves do not have this kind of spare cash lying around, and normally, this kind of uncertainty would be detrimental to a stock price, especially in a bad general market. What’s going on?
Well, the market is betting on two things:
- That Merrill Lynch loan ($70M)
- Testing results from the Elk4 well
Apparently, the market is optimistic, but optimistic about which? We think the more likely candidate is the well test. Why? Consider the following thought experiment. Say, no results were due, and the only issue was the Merrill loan. Would the stock price have rallied from 20 to 27 this week? (At the moment of writing, we have an hour of trading left).
Very unlikely. Also, Clarion Finanz, an insider, converted debt to equity on good terms. Apparently, they were optimistic.
Now we know the markets are not supposed to work like that, but if one goes back in InterOil’s history, one cannot help but notice that good or disappointing drilling news were more often than not reflected in price movements well in advance of their announcements.
This information is hard to keep a secret. Hang out in the bar were the drillers go after work, check for flaring of gas, or even bribe some people, salaries in Papua New Guinea are very low by Western standards. We do not approve, but these things happen.
Actually, the Elk news is several orders of magnitude more important than the Merrill loan issue. A successful well almost certainly points to billions in natural gas, while the Merrill loan is just, well, $70M…
We also think it’s likely that drilling results will arrive sooner rather than later, as the company will be in a hurry to impress Merrill, or some other people they hope to get financing from.
It’s going to be an interesting week, that’s almost guaranteed. Don’t forget to do a little hedging though.