InterOil, Daily Distortions no.16. UCLA professor Eric Sussman came up with a PR from May 2007 which was supposed to show IOC management is highly misleading. That PR announced a third party taking an option to negotiate an interest in Elk and the future LNG facility. Eric gloated that nothing had become of it (hardly a crime and certainly no sign of misleading management, as the PR only announced an option to negotiate a final agreement) and even we assumed that was the case. But was it…
We have UCLA professor Eric Sussman coming up with a couple of examples which are supposed to show InterOil management is highly misleading. His previous examples fell flat on their face (see here, here, and here), they showed that the misleading party is Eric Sussman, not InterOil.
His latest example is no exception (we already demonstrated that here) , but there was something very interesting we didn’t mention before, something that looks to be quite promising….
It’s all about that options agreement with a third party. They put $42.5M in an escrow account in May last year as a sign of good faith, enabling them to negotiate for an agreement to take a 5% in Elk (probably now Elk/Antelope) and a 5% stake in the LNG facility when more data became available to assign more definite valuations.
That was the first and last we heard of that. Apparently the third party didn’t take the option to negotiate for a definite agreement. Even we assumed that. Apart from the fact that that would hardly constitute a crime or serve as an example of misleading management, as Sussman had it (negotiations do not necessarily always conclude successfully), that assumption now looks to be wrong. The deal is still on the table.
A question was asked about this in the recent conference call (see here), you have to go to minute 30 where the first question from shareholders is about exactly this third party with the $42.5M in escrow. Here is what Phil Mulacek had to say:
- We’re advancing, we’re actually in discussions, and more than that, we’re into the drafting with their respective legal teams, to final key terms of agreement and we look to conclude a couple of these over the next year.
- It wouldn’t be a lump sum, it will be staged over three years and as reserves and resources get quantified then there’s additional payments so it would not be a one time event for the company, it would be multiple sales over a multiple year contract and that will add stable capital and earnings and revenues for a number of years. [Phil Mulacek]
Now, Sussman taunted everybody (especially us) about this options agreement:
- Oooh. So, so sorry, stp. I am afraid your answer does not warrant a passing grade and is, quite frankly, an abject failure. You failed to answer question one entirely, which is unfortunate. You didn’t read the exam quite carefully enough. And, as far as question two goes, it is wholly inappropriate to answer the exam questions with other questions.
- Besides, you failed to point out the obvious lack of disclosure as to the identity of this mystery strategic partner, and perhaps more critically, why they ultimately failed to exercise their option and proceed with the escrow, an obvious question which IOC never, ever answered. It is unfortunate, if not worse, that the company failed to follow up this announcement with a single word as to what happened to this “escrow” and why, which must have been material if the company put out this initial press release in the first place.
- In short, you have failed this exam and I cannot say that your work is even remotely reflective of that we would expect from the author of such a noteworthy blog as “Shareholdersunite,” which has been visited by at least three people this month. Oh, well. Although this particular strategic partner bailed out (as did Helia Tec, so that’s two), I am sure that another strategic partner is waiting in the wings, just like RJ has stated, which will provide an implied industry valuation many times yada, yada, yada! [Eric Sussman]
Apart from condescending tone and the fact that we did answer him and showed how he applauded a posting sociopath who tried to mislead people into thinking that the option agreement implied a valuation of Elk (which it manifestly does not, as we demonstrated here), he can not point out in any way why failed negotiations are a sign of misleading management.
After all, the “misleading” PR was just an option on negotiating a final agreement when more data became available after more drilling and testing. The data from Elk2, which was mentioned in the options agreement as the well that was supposed to give a definite resource estimate, were not conclusive enough, but that doesn’t mean the whole options agreement was off the table.
It is also an important reason why that $42.5M (or $57.5M if we include the other party which was Carlo Civelli) could not have implied a valuation of Elk, they just didn’t know enough about the resource at that stage to put any definite numbers on a valuation. Which is why it was an option agreement in the first place..
That argument is demonstrated once again as Phil argued in the recent cc that the type of agreement they’re looking for is a multi-year one where they can fill in more exact figures as more wells are drilled and tested.
There is enough gas to support an LNG facility, that much is a near certainty, but just how much gas (and liquids, and possibly oil) there is, we don’t know that until more wells are drilled and tested, and only then can you roughly know what it’s worth.
But even more importantly, that options agreement could, in fact, very well be concluded successfully in the near future. We will suspend our judgement on that until it happens, but the conclusion that these negotiations had failed is, how shall we put it, a tad too soon…
So, let’s resume:
1) Sussman argues the company is highly misleading. His first two examples do not show anything like that, and being asked multiple times he cannot produce even a single argument as to where they are misleading.
2) He does not take a word back though, and uses one of these PR (a pre-testing provisional guestimate of a resource find in 2003, verified by a third party) to smear the latest blockbuster DST results. He keeps silent when we point out that
- These pre-testing estimates were verified by a third party
- There is a crucial difference between pre-testing provisional estimates and the hard quantified results of a DST test. Only testing can show whether a resource you found can be economically winnable. For instance, the oil could be there, but it could be in rock that doesn’t flow. Only testing will tell you.
3) He could not defend his position in any way, not coming up with even a single argument of why these PR’s were examples (supposedly his prime examples, as they were the first ones) of misleading management. Instead, he comes up with two new PR’s (and a silly quiz form, he challenges us to find out what was wrong with them). One of them was the PR annoucing this options agreement
4) We didn’t see the crime of negotiations not being concluded successfully, and instead pointed out how he in the past defended a sociopath poster who claimed that the money in escrow implied a valuation for Elk (it did nothing of the sort, it even couldn’t have if they wanted to as nobody knew how big Elk/Antelope was, nobody still knows today, although we know it’s big).
5) He taunted that the ‘strategic investor disappeared, but how does he know? Mulacek argued they were in legal documents drafting stage..
Soo, we have an UCLA professor who claims bold things, for instance that management is misleading. He usually leaves it at that, but we press him for examples, and then for arguments of why the examples he comes up with show that management is misleading.
So far, he hasn’t shown anything of the sort and where he provides arguments (very, very rarely), they have such large holes in them you can drive a truck through them. He hasn’t shown in any way how InterOil is misleading, but it’s not too hard to show how he is..
By the way, you might have noticed how he mentioned Helia Tec as another ‘failed strategic investor’, according to Sussman. Well:
- InterOil never came out with a PR announcing them as such (Helia did, and InterOil was not very happy with that as they did so prematurely)
- Even that PR did not talk about a transaction between InterOil and Helia, but between Civelli and Helia.
We don’t think that deal materialized (but then again, we might be wrong..)
And, it’s hard to believe (and sad), it’s really not all. It’s one UCLA professor for whatever reason hell bent on a distortion campaign, and we have more on him..