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Daily Distortions 31: the shorts attack InterOil again

August 12th, 2009 · 5 Comments

Is there anything to it? Not really..

While drilling proceeds smoothly at Antelope2, the following story came out. Barry Minkow, who we featured before and whose business model is to short stocks, write reports accusing the company in question of some misdeeds (at least on one occasion financed by a hedgefund) and cash in. He (and understudies Howard Sirota and Sam Antar) did that with Herba Life and USANA Health.

Not always successful, but it depends what you mean by success. Today’s world is ruled by perception, and if you can create the perception that something is wrong, that’s often enough to produce a desired effect. Authorities have found no wrongdoing at USANA and Minkew even had to retract all his accusations against Herba Life.

This time, Barry has hired a geologist by the name of Renato Bertani. He will, according to the newsstory out today, put a lot of question marks over InterOil’s resources. How exactly he’s going to do that from the comfort of his desk is quite another matter, but let us put some rather large question marks over that newsstory out today.

  • For years, the energy company has made encouraging announcements about its progress in finding natural gas at its key Papua New Guinea drilling project – talking of a “world class” find, or a “world record” flow of gas, or a flow so strong that stemming it was like “trying to stop the Mississippi.”

Note how the impression is created that IOC has claimed they have big things for years, while in fact they’ve drilled only four wells in the Elk/Antelope structure. Indeed, InterOil argued, with the help of seismics and information from the earlier wells, that the structure is large, based on their geological interpretation of Elk/Antelope.

Fact is, the more they’ve drilled, the more their geological model proves to be right, even old foe Ross Smith Energy Consultancy, in a rather embarrassing about-face, had to admit as much.

Note also the quote from InterOil’s CEO Phil Mulacek, about “stemming the tide of the Mississippi”. This actually refers to the problems they had in controlling the gasflow at Elk1, the first discovery well drilled in 2006, read Mulacek’s the quote in full:

  • The size of the discovery was so large, Phil E. Mulacek, InterOil’s chairman and chief executive, informed an analyst, that simply controlling its output “was sort of like trying to stop the Mississippi.” [NYT]

They had such problems in controlling the gasflows that they had drilling mishap which we believe was covered by an insurance company. After a few earlier disappointing discovery wells they were ill prepared for 100MMcf/d gasflows.

We also wonder what else one could call a 2000 ft net payzone with 8.4% average porosity and a 382MMcf/d flowrate with only 1/3 of the pipe open anything else than ‘world-class?‘ In fact, it was recognized as such as Antelope1 (from which these metrics come from) made the cover of World Oil Magazine in May this year.

The newsstory announcing Barry Minkow hiring a geologist continues with:

  • Yet, despite InterOil’s optimistic statements, it’s never been able to report any proven, viable gas reserves under regulators’ standards.

This is such a clear indication of a negative bias. For starters, only recently has InterOil received an independent resource assessment from Canada’s premier outfit GLJ Petroleum Consultants. They put the resource at 3.4Tcf (P50), but it’s important to realize that this figure only included data up to 31 December last year.

That means that almost all data from Antelope1 (the record vertical payzone, record flowrate, porosity) wasn’t included. Antelope1 is by far the best well, so that number can only rise significantly with the inclusion of Antelope1 data. And indeed, there is a newer independent resource report from Knowledge Reservoir that put the P50 number at 6.7Tcf.

To argue that IOC has never been able to prove reserves when they don’t (yet) produce any carbohydrates and have only just been evaluated by third parties is a bit of a hoax. We have written about the resource/reserve distinction before, but ponder over the following statement from the OilSearch yearend report:

  • When a final investment decision is taken, OilSearch will move approximately 580 million BOE from reserves to resources (P2).

A final investment decision will do something similar for InterOil. So basically, the argument from the shorts is circular. They won’t build an LNG facility because they don’t have reserves. But the truth is, if they decide to build the LNG facility, most of their resources will be instantly classified as reserves.

For amusement purposes we’ll give you a taste of what some people write on the message boards about this:

  • “Does labelling gas in the ground resource, rather than reserve change, in any way, the assessment of the QUANTITY that’s in the ground??” Yes it does. It makes it much more likely that the quantity is ZERO. [Bostonkenmore]

This is the same character that was featured in the first ten episodes of this ‘Daily Distortion‘ series, but he seems to have moved up in his world, as it looks like he had early knowledge of this “news” coming out (see here and here). It certainly looks like he didn’t want to provide a link to the story (links are not his forte anyway) as the story only came out later that day (August 11):

  • A yahooo message board is not the place to present evidence of fraud. Evidence of fraud is for securities regulators. Not a yahoo message board controlled by Interoil insiders. [Bostonkenmore]

We go back to the newsstory:

  • Now, two of the company’s biggest critics contend that some of InterOil’s rosy statements have violated securities regulations. And these critics speak from experience: They’re both reformed financial criminals.

Is that experience relevant? Hardly:

  • Barry Minkow and Sam Antar, who now work to uncover corporate fraud, allege that InterOil misled investors when it indicated that drilling tests it has conducted at its gas find validate its plans to build a gas-processing plant that is critical to the company’s future.

So their ‘experience’ as convicted financial criminals gives them insight into resource evaluation? Really? More insight than GLJ Petroleum Consultants, the premier independent resource evaluator that assessed Elk/Antelope as having 3.43Tcf even before including all the most important data from their best well by far, Antelope1?

The 3.43 is already enough for a single train LNG facility, but since it doesn’t include the best data from Antelope1 the figure will be significantly higher. (Indeed, a later report by Knowledge Reservoir put the number at 6.7Tcf.) So we can’t wait to see how that geologist hired by Barry Minkow, who is short in IOC and paid the geologist out of his own pocket, will arrive at any different conclusion.

And how is he going to do that? That’s another interesting topic. Here is our friend Boston again:

  • Investors should know. None of the energy companies mentioned endorses Interoil or their finds. I would advise you NOT, to imply that Schlumberger has endorsed the company or its claims. GLJ, has only made resource evaluations based on data given to it by the company. If you mention this again, I will call Schlumberger and give them your name and let them know that you are using their name to promote a fraud. [Bostonkenmore]
  • Interoil and Interoil alone provided the data and most importantly its interpretation. No other firm has endorsed the data they have collected or its interpretation. [Bostonkenmore]

Our question would be: how would this hired geologist arrive at any radically different conclusion when it can only rely on the same data at best, and no independent data (we’ll leave aside the nonsense about imposed interpretations by InterOil)? One could say that there are different “interpretations” possible, but that implies that one interpretation is better than the other.

Which one would that be, the interpretation of Canada’s most reputable independent resource evaluator, or that of a hired hand of a shorting ex-con. Neither have access to any independent data, according to Boston, and the hired geologist has at best access to the same data, but probably a lot less. We’ll leave you to answer that question..

We also strongly believe that many of the parties interested in parts of the InterOil business (see here for a summary) will bring their own geologist to go over the data. The report goes on with:

  • Minkow contends, that InterOil misled investors when it said in March that its testing “clearly confirms” its gas discovery has enough resource potential for the company to proceed with plans for the LNG plant. In that same statement, InterOil acknowledged that there is “no guarantee” that the gas it has found will ultimately be able to be extracted and sold commercially.

While the onus is on the critics to prove that GLJ is wrong to conclude that there is 3.43Tcf of gas (even before Antelope1), of course there is ‘no guarantee’ that it will be produced. InterOil needs government approval (pending) and outside parties to finance the LNG facility. Until that happens, there can’t be guarantees, but funny enough, if that happens, much of InterOil’s ‘contingent resource’ will change into ‘reserves’. Funny because the shorts argue IOC won’t be able to build the LNG facility exactly because they “only have contingent resources, no reserves.”

The report goes on:

  • What can be said, though, is that this adds to the stockpile of questions about InterOil  – such as the recent concerns about whether InterOil had omitted information from its public disclosures about who helped it raise $95 million in a critical financing last year.

A “stockpile” of questions? The author could mention only one, very tangential, unproven issue of which even Boston argued that the SEC was not likely to take any action. Even Barry Minkow says on his websites that it is the authorities that determine whether any fraud has been committed..

  • It’s also clear that the company still has nothing to show for its years of work – no proven, viable reserves, still. Years in which it’s raised several hundred million dollars from investors, lenders and partners in a series of stock offerings and other financings, aided by those optimistic statements about its progress. InterOil has a market value of about $1 billion. If its claims about a world- class gas find prove valid, maybe it’s worth that much, or more. But that’s the question, isn’t it? If.

Still has nothing to show for it’s years of work??? Huh? Three wells flowing way more than all of OilSearch’s combined, refinery moved to profitability, balance sheet cleared up, independent resource reports vetting its resource, long-term critics Ross Smith turning around, etc. etc.? Nothing indeed…

And then the market cap of $1B, which the author (a certain Michael Rapoport) claims would be the maximum, if it’s claims are valid. No Mr. Rapoport, if IOC’s claims are valid, it will be worth a multiple of this, as we’ve set out, for instance here.

Tags: Daily Distortions · IOC

5 responses so far ↓

  • 1 IOC4EVER // Aug 12, 2009 at 11:11 am

    Brillant as always!
    Thank you very much!

  • 2 CommanderCricket // Aug 12, 2009 at 2:47 pm

    Can’t wait for the Minkow gang to move on…

    This is how Bashers work:

    * They will do their best to remain anonymous or use a fake identity.
    * They will use about 10% fact and 90% suggestion. The carefully chosen and carefully placed facts are there to lend credibility to the rest of what they say, which is merely unfounded suggestion intended to deceive.
    * To start with, they wait for others to help you learn about whatever stock interests you. Then they develop rapport and build a support base before initiating their bashing routine.
    * They will enter the discussion with humor and will reply to everyone else who replies to their target’s postings.
    * A single basher often will use two or more aliases to make it appear that a discussion has begun. He or she will post from multiple ISP’s and use multiple “handles.”
    * The basher usually does not start with an all-out slam of the stock. He or she will build up to the bashing over a period of time.
    * Bashers will identify their foe, usually the board’s “guru.” Then the clever bashers will use them to their own advantage and lead them, but they will not follow the “guru’s” lead.
    * Bashers only bash until the tide and momentum turns, then they simply let doubt carry their message the rest of the way.
    * Bashers try to give the appearance of being open-minded.
    * Bashers are bold in their statements, knowing that people like to follow strength.
    * Bashers like to write headlines in capital letters and use catchy phrases.
    * Bashers will “pour it on” as their position gains momentum.
    * Bashers don’t worry about being labeled a “basher,” since the current newbie being targeted won’t know the basher’s history.
    * When identified, a basher will put up a brief fight, then back off and return in an hour or so. But if a basher’s foe is a weak in reasoning powers, the basher will just come on even stronger and push ahead with the bashing.
    * If a basher is discredited, he or she will change aliases, maybe change the gender of the alias, and continue on that board or another one.
    * A basher’s goal is to limit the momentum of the run, but not to tank the company or create a plunge in the stock; thus a basher will tend to be subtle and consistent.
    * The basher is out to kill the dreams of profits, but not the company or the stock itself.
    * Bashers use questions to create critical thinking, but they guide the critical thinking toward their own intended conclusion. What is posted ends up not actually being critical thinking on the part of the investor; it just looks like it is. The investor feels informed but, in reality, the basher has guided the thinking.
    * Bashers try to look nice. They don’t lie, use profanity, or resort to name-calling.
    * Bashers encourage people to call the company, knowing that 99% of them won’t ever do so. Instead, all but the most savvy investors will take the basher’s word for claims made. If an investor does call, a smart basher can always find something that is inaccurate in the report of what the company said.
    * Bashers also discourage people from taking the company’s word for anything, saying, “Of course that is what the company is going to claim.”
    * If the company’s history or its PR is negative, a basher will continually return to that point.
    * The basher will compile a list of anything negative about the company that is true before beginning to bash it.
    * If the price of the company’s stock rises, the basher will attribute that to the hype or the PR, claim it’s only a temporary mass reaction, say “it’s just the market,” or give any reason other than the actual merits of the stock itself.
    * If other posters share a basher’s “concerns,” the basher will play on his or her good luck and share even more “concerns.”
    * Bashers always cite low volume, even when it’s not true.
    * A basher who is writing from three or four aliases can dominate a board and wear down the rest of the posters.
    * Bashers will bait the hypesters into personality debates, diverting their focus and efforts from the stocks to the posters.
    * Bashers will say they are trying to present the facts from a “different perspective.”
    * Bashers will try to promote other stocks that would-be investors can investigate instead of the one they are bashing.
    * Bashers refuse to respond to any challenges on the “values” or ethics of what they are doing. For them, it’s a game, and they are playing it by their own rules.

  • 3 CommanderCricket // Aug 12, 2009 at 2:49 pm

    Identifying a Stock Basher

    Countless investors find their way to the message boards only to see false posts about “SEC Violations” and “Class action suits.” Such boards are filled with bashers using a variety of aliases, posting false or misleading information, all in all making it very difficult for a newcomer to tell truth from fiction.

    For nervous investors, it is often easier to sell the stock and put the money in the bank. These are the people on whom the bashers prey. Bashers bet on a stock to go down and they do their best to help it happen. They are not concerned with the risk of loosing money like the average investor, because they are usually paid to bash the stock. In other words, they are not using their personal funds and are not actually investing themselves, or at least not in that stock. Additionally, bashers do not wait for the markets to go up or down; they make them move themselves. Bashers use fear, lies, and falsehoods to prey on the nervous investor, thus influencing the markets in their favor.

    Lesson 1
    Bashers never bash bad stocks. You can watch the board for stocks with no potential. You’ll see pretty quickly that those stocks don’t have bashers. Bashers only go after stocks that are going upwards or have excellent potential to go up. Bashers get left behind, so they want to bring the price down.

    Lesson 2
    Bashers bring up old news that you have heard many times. New start-up companies always have a few bits of bad news. The basher will post these bits over and over again. The stupid basher will try to make the old news a bit fresher to try to fool you. Don’t be fooled!

    Lesson 3
    Bashers post many times a day. They try to wear you out. They comment on everything, every other post, and can answer every question. To hear them say it, they know it all.

    There is no positive comment they won’t bash. They try to control the board with their negativity. If they seem to be working on this one stock full time, that’s because they are! Even more than full-time.

    Lesson 4
    Bashers will lie to your face (or your keyboard). Never trust a basher. The truth on start-up companies is that many mistakes are made and losses happen. The basher will try to make you believe all start-up companies make a profit, release financials every quarter, and have all aspects of the business running smoothly from the start. This is not true. Anyone who says it is true is either lying or ignorant. Don’t listen to either kind. Start-up companies can go years without profits; this is the nature of the beast.

    Lesson 5
    Bashers know that you can’t verify their statements. That’s why they make the statements they do. You can’t check them out and you may just believe them and then they win. Either way, they don’t lose.

    Lesson 6
    Bashers play on your lack of knowledge. They count on the fact that they can lie about information and you won’t know the difference. And you won’t, unless you have done your assessment of the company and know truth from lie.

    Lesson 7
    Bashers play on your lack of patience. You have held a penny stock for a while, knowing it will be a big penny stock someday. The basher can get to you because you are tired of waiting for your gain. When you are getting your plan, you are ripe for a bashing. You are tired and you’ve forgotten that the goal for the penny stock was to hold it for one year, then see where it stands. The basher is bothersome and tiring, so you dump it on a bad day and so do others. Then you get angry about your loss and you return to the board to let everyone know how mad you are. Congratulations, you too have become a basher. The basher has won and gained a new, unwitting, partner. At this point the basher will buy low and become a pumper, maybe using a new alias, and will try to reverse the trend. Your loss becomes the basher’s gain as your penny stock rises after you sell it.

    Lesson 8
    The basher is all about bringing the price down. That is the nature of a basher. The truth is not important; lies are the norm. They are trying to hit the newbies visiting the board for the first time, so they post continuously throughout the day. They are trying to wear out the longs on the board and they will do whatever it takes to do so.

    Lesson 9
    Bashers will try to create doubt and get you to research items that they know will lead to the creation of doubt in you and in other stockholders. A typical trick of an advanced basher is to propose that there is a potential “problem” because “we” don’t have the facts on a particular subject. The basher dares someone in the group to find out the answer to the question. The basher already knows the answer and knows what you will find. The power of this tactic is that the basher is now in control of the actions of the stockholders; the basher has you in his web of lies. Most stockholders will do due diligence when confronted with a questionable news story. When the stockholder cannot confirm or deny the story because of too much conflicting information, the basher gains credibility.

    What do you do?
    It is important to find answers on your own terms. Pick up the phone and call the company, talk to the investor relations person or the CEO until you get a satisfactory answer. The problem here is that the advanced basher has you doing his bidding; you have essentially joined his ranks. So, develop your own little “Due Diligence Package” and answer questions by placing the information into the package. Then you can refer new investors to read your well-researched answers to questions raised in the Investor Information package.

    What you need to avoid is getting into a conversation with the basher himself or herself about the topic. Once you get into direct conversation with a basher, you give the basher credibility. Answer the question if you need to, but do it indirectly. Never use the basher’s name. Never get into a personality contest with a basher.

  • 4 kencooksam // Aug 12, 2009 at 3:27 pm

    Now thats basher defined.Nice job.

  • 5 Bronte Capital throws in the hat — shareholdersunite.com // Nov 5, 2009 at 7:53 pm

    […] The research they claim to have done is very likely to be a geologist (Bartoni) report commissioned by Barry Minkow’s FDI. It is actually funny to see how the latter argues it proves InterOil is a ‘Ponzi scheme’ while the geol…. […]