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InterOil’s sell-off part III

January 29th, 2010 · 2 Comments

Yes, it hurts, no, this is no time to panic..

We made a call yesterday that this sell-off is driven by a combination of factors, one of which is possible disappointing well news. We have no reason to alter that ‘diagnosis’ (if anything, the continuous sell-off reinforces our belief). The question is, what happens next? An inventory.

  1. We think there might be some early indications the rock at the bottom is not of the quality that lets the oil flow vertically. Horizontal drilling can still salvage this, although the chances for that haven’t increased either if our diagnosis about the quality of the rock at the bottom is correct
  2. Effectively, we might need to re-evaluate the proposition as InterOil having no commercial oil find any time soon
  3. You might want to realize that none of the analyst following InterOil has factored in a commercial oil find. Nataxis has an $98 price target and Morgan Stanley an $115 price target. Excluding any oil. You might want to revisit these reports
  4. Since the quality (dolomite and limestone reef) rock dips down, there are likely to be spots where the oil, that is there (even Bertoni, the geologist paid by the shorts acknowledged that) will flow, but that takes time.
  5. What can stop the rout? Well, even this will pass. We have argued before that the absence of an (imminent) oil find is likely to lead to a considerable correction, and this is what’s going on, in our opinion.
  6. We think this disappointment is now more than priced in, but for a short-time, the stock could very well overshoot at the negative as short-traders are jumping on this opportunity
  7. There is potential news that could easily remedy this sell-off. Perhaps we’re wrong about the oil. We’re near certain a liquids stripping deal is close. Further out are substantial resource upgrades and LNG plant deals, sell-off of stakes in Elk/Antelope.
  8. What to do? Technically, there is very little to go on (see chart below). Although we think an oil disappointment is now more than fully ‘priced in’ (priced out is perhaps a better way of describing it), we can’t exclude further price falls.
  9. But the value is there. All of you who where in InterOil stock for the gas and not for the more speculative oil prospects still have their value proposition intact, with added liquids stripping for earlier cash-flow and other deals coming. We have some valuation tables for you to play around with the gas and valuation metrics to see how many T’s valued at what price woud arrive at what company value.
  10. Add for the long-term if you can, we think in half a year or so, all of this will be seen as a last buying opportunity.

Tags: IOC

2 responses so far ↓

  • 1 Tahir Rizvi // Jan 29, 2010 at 6:33 pm

    The current valuation of IOC stock is fairly estimated as follows:

    1. Nataxis has an $98 price target. Excluding any oil.

    2. Morgan Stanley an $115 price target. Excluding any oil.

  • 2 We said it on the way down — shareholdersunite.com // Feb 12, 2010 at 7:04 pm

    […] now we’re saying it on the way up….Some people were disappointed when we wrote that the share price fall from $80 to $60 probably indicated some disappointing news. It turned out […]