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InterOil revisited

March 4th, 2011 · 4 Comments

We missed something..
A couple of days ago, we’ve told you to sell InterOil. Although you would have done mildly well if you’d followed that advice (even in the face of a broad market rally), the thesis is worth a revisit, for several reasons.

First, let us stress once again that we haven’t changed our longer-term outlook for this company at all. We still think it’s a $200 stock in a couple of years (with the important proviso that world economy doesn’t implode). Our selling advice came from increasing market risk and technical considerations.

What has changed since then?

  1. The Libyan situation seems to be heading towards the worst case scenario, civil war
  2. There have been protests in Iran and Saudi-Arabia, we don’t have to spell out what trouble there would mean for oil prices
  3. The bad news has, for now, been overshadowed by good news from the American economy.

This is what The Economist wrote on Saudi Arabia:

And then there is Saudi Arabia itself (see article). The kingdom has many of the characteristics that have fuelled unrest elsewhere, including an army of disillusioned youths. Despite spending $36 billion so far buying off dissent, a repressive regime faces demands for reform. A whiff of instability would spread panic in the oil market.

And this on the general oil market:

Even without a disruption to supply, prices are under pressure from a second source: the gradual dwindling of spare capacity. With the world economy growing strongly, oil demand is far outpacing increases in readily available supply. So any jitters from the Middle East will accelerate and exaggerate a price rise that was already on the way.

We’ve reported what policy makers think will happen to the British economy if oil prices rise further. Although oil prices rises are way more muted in Europe as a consequence of very high taxes on gasoline, 75% of Europe’s natural gas is tied to the price of oil with a lag, and this has yet to start biting, while the recovery in many parts of Europe is fragile (or even non-existent).

If oil prices stay high for some time, inflation could easily creep up, giving central bankers quite a dilemma. The ECB already is alarmed.

Now, InterOil is in the crossfire of opposing forces if the oil situation worsens:

  • It will greatly strengthen the importance other energy sources, especially where they are located in less troublesome and volatile locations.
  • However, it remains to be seen whether InterOil’s shares can escape any possible market melt-down.

And now for the embarrassing part.

We presented a graph a couple of days ago, which supposedly showed that the downward support of the wedge was about to be broken.

Well, today (Friday March 4 before market open), it’s still not overwhelmingly clear-cut, but what’s more, we actually completely missed the $70 support line.

Oops…

To our defense, this doesn’t alter the picture a great deal, as you can see for yourself:

What’s more, our stance was discussed quite widely on message boards, but nobody actually attended us to the existence of the $70 support (although there was no shortage of ascribing all kinds of funny motives to us for taking this position, we spare you the details).

So we were not the only ones.

Now, how does that change our position?

In the original article, earlier this week, we were of the opinion that the upward trend was about to be broken and the stock would likely move to the mid sixties (the 200 day moving average). Since the support around $70 is a little more solid than we originally thought, this is just but one possible outcome.

Here’s what you can do:

  • If the $70 support level is broken, you could sell
  • If you don’t want to be bothered with picking up a few possible points, you can just stay in the stock. News will arrive sooner or later, there is a high probability that the massive gas and liquids find will get monetized (and get bigger), providing massive cash-flow and a large long-term upside to the stock price.

Tags: IOC · IOC Technically

4 responses so far ↓

  • 1 CommanderCricket // Mar 4, 2011 at 4:21 pm

    Excellent comments and agree we are close to whether or not IOC breaks lower or can maintain higher within the wedge.

  • 2 aaron // Mar 4, 2011 at 4:24 pm

    NICE STP….back in business..!

  • 3 Gator // Mar 4, 2011 at 7:07 pm

    Everyone make mistakes. Your reaction seemed emotional due in part to the inverse price movement, the lack of news flow, and the mind numbing volatility. Before you hit the panic button look at the 200 moving average line and think about the $200 price target. Keep up the good work

  • 4 N // Mar 4, 2011 at 10:59 pm

    ONE word “SELL” and buy IOC at a cheaper price.. there is ABSOLUTLEY no news at the current time to make the stock price pop, we are months and years away from commerical production…why have your $$ tied up in a stale stock w/ no divended yeild.. Im not saying IOC is going to be a good stock, OH it will and looks like a great deal, but for now and the world economy…take your profit and sell and buy low….

    OIL is sky high and will keep going so invest in oil, maybe USO if your not drilling for oil…….

    Invest by this saying:

    “By greedy when those are fearful and fearful when those are greedy” right now everyone is panicing on the price of oil..change your mind set and let the price benefit you.

    IOC you will be missed but i will jump back on at a later date…over and out