We are waiting for results of the drilling at Elk4. That will be all determining. If these results are as expected, IOC will rally strongly. If the results are disappointing, we will go pretty low.
In the previous entry, we argued that the chances for Elk4 to confirm the economic value of the Elk property were always pretty high, and probably even higher after what was said in the fourth drilling update. However, there are a few other arguments to be made.
Price is likely to give an early indication. It’s difficult to keep results under wraps until they’re officially published. This hasn’t happened at previous occasions, both results at Elk1 and Elk2 were preceded by strong price movements.
One has to realize that there are a couple of hedgefunds that are short in IOC, VERY short. Almost one-third of all outstanding shares (31M) are presently short. That’s an awful lot. It provides very strong incentives to have an information edge.
It cannot be to hard to slip some envelope in the right place, or frequent the bar where the drillers hang out, even have a guy looking for flaring gas, you get the picture.
So the shorts are powerful and they are likely to have an information advantage, if trading patterns of previous wells is any guide. But they are not so powerful as to be able to go against the stream. They know that if the news is good, not only will it attract heavy buying, but other funds will turn the screws.
For instance, it’s reputed that T Boone Pickens, an industry heavyweight and a big investor in IOC, lends his shares to the shorts at rates that loan-sharks would be proud off (in the order of 27%). While the shorters use those shares to get the price down, Boone not only collects a hefty fee, but he can buy more shares cheaper.
And if the news is good, he can call in the loan, forcing the shorters to buy into what will already be a nice rally. We will have a classic short-squeeze. And of coarse, the market will be well aware of the shorters predicament, the knowledge that there is a wave of forced buying is handy inside-info, and totally legal. There are presently more than 9M shares short, quite a wave.
What this will do to the price we’ll leave to your imagination, but we’re pretty sure the shorts will not stick around to find out. That’s why it is likely that the price will move before the news is out. It has happened before.