With every day that there is no news about the Merrill Lynch loan, and the stock price sinking further, the conclusion that not all is well becomes more difficult to escape.

By ‘not all is well’, what do we mean?

We are sure that on the all important drilling of Elk4, total depth has not been reached and no DST test has been performed (see the drilling update today), so in terms of resource estimates, nothing has changed. It’s pretty important to keep this in mind, as temporary mishaps also provide opportunities.

We cannot say the same with regard to the negotiations with Merrill Lynch. Basically, we do not know. We presented the case explaining why it’s in Merrill’s interest to be accommodative, as they stand to gain very significantly from the LNG project.

But this logic might be lost on people at the top of Merrill, as Merrill has its own financial problems to deal with. It’s not inconceivable that orders from above have send tough signals out to the troops, and if you want a career in a tough organization like Merrill, you better comply. We also argued yesterday that Merrill is in a pretty strong short-term bargaining position vis-à-vis InterOil.

This is all speculation based on price action and the lack of news on the loan, but somehow we have a feeling that these negotiations are not going smooth. It would be cynical now that InterOil might very well be on the edge of putting any lingering doubt about the Elk property to rest, only for Merrill to change its stance at the very last hurdle. If that happens, it doesn’t mean it’s the end of the world.

In the worst case scenario is that InterOil will have to look for finance elsewhere. Availability and conditions will depend on the outcome of Elk4 and the independent resource estimate by engineering firm Netherland Sewell.

We have argued that the bar is pretty low for Elk4. They only have to prove the deliverability of the gas already found at Elk in other places, and we have no reason to doubt that the independent audit of Elk will yield the results InterOil and Raymond James have argued since Elk1 was discovered.

So, short term financing problems could very well provide a long-term opportunity, but in the meantime, things do not look pretty. We have always argued to hedge if you’re long.