IOC update no. 2 24/4

It’s pretty hard to keep up. The drilling report that was out this morning did not contain any news, apart from the fact that one can deduce that there were pretty substantial delays. The stabilization of the well took longer, or perhaps there was some other mishap. These things happen, but don’t change the situation in any meaningful way. 

It is still too early to draw any conclusions from the drilling, so if the delay contributed to the sell-off, that is really not justified. Let us provide some perspective.

1) For investors who have nervous dispositions this is not the right place to be, perhaps. We’re sure the IOC share price is heavily manipulated. However, if Elk4 and the independent audit take away the last lingering doubt about the Elk property, it is really severely undervalued and the short-thesis will melt as snow on the first day of spring.

2) That actually should already have happened when Elk1 was discovered and very reputable analysts put target share prices several multiples out of the existing one and knowledgeable investors took very large positions after Elk2, which was supposed to be a failure. It was not, as we argued elsewhere.

3) But alas, two holes is not enough to nail it beyond any reasonable (or unreasonable) doubt. Elk4 is within weeks of doing this, and as ever, drilling results are not guaranteed. But at this stage, there is no conclusion possible yet it is just basically to early.

4) We have always argued that the bar for Elk4 is pretty low. If there is a meaningful flow of gas in a DST test, Elk will have enough gas for one, in all likelihood two trains of LNG facility.

5) Merrill Lynch, of course, realizes this, and perhaps they try to take advantage of their short-term bargaining position to grab a bigger slice. We do not know that for a fact, but it’s possible. Or they might just wait for the outcome of Elk4 before taking a position on how to proceed with the outstanding loan.

6) That could be a mistake. If Elk is proven, InterOil’s bargaining position will be strengthened. So, like we said before, it’s conceivable that a game of brinkmanship is going on right now. Investors do not like this kind of uncertainty, and the funds that shorted it act like a pack of wolves. Hence the sell-off.

7) Meanwhile, the demand for LNG is exploding, especially in Asia. We have produced a resource links page for IOC with numerous links to articles explaining that, and as often, price tells a better story still. LNG prices are advancing and selling at a steep premium in Asia.

8) So it’s still all to play for. LNG is a very promising business prospect, these days. Long-term investors who keep this in mind might be amply rewarded if they have the stomach for the short-term fun and games.