Profit taking in InterOil

As we feared yesterday, today seems to be a day with some profit taking. We went up from 18 to 29 in one go, usually when something like that happens, a stock needs to take a breather at some time. News, however good is usually a good reason for that. 

It’s buy on the rumor, sell on the news. However, we don’t expect it to last too long, we’re fairly sure news from the well will be discussed in the conference call Thursday morning and as we argued in our investment thesis, there are ample signs that news is going to be good.

But once again, we urge you to hedge, as success is not guaranteed. Now, although the relations with Merrill Lynch are probably somewhat strained, we don’t see too many problems for the long-term here. They are 1/3 owner of Liquid Niugini, the company which plans the LNG facility that is going to process the gas from Elk/Antelope.

They won’t back out, as that’s too profitable a proposition right now, and Merrill actually have a 49% stake in another gas field in PNG, the Uramu field

We argued that it was likely that they were getting too greedy, and the run-up in the share price made getting a better deal than Clarion very difficult. Perhaps they were banking on InterOil not being able to get financing at such short notice.

That is the very nice (although nasty, from Merrill’s point of view) surprise. This is a second very good deal for InterOil. As someone pointed out on the boards, it’s not dilution, as it converses debt to equity. It’s actually good from a balance sheet perspective.

So, we’re quite happy, but we’re anxiously waiting for those Elk4 results. These are going to determine the future of this company.