Written by a free-lance journalist and published in Jan 2007, an article about InterOil keeps reappearing (through the effort of one person, albeit with multiple identities). Is there something to that article? We once wrote a rebuttal, here it is in full. Daily Distortions no.21. [we’ve added a minimum of updates in brackets]

1) A couple of times a week, a guy with multiple identities (because Yahoo keeps removing all his posts and blocks his old identity, he has to adopt a new one) post it, so it must contain something negative (as he is a paid basher, even Yahoo knows that). It’s not so difficult to deconstruct this article in the good old postmodern fashion and the results are surprising.

2) “Enron Survivor“, the article even puts this in the title. This guilt by association tactics turn out to be very thin indeed. Such a title would one lead to expect Mulacek to have had a career at Enron, and even having served prison time for wrongdoings there, something like that. In fact, it’s not anything like that. In 1997 one (of thousands) of Enron’s investment vehicles bought a small part in one of the predecessor companies, together with another company (Titan). Mulacek needed money for relocating the refinery, they invested. But this investment was soon superseded by the much larger OPIC loan, so it’s relation to Enron, which the writer of the article deemed important enough to mention in the title of the article, turn out to be nothing more than one of thousands of Enron’s investment vehicles at one part, more than 10 years ago, bought some stake in the predecessor of Interoil. Any evidence (or indications) of any wrongdoing here?? Nope. What you see though, is an effort to taint IOC with Enron.

If we use these kind of tactics, anything ever touched by any remote part of Enron would be tainted, including at least half the American government, including it’s president, including probably most of US energy companies, should I go on…

3) Turns out that IOC’s backers are mostly pristine names: “Merrill Lynch, Morgan Stanley, Goldman Sachs, Wells Fargo, and Boone Pickens’s investment firm, increased their bets after the discovery was revealed. Stanley Druckenmiller, a former lieutenant of George Soros, disclosed three days after the announcement that his hedge fund had poured more than $30 million into InterOil stock.” [Although he is out of it now]

And who are it’s detractors?? Hmmm. Such pristine names as…

• “Peter J. Hodson, a senior portfolio manager at Sprott Asset Management who has both owned and bet against InterOil’s stock.”

Peter who? Oh yes, of course, the famous Sprott Asset Management. Since they also held IOC, it can’t be all bad anyway. And what did he say?

• “This is a very questionable company, these are not the types of people who are supposed to win the energy race.” Nothing more than that, that’s all!

He doesn’t think they are the ‘types of people who are supposed to win the energy race’.. Which type would? Is there any type? I would say, relocating a refinery from Alaska to PNG shows some vision and daring, not to mention perseverance, as Mulacek kept at it for over a decade. This Sprott guy never substantiate his qualification that “these are not the types of people who are supposed to win the energy race”, he might not even have meant anything negative with it, but the negative impression lingers on, exactly the objective of the article.

4) Apart from tainting IOC with Enron in the title, these smear tactics are used in other places in the article, and they turn out to have very little substance:

Carlo Civelli, owner of Clarion Finance (one of the main financiers of IOC, together with Merrill Lynch) has been accused of what are suggested as shady deals. In each case, he has not been convicted, in fact, no charges have ever been brought forward, but the author of this NYT article nevertheless feels an urgent need to go on about this for some considerable length.

Reality check. How many listed US companies would have at least one financier against which some charges might have been brought (but never did)? I would bet at least half. If anything, I think one could find at least a single CONVICTED financier backing quite a few.

The next stunt in the article is particularly telling:

• “In 2004, Mr. Mulacek hired an investor relations executive named Carl Caserta, whom the Securities and Exchange Commission had barred from the securities industry almost two decades earlier, after he was accused of buying hundreds of thousands of stock shares for clients without their authorization. Mr. Caserta, who declined to speak on the record, stopped working for InterOil in 2005.”

Yes, you read that right. IOC hired somebody who, almost two decades ago(!), was accused (convicted? The article doesn’t say so, and you’ll bet if he was convicted, this article would have mentioned it) of something improper. Not a hint that that ‘something improper’ had anything to do with anything related to IOC (pretty hard, as it was almost two decades ago), and when IOC management found out, they released him.

Terrible! I’m shocked!! They hired somebody who was accused of something two decades ago. How could they! That makes me lose all my trust in IOC!! Think of it for a moment. Which company hasn’t hired somebody who was accused of something a couple of decades ago…

I’m not going to trust IOC because one of their employees tried to chat up my wife once. Terrible!

You see how he smears the company with really VERY VERY little substantive issues. So unsubstantiated, in fact, that you could smear ANY company this way, if you wanted to. And that this guy wanted to is beyond reasonable doubt after reading this.

You would think, especially after reading Enron in the title, that this journalist would have been able to come up with something more substantive, a history of shady people and shady deals. Nope. VERY LITTLE SUBSTANCE INDEED, but effective taint job nevertheless.

5) Unconfirmed stranded gas

• “The gas in unconfirmed and cannot be shipped.”

Says the article. Indeed. But the article itself also provides the answers to those issues: “But until you drill a lot of wells, you can’t really measure anything,” Mr. Moss added. “It’s almost impossible to accurately forecast anything at this stage.”

Indeed. That’s just what they’re doing, and it takes time (but they’re going to get a second rig, speeding things up). “It can’t be shipped. Indeed. That’s what the LNG plant comes in:

• “If InterOil can convince investors to back an L.N.G. plant, the company is almost certain to profit from the gas fields, analysts say, because it will make the deposits cheaper to develop than fields I n other countries.”

6) Disappointing results

• “Disappointing results.”

The article is talking about the refinery here. Yes, the refinery has not produced profits [that has changed, results are a lot better in 2008], but there are four simple reasons for that:

1. The refinery was only working at less than half it’s capacity”, no refinery anywhere would produce profits in such circumstances. Capacity utilization is now on the up by the way.
2. It needed important rework optimizing it for the type of fuels the market demanded and the type of oil it uses as input
3. Crude prices have risen threefold, and output prices have not kept up, exactly why IOC is now forcing the issue, unilaterally increasing retail prices.
4. And remember, the vision was to bring a refinery to PNG to use IOC’s own oilfinds as input. This hasn’t happened yet, but it could still very well happen. There are very few places where there is gas without oil..
5. [as a comment today: another reason was unfavourable terms in contracts as they were a beginning refinery with no track record, these contracts are now expiring, and changes in the import pricing parity (IPP) scheme which have a favourable effect]

7) Worrisome ownership structure

• “The company’s ownership structure is worrysome”

They quote one hedgefund shorter saying. But why that is the case, it doesn’t make clear at all, the author just use it to SUGGEST that Mulacek and Byker have profited personally. However, he cannot disprove that:

• “We’re all pretty well committed,” said Mr. Byker, who personally owns shares worth more than $8 million. Mr. Mulacek holds shares worth more than $25 million, according to securities filings.”

8) Yes, previous wells have looked promising in the beginning but that promise has not been born out after the drilling completed. BUT THIS HAS NOT HAPPENED WITH ELK1 [and not with Elk4 either]. In fact, quite the opposite, initial enthusiasm has only increased.

9) Another quote from the article:

• “Furthermore, analysts say, given the enormous amount of natural gas development occurring elsewhere, it is unclear if developing even a large discovery makes sense. InterOil critics note that Australia, a neighbour of Papua New Guinea, is already the fifth-largest producer of liquefied natural gas in the world, and is expected to more than double its production by 2015, according to the United States Department of Energy. Such concerns helped persuade a consortium of investors to pull out of plans to build a pipeline from Papua New Guinea to Australia in August.”
• “High gas prices have seduced investors into overlooking concerns,” said Mr. Boland at Peters & Company. “Energy is always cyclical, and the natural-gas market is particularly fickle.”

The article thus suggest that these IOC investments make little sense. However, with the advent of India and China, I don’t think many people would agree with that. China alone accounts for half the world’s increase in oil consumption. And natural gas export from Indonesia (the worlds biggest exporter) are declining rapidly.

[We’ve also argued that PNG holds advantages over Australia

• Australian coal seam gas doesn’t flow before wells are treated and many more wells have to be drilled and manned because of that
• Labour cost are a fraction in PNG versus Australia and as a result of the many necessary wells, projects also need much more labour in Australia compared to LNG projects of similar size in PNG
• PNG has little restrictions on using Filipino labour, which is next to impossible in Australia]

I’ll bet you that a lot of Asians would beg for a participation stake once Elk1 gets confirmed by subsequent wells. They’re already lining up.