This market is a curious beast. There are companies, many companies in fact, that are in better shape than ever and yet they are battered into oblivion. We can come up with numerous examples, but let us stick here with InterOil.

InterOil’s stock trades at multiple year lows while the company has never been in better shape. More about that in a moment, but let us look at the graph first.

The technical picture looks like it could improve any moment, The MACD is at the verge of turning and the RSI is in oversold territory.

To be honest, we’re surprised, but not terribly concerned. We’re quite sure the big lurch downward is market related and has nothing to do with the state of the company. There are many companies out there in similar predicament.

Since IOC only plans to sell LNG in 2014, the present economic circumstances can really affect the company in one major way only, making it more difficult to finance the planned LNG facility. We set out our thoughts on this issue in great detail, the upshot of that was that:

1. LNG demand is set to double in 2015 (it’s cheaper and cleaner than oil)
2. Supply is going to suffer more than demand in the present climate, setting us up for way higher energy prices when the world economy recovers
3. Marginal projects will suffer because of lower energy prices and difficult to get credit
4. IOC is most definitely not a marginal project, it’s one of (if not the) cheapest planned LNG facilities in Asia due to those profusely flowing wells, low labour cost and taxes, and a mild regulatory regime
5. In any case, financing of the LNG facility doesn’t depend on credit markets but on the interest of third parties. These fall in two categories (big oil and Asian utilities), both of which are largely unaffected by the credit crisis and have deep pockets.

The one remaining risk is that they won’t manage to prove that there is enough gas for the LNG facility. Based on InterOil’s own estimations, this risk seems very remote to us, but we can appreciate that any third party willing to fork up large amounts of money want substantial guarantees in the form of independent resource assessments. These are forthcoming, work is being done at the moment.

In the meantime, we’ll get a full technical presentation of Elk/Antelope on November 11, the day that they’re presenting quarterly results.

Now, why is the company in its best shape ever:

• The refinery has turned around due to better crack spreads (mostly the result of improved contracts) and slowly increasing capacity utilization. This further eases the financing requirements for drilling
• The balance sheet has been greatly improved this year, they were able to attract finance at surprisingly good conditions in the midst of the credit crisis
• They had a second very large find
• They are already almost 500 meter down the new well in less than two weeks, this could seal things beyond any reasonable doubt before the year is out, if a third party report hasn’t done that already
• They are in talks with numerous parties, even during these difficult times.

The disconnect between the business and stock price developments is not typical for InterOil, and it could last for a while longer, but at present prices, you pay for the refinery and retail business and get the rest for free, that is, two record wells, a very substantial gas and gas liquids resource, almost 9 million acres with many more promising drilling opportunities, exactly the things big oil majors are looking for.