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InterOil’s stock price gyrations

June 23rd, 2009 · 7 Comments

From $36 to $26 in a week or so. You should ask yourself some fundamental questions…

  1. Can you handle this kind of volatility?
  2. Are InterOil’s fundamentals any worse off this week, compared to last week?
  3. Was InterOil’s stock overvalued last week?
  4. And last: if these don’t explain the sell-off, then what does?

Can you handle this kind of volatility?

  • Only you can answer that. You should be able to handle it, otherwise this is not the right stock for you.

Are InterOil’s fundamentals worse of compared to last week?

  • No. In fact, they’re significanlty better. A new resource estimation by a third party engineering bureau put the Elk/Antelope resource at 6.7Tcf (midpoint). That’s double from the previous report, because now much more data from the record Antelope1 well could be included.
  • Combined with the really excellent deliverability and therefore compelling economics (just three wells can supply 120% of the daily needs of an LNG facility already), there can be no doubt as to the attractiveness of InterOil’s LNG venture. 6.7Tcf is more than enough, and there are still other appraisal wells to be drilled and other promising properties to drill in InterOils 4.8M acres
  • They’re also going to perform a production test at Antelope1 to have a final word about whether oil can be recovered commercially from this well, and see what the condensate flows will be from here (although unofficially, there are already enough condensates to make that a viable monetization option).
  • A second rig will be added soon, which will double the exploration efficiency with just adding 10% extra cost.
  • So we’re hard-pressed to argue that InterOil’s fundamental prospects have fallen dramatically. In fact, one could say that they have improved really substantially

Was InterOil overvalued at $36?

  • If you take the roughly $1 per Mcf (LNG sells for $10+ in Asia, so this is by no means a rich valuation metric) of Nippon Oil’s purchase of a 3.6% stake in OilSearch fields (as far as these are relating to their LNG project) as a base, really not. The gas alone would take IOC’s valuation to $3.68B just for the gas, roughly two and a half times that $36 per share price of last week.
  • Mind you, in that same deal, Nippon Oil also paid almost $400M for a 3.6% stake in the Exxon/OilSearch LNG facility, which has yet to commence building. InterOil holds a 50% stake in just such an LNG facility, perhaps a bit smaller (these things have yet to be determined)
  • Some have compared it to another gas property, by Rift Oil, which seems to have been sold for as little as $0.38 per Mcf. However, this is stranded gas (because they do not have enough of it to support an LNG facility), there is no third party vetting of the numbers, and Rift Oil was running out of finance (see also what Raymond James had to say about this issue)
  • We might also remind people of other deals in the region, which were valued at way higher prices than $1 per Mcf, like Conoco’s stake in Origin at $3.23 per Mcf. And that’s Australian coal seam gas, where thousands of wells have to be drilled and treated (they don’t flow by themselves), and all that in a high-cost environment.
  • Petronas paid $4.75 per Mcf to Santos another Australian coal seam gas player.
  • So, the case for overvaluation was already particularly thin last week, it has gotten a whole lot thinner still…

What has caused the slide? Some factors, take your pick, a combination of the following:

  • Market sell-off
  • Oil price sell-of
  • Some investors who might have been expecting a commercial oil leg and/or a deal announced by now, might be losing their patience
  • InterOil has been manipulated before (record time on the regSHO list and up to 6M undelivered shares by June08), some of these players might take advantage of the temporary softness. The rather small float lends itself well to this, unfortunately. There are also some efforts by some new players in this game, but these look so pathetic that we do not believe that caused even a ripple in the price

Tags: IOC

7 responses so far ↓

  • 1 kencooksam // Jun 23, 2009 at 12:33 am

    So we go up in price tomorrow??smile .Soon for sure.

  • 2 Darcy Patten // Jun 23, 2009 at 9:21 pm

    I just wish I would have had the courage to sell when it was 36+ as I had my first double. I could have bought back in at these levels and added 30-40% more shares. Sigh……..I am not a seasoned enough investor yet, plus I am too afraid to not be in when the first offtake is signed.

  • 3 admin // Jun 23, 2009 at 10:22 pm

    To be honest Darcy, nobody could have known this was going to happen, seasoned or not. Stock prices are not terribly rational in the short-term, and react to news, which is by definition difficult to foresee..
    Fundamentally though, things are looking very good, and it’s certainly undervalued.

  • 4 kencooksam // Jun 24, 2009 at 1:31 pm

    Buffett doesn’t trade. Worlds best long term record.Over 20% for over 25 years,Buy em when they are cheap sell when the fundamentals drop off.Ones not supposed to sell when the fundamentals are improving.Be hard to find a part of IOC’s biz not improving.Wait till year end and you will have a lot more than a double.Could have some traders and some buy and hold. Many people do that.

  • 5 Darcy Patten // Jun 25, 2009 at 12:09 am

    STP and Ken, I agree with both of your comments, but the difficulty I have is when do I take some profit out.

    For example I hate bringing up IOC with any colleagues as I mention that I have a double and they instantly tell me I should sell. I respond that you don’t know anything about IOC and that a double is just scratching the surface. They don’t understand this.

    But if I listened to this advice I own 30% more shares……..argh……hindsight is too easy. I just need to stick to my original plan to take profits at 120 pps. Because I get paid in canadian $$$ this is approx 100 us pps.

    This is still doable in the next 12 months I think, but not by end of year as I initally thought. Thanx for listening to me ramble……

  • 6 admin // Jun 25, 2009 at 2:53 am

    Darcy, we sympathize with this, but our approach is quite different:
    – we have desisted from timing events at InterOil for quite some time, we’re just focusing on the longer-term, which has never looked better
    – therefore, we’re basically advice buy and hold, as it’s difficult enough to say anything sensible about the timing of InterOil issues, timing the market is another ballgame altogether..

    If one can time it, or trade a little bit, all the better, and kudo’s to those who get it right.

  • 7 kencooksam // Jun 25, 2009 at 1:53 pm

    Darcy. I see many diferent events that will happen very soon to drive the stock price back up.
    *Company is trying to get permision to release the entire Knowledge Reservoir resources report
    *Knowledge is doing a report on how to monetize the assets found.
    * New drilling rig
    *Maybe some horizontal drilling equipment. Sounds that way.
    *The stock would fly with two rigs both drilling for oil.
    *The deal flow, some will get done this summer maybe late this summer
    *Antelope 2 drilling results.
    *PNG govt approval of the project
    *Ground breaking for the LNG plant Dec 09
    I am sure there are more but we have a bright future.