From $36 to $26 in a week or so. You should ask yourself some fundamental questions…
- Can you handle this kind of volatility?
- Are InterOil’s fundamentals any worse off this week, compared to last week?
- Was InterOil’s stock overvalued last week?
- 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