We think the shorts are ripe for the taking…

Despite a difficult market, InterOil shares keep on rising bit by bit, day by day. Both Morgan Stanley and Raymond James put out promising progress reports recently, arguing monetization is getting nearer. Raymond James even changed it’s stance to market outperform.

What’s going on? Well, we might indeed be getting near to the start of monetizing the resource, but it could also be something which could have been read in a comment at the bottom of an article on shareholdersunite.com:

• What I’m hearing. Institutions from recent road show will start to dry up the remaining current float prior to the news. [Jeanine]

Why would they do something like that? Well, that’s not really that difficult:

1. Monetization is likely, per Raymond James and Morgan Stanley
2. There are 6M shares short
3. The float and daily volume is rather small
4. The shorts are under investigation of the SEC

This seems a pretty favourable scenario for a manufactured short-squeeze, where funds aware of this situation slowly but surely turn on the screws. By doing this slowly, the shorts are made to squeak, having to face an awkward dilemma of starting to cover (and turning the price much higher), or waiting, with the risk that this happens anyway (not to mention what positive company news would add).

Indeed, it seems that they are starting to run scared, with the return of notorious people like Howard Sirota and BostonKenmore to the Yahoo message board, while the rest of their people (Minkow, Lobdell, Antar) haven’t really commented since the SEC started investigating them.

They even pulled their Internooil website off the air, which doesn’t wonder us too much, since we’ve commented on some of the over-hyped stuff on that site (see here).

The shorts story is that InterOil is a fraud, and they have embarked on a campaign involving several websites and journalists for over a year. The stockprice has run-up from the mid 20s when they started up to $80 and now $58 (after some disappointment about oil). We’ve covered much of what they’ve written, see for instance:

• Overview on Seeking Alpha
• Barry Minkow hired a geologist and really abused his report (that report written by Bertoni predates Antelope2 anyway)
• Their “prime arguments” resource compartmentalization and pressure depletion
• First take, when the short started their publicity campaign
• Another take
• A peek into the modus operandi of these people
  
• The FDI’s undercover interview with Wayne Andrews

One walks away with the distinct feeling of people desperately stretching every possible argument to its limits, or even beyond (hence their disappearing website and the SEC investigation), see here for another classic example. And there was Henry Blodget (here and here), sharing the same dodgy past as Minkow and Antar. And what happened to him…

If you keep your eye on the stylized facts, this one really isn’t rocket science:

1. InterOil has a huge resource (per GLJ: 8.2Tcf of gas and 156Mmbbls of condensate, probably more after finding more dolomite in the horizontal) and all data points to this resource being highly economical (the flow rates, huge net payzones, porosities, near instant pressure rebuild after testing, rock quality, etc.) while the shorts cannot point to a single data that points at the opposite. They can only try to cast doubt.
2. While the shorts have every incentive to stretch ever argument to the limit (and beyond, see the examples in the links above), their efforts haven’t convinced. They lack any industry knowledge, never have been to PNG and they don’t have access to much of InterOil’s data. Most of them have dodgy reputations, like Minkow, Antar, and Blodget.
3. There are numerous instances, like GLJ, Knowledge Reservoir, Raymond James, Morgan Stanley, George Soros, Nataxis Bleichroeder, Henry Aldorf, Wayne Andrews, Schlumberger, Wheaterford, and the like, which not only are well versed in oil&gas exploration or are industry insiders, but all of them have been on PNG and have access to proprietary data (some of them actually having produced it, like the logs, DST tests, wires)  from the wells. All of them also have good reputations (at stake) and Andrews and Aldorf gave up good jobs to work for InterOil.
4. The first group, the ones with the dodgy reputation, lack of industry knowledge and lack of access to all the data, never having been on PNG, argue InterOil is a scam. The second group, the ones with ample industry knowledge and access to way more data, and with premier reputations, argue it’s not. Guess which of these is under investigation by the SEC? It ain’t InterOil…