Interoil: The Next Enron?

For anyone who remembers, Interoil (IOC) was born out of a refinery deal with Enron. It now appears they will meet the same fate as their once parent/partner company.

IOC is out with its latest quarter, and of course all the company wants to talk about is gas, gas gas. Yet, they fail to mention that the company is on the brink of bankruptcy.

No wonder -- the results from operations have more red flags than a Chinese New Year's day parade.

Raymond James projected this quarter at 2c, yet the company lost 25c a share... again..

Worse, they didn't mark down their inventory, even though crude oil fell 25% over the span of the quarter (inventory had doubled inexplicably last qtr.). This could have added another 60c per share to losses, but we note there was no CFO last quarter to attend to the adjustment.

The refinery business, after years of promises and promised new equipment installations to make it profitable, is now shown to be a terminally losing proposition, and will be required to be written down to true market value when the company files its audited report. Raymond James had estimates of the refinery doing $223 million, when in reality all it did was $90 million. That is a miss by a country mile.

The write down in inventory and refinery alone puts IOC at bankruptcy.

Gas Gas Gas

The company says they have hit "possibly the largest gas find in Papua New Guinea. We wonder if most IOC investors are aware that there is already a lot of gas in New Guinea?

The problem of course, is that, to date, there is no way to sell natural gas found in PNG - virtually 100% of the gas already found in PNG is stranded.

In fact Exxon (XOM) and Oil Search, PNG's largest explorer, are already scoping out the feasibility of a LNG facility. What is different between Exxon's project and IOC's proposed one - financed by Merrill Lynch and Clarion Finanz - is that Exxon actually has the resources to build a LNG facility -a $3 billion plus capital project.

IOC has no economic model for this huge capital project. At this point is fair to call it nothing more than a "pipe dream". Practically speaking, Exxon chooses to build one, there is no way new venture capital will back a 3 billion competitor. If Exxon doesn't build one, where is the case that it makes economic sense for anyone else?

Promises Promises Promises

Refinery Promises: For years IOC was a refinery dream story. If they could only beat the odds and drag this "refinery in containers" from Alaska to New Guinea and get it running, they'd find the pot of gold.

Years and years go by. The refinery is finally transported, set up, and put online. Surprise surprise, it never runs above 30% of nameplate capacity and loses money. Every quarter.

The company promises that if it makes "adjustments" the refinery will turn profitable. Raymond James keeps thumping the tub, keeps its buy recommendation and target over 100% its market value, and ignores its own failure, quarter after quarter, to project a business model for the company even remotely close to its abysmal results.

So another year goes by, the new equipment goes in, and the losses just continue.

IOC is required by accounting standards to write down the refinery, currently carried at nearly $250 million of asset value, to its current economic value. There is no way it can justify a value even half of its current book basis.

Oil Promises: So IOC reinvents itself as an oil exploration company. It can't sell stock to drill for oil, because its already got such heavy overhead on the refinery. So it sells a drilling partnership and spends 60% of it without hitting a single drop of oil. The oil drilling money is unavailable for the extensive additional exploration costs of gas that can't be sold.

Investors had better look at the track record of IOC's Triceratops well before biting on the current story. After dozens of rosy statements about the huge find at Triceratops, it is now capped.

Financial Realities

Cash is now down to a paltry $30 million, down by half from last qtr.

An entire $130 million debt facility has been completely drawn down.

This gas well requires huge amounts of new money for additional wells, and equipment just to verify that it is a commercial size find.

Then it would require more money to pipe it to the coast. Then it would require a 3 billion LNG facility to be in place to sell it. The drilling partnership money is explicitly restricted from its funds being spent to develop gas. Add it all up and what do you get ?

A billion dollar market cap for one stranded gas well in a country with estimates of 30 trillion plus cubic feet already stranded - so much that every other explorer already stopped drilling for more.

Cautious investing to all.

Disclosure: Author is short IOC

IOC 1-yr chart:

Comments

[Ray Lopez:]

Ouch! I feel your pain author. Chart looks like a short squeeze. Hope IOC goes bankrupt before the shorts do.

2006 Nov 19 11:23 AM

[yA-eL:]

WOW! [Jan2009] 3 years later - good news! www.interoil.com
Back in Dec 2008 they confirmed a gas discovery in the Antelope field.[not yet known is its commercial or not]
1-13-09 IOC “a 9 million acres and four exploration licenses and two retention licenses in Papua New Guinea”... announced the discovery of the largest well in New Guinea? are they now “the largest distributor of refined products in Papua New Guinea” ?
I also read IOC is a main provider for Singapore “Crude oil supply contract with BP Singapore and refined product sales contracts with Royal Dutch Shell.”
It also says: "The results are far better than expected confirming the reef with in excess of 1,800 feet of net reservoir, which has demonstrated exceptional porosity and permeability. The well logs reflected the largest vertical section of net reservoir I have seen in my career," said Mr. Phil Mulacek, Chief Executive Officer.

www.interoil.com/newsr...
please check these news here and HELP me make sense of it all.
1.What does this mean for IOC future?
2.Has it just became a GOOD CANDIDATE for an acquisition by XOM ? They might step in and buy them now...
3. Stock holders - is it time to get rewarded for holding on! I'm an investor since it was $30, added more at $15 and lately at $10...expecting to see it up at $100 one day. [yes, collected some nice premiums on IOC puts from you 'skeptical' so my overall purchase price is now at ~$10 [stock is now at $20 with a nice upward trending chart ] 100% up in 3 weeks. WOW!
Not surprisingly IOC current PE is still too high ~40 It iwll take time for them to materialize but the news are out...the market reflects the new exploration and its priced into the stck already [i think].
NEXT, i assume the market will speculate XOM will show interest in this live well...the stock that has started the climb already might continue towards $25. What to do? I expect some pull back [time to sell some Feb15 CALLS for a nice 5K premium]. If collapses under 20 my 5K cushion will protect me all the way to 7. [stop loss at 12 will still give me net 5points in this case ~45% gains overall. Not bad under these circumstances. If IOC continue to drill drill drill and XOM will buy buy buy:) the story will be a success they all waited for since 2006 and before...then the PE will get to the single digit# EPS will defensibly go up from its current $0.84 ...oh and my $12 shares will make me even better returns than 45%.
[BTW this was my first on line review EVER!] thanks for reading.
What do you think the future holds for IOC?

Jan 18 06:21 PM