For anyone who remembers, Interoil (NYSE: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 (NYSE: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.
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: