If Whitney Tilson's writings are a reflection of his due diligence on InterOil (NYSE:IOC) (and why would one doubt that, he has every incentive to out every possible argument against the company), he's in for a good deal more trouble than he already is with his short position on InterOil.
Tilson's latest rant against InterOil is even more irrelevant as the previous ones. He almost starts to sound like people who are now under investigation from the SEC, like Barry Minkow and co. (see also here).
Lets look at his "arguments."
1) "InterOil one of the biggest promotions in history"
It's a very big statement that's very light on substantiation. Actually, there isn't any substantiation at all. So we ask, details please! What did they promote? When? What isn't true?
Once you start looking at those details (as we have over the years), the picture changes quite a bit.
2) "InterOil hasn't even reported Q3 earnings."
Really, Whitney? There are numerous other companies that have yet to report, and in fact, InterOil did report preliminary earnings. They're in the SEC files Tilson didn't even bother to read. How about that for DD?
3) "CEO Mulacek's preferred financing option was the partial sale of the field"
Here he has something of a point. InterOil has taken a very innovative way to monetize the field, which will work faster and with much less upfront capital needed, as we've explained here.
However, has it ever occurred to Whitney that one's negotiating position might be somewhat impaired if one is running out of cash? That's what Raymond James argued. And it doesn't strike us as promotion when management is participating in a the placement in a meaningful way.
It's a bit of an understatement to say that the placement went down rather well. Could it be, that the $280M or so InterOil got from the placement will go a long way towards building the infrastructure for the LNG and Condensate stripping plants ($100-200M) and further exploiration?
4) Dismissing George Soros
One of these is George Soros. He almost single-handedly took a prior offering, at $35, and has been adding ever since. Tilson derides this as a 'macro bet.' We think the last laugh will be on George. It certainly isn't a macro bet. Soros has been selling energy stakes. For instance, he's completely out of Petrobras, previously his biggest holding. Could it be that Soros done his homework a bit more thoroughly?
5) The 800 pound Gorilla Whitney isn't mentioning
Tilson's biggest mistake. Instead of deriding the lack of 'reserves' and unsubstantiated smear at GLJ, one of the best resource analyst in Canada, Tilson could (in fact, should) have asked himself a couple of questions, like:
- Why did Wayne Andrews, a geologist and previously at Raymond James covering InterOil, move over to InterOil?
- Why did Henry Aldorf, extraordinary successful at building an LNG plant for Marathon in Equatorial Guinea, come out of retirement and take a good deal of his team with him?
To deride GLJ, the company that has vetted InterOil's resources, is just plain silly, especially if it comes without any substantiation. Tilson states that InterOil shopped around. Is there any proof of that? Even if there were other reports (we're not aware of them, but cannot entirely exclude the possibility, it's hard to proof something doesn't exist), these are almost certainly older ones not including the Antelope wells.
And there we arrive at that 800 pound gorilla. Those two Antelope wells. Some metrics:
- 2277ft and 1175ft of NET pay
- 8.8% and 14% average porosity
- 385MMcf/d and 705MMcf/d gas flow rates
- 5000bbls/d and 11200bbls/d of liquids flow rates (which seem to have Mitsui's appetite wetted as they agreed to finance a liquids stripping plant).
Argue that away, Whitney. And these are all third party produced figures (Wheaterford and Halliburton). Whitney seems totally clueless about what those numbers mean, he just calls them company hype. Combine them with the resource size, and there really can be little doubt this is a world-class resource. In the US, they're happy if they find 20ft of pay.
We've been here before. Ross Smith Energy Consultants have been critics, when there were just the Elk wells. But they saw what's coming in the very early drilling of Antelope1, when they just hit the reef. They basically capitulated and we've never heard from them since.
If Whitney still thinks he has a case against Elk/Antelope, he should ask himself what his special knowledge of the industry really is. What does he know, which experienced industry veterans like Cactus Schroeder and Matt Badiali who went there for Stansberry, people from Morgan Stanley and Raymond James and (formerly) Nataxis Bleichroeder know.
Perhaps he should wonder why, all those industry and investor presentations that Wayne and Aldorf and Mulacek gave, nobody ever raised these "issues" about GLJ and the lack of reserves that Tilson does. Could it be these people understand what 2277ft of NET pay means?
Financial markets are rife with information asymmetries. Sometimes you've got to wonder whether the people on the other side of the trade know a bit more about the situation.
Disclosure: Long IOC