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In my article published yesterday, I wrote that I was sure that InterOil (NYSE:IOC) had plenty of gas reserves in its Elk Antelope wells. However, now I am having second thoughts.

Having read Seeking Alpha poster eoneil's comments about the way things are run in Papua New Guinea, I got even more skeptical about InterOil. If you check out Eoneil's profile (real name Edgar Oneil), it says he was the Director of Petroleum Tax in Papua New Guinea, responsible for administering mining and petroleum tax. He has written long technical books on tax policy in the region; one of the books is here. I'm a pretty good judge of people, and from exchanging messages with him, checking up on his background, and reading his comments, I'm sure he is who he says he is.

Looking back on his comments, a couple stand out to me as serious concerns for IOC shareholders.

Obviously the PNG Dept of Petroleum and Energy do not believe that Elk/Antelope contains $100 billion worth of gas/condensate - or anything near it. Otherwise they would have granted the company a development licence to enable them to proceed to commercial production. There is no way round this point. A company may only obtain a PDL - Production Development Licence - when petroleum (meaning oil or gas) has been discovered in commercial quantities. Obviously this point has not been reached yet.

- Found in the comments here.

NO - Interoil does NOT control a valuable gas resource. That is why they have been unable to attract another partner into the project. If it was as big as it says, international partners would be lining up to join them. If the find was considered big enough to proceed to commercial production, they would have been granted a Development Licence by the PNG Department of Petroleum and Energy (DPE). This has not occurred so they are still operating under an exploration/ retention licence which gives them more time to 'prove up' their find.

- Found in the comments here.

Senior DPE (Dept of Petroleum and Energy) officials I spoke to could not understand why InterOil wanted the LNG project agreement signed with the government before any PDL was awarded. Its like someone planning to buy an expensive car before they have got a driving licence!

- Found in the comments here.

This last comment I find interesting. Mr. Oneil has actually spoken with his colleagues at the DPE, and they don't understand what InterOil is doing! They find it so strange that the company is going ahead with all these plans and trying to find partners without even having a license yet.

And what InterOil is doing strange goes far beyond this. It hired not one, not two, but three investment bankers Morgan Stanley, Marquarie, and UBS to find a major partner, and for all we know have accomplished nothing so far. I wouldn't be surprised if InterOil's CEO Phil Mulacek and the investment bankers of all three firms are at a lavish hotel party right now, sipping champagne and laughing at the gullibility of the investing public. A Seeking Alpha poster KenCookSams commented here: "In 11 years IOC has not met a single deadline, found a single large scale partner and is destined to failure."

Mulacek is spending shareholder money like a drunken sailor without even knowing if the LNG project is going to work out as it doesn't have its required major partner or a PDL yet. In the third quarter results that came out yesterday, InterOil is spending money on all kinds of weird stuff.

...expensed seismic costs were higher by $5.5 million compared with the prior year quarter, and the recognition of a loss on Flex LNG investment of $6.0 million due to fall in its quoted share price.

The improvements were largely offset by higher exploration costs for seismic activity and higher interest expense due to an increase in inter-company loan balances.

We contracted airborne magnetic, gravity and gamma ray prospecting over PPL236, PPL237 and PPL238. Five acquisition blocks were acquired for a total of 14,288.6 line kilometers of airborne data. A new airborne methane particulate detection tool was trialed over PPL238.

Huh? Gamma rays? Why not get some military humvees and titanium, sharpened diamond drills while you're at it, Mr. Mulacek. Spending so much money, eventually, the company will have to issue more shares at $10 apiece because that's how low the stock will get when it runs out of money and it still won't have a PDL or a major partner yet.

If you're an IOC long, don't get angry at me for this article. These are all concerns you should bring up in the InterOil conference call today.

Source: Has InterOil Turned Into A Full-Blown Scam?