Analyzing InterOil's Short Interest And Ownership Base

| About: InterOil Corporation (IOC)

InterOil (NYSE:IOC) has 48.2mm shares outstanding. Of these:

  • 7.4mm shares (15.3%) are owned by IOC's Insiders (management, board members, etc.)
  • 28.7mm shares (59.5%) are owned by IOC's Top-10 public holders

As such, Insiders and the Top-10 public holders own and control 36.0mm shares (75%), leaving only 12.1mm shares (25%) held by other investors.

IOC's short interest is 9.8mm shares (as of May 31, 2012), which represents:

  • 20.4% of total shares outstanding
  • 24.1% of shares excluding Insiders
  • 81.0% of shares excluding both Insiders and the Top-10 public holders

Therefore, there are only 2.3mm shares left in the "available float" (hereafter defined as total shares outstanding less Insiders, Top-10 public holders, and shares held short) - that's less than 5% of total shares outstanding.

Here's a more detailed look at IOC's Insiders and Top-10 public holders:

Richard Chandler

Richard Chandler, IOC's largest shareholder, recently increased his stake in IOC by 4.540mm shares (9.42%), going from 2.451mm shares (5.10%) on March 5, 2012 to 6.991mm shares (14.51%) on June 1, 2012 (his most recent filing).

More detail on his purchases can be found in SEC filings and press releases:

  1. March 5, 2012: 2,450,729 shares (5.103% shares outstanding)
  2. April 30, 2012: +2,463,920 shares (Total: 4,914,649 shares or 10.21% shares outstanding)
  3. May 16, 2012: +1,111,202 shares (Total: 6,025,851 shares or 12.51% shares outstanding)
  4. June 1, 2012: +964,873 shares (Total: 6,990,724 shares or 14.51% shares outstanding)

And on SEDI:

Richard Chandler's background and decades of investing success are notable. In a span of 20 years, he turned a modest family fortune of $10mm into a powerful $5bn fund, accepting no outside capital along the way. That means Chandler generated an annualized return of 36.4% for 20 years, resulting in a return of ~500x (~50,000%) his initial investment. Now he's applying that success toward his investment in IOC as the Company's largest shareholder, with 6.991mm shares (14.51%) worth more than $410mm (as of Tuesday's closing price of $58.59). You can read more about Richard Chandler's investing success and activist style on his website and in this Institutional Investor article.

Short Selling Basics

Everyone knows that a short seller profits by selling borrowed shares to receive proceeds upfront, and buying later at a lower price - and that the profit equals the price difference, less the cost of the stock loan. A short seller obviously has the risk that the stock price might rise, causing the covering purchase to be at a higher price, with the loss equal to the price difference plus the cost of the stock loan. To maintain a short position, the short seller needs to borrow actual shares from a holder and sell them in the market. Typical stock lending agreements allow a holder to recall their loaned shares at any time, with three-day settlement. A short seller is free to cover their short at any time by purchasing shares in the market, returning them to the lender, and thereby exiting the short position. However, if the shares are recalled from a short seller, they must either:

  1. borrow from a new source to maintain the short exposure, or
  2. buy stock in the market to close out the position, regardless of the price.

Short Squeeze Basics

A so-called "short squeeze" occurs when it becomes difficult, expensive, or even impossible for existing short sellers to borrow shares. This happens when the number of shares held short nears or exceeds the number of shares available to borrow. In such cases, the only legally permissible way to close out the short position is to purchase shares in the market, driving the stock price higher.

Short Squeeze Example: Volkswagen Jumps +348% Catching Shorts in a ~€30bn Squeeze

In October 2008, Volkswagen ("VW" / Ticker: VOW.DE) shareholders found out what happens when the number of shares held short approaches the number of shares available to borrow.

In one trading day, shares of VW jumped +147% (+201% intraday). In two trading days, shares of VW jumped +348% (+377% intraday). According to the articles below, in a span of two days Porsche (long VW) made €30-40bn while many hedge funds (short VW) lost €30-40bn.

Here's how BBC News described what happened in their article, How Porsche Made Billions:

Volkswagen shares became some of the most 'shorted' stocks in Europe. ..

On Sunday 26 October 2008, Porsche dropped a bombshell. It announced it had increased its stake in Volkswagen to 42.6% and held cash settled options on a further 31.5% - meaning it had positions on up to 74.1% of all Volkswagen shares. It seemed [Porsche] had effectively cornered the market and short sellers who needed to buy back shares to close their positions were forced to fight over the remaining available stock. ..

The value of Volkswagen stock rocketed to more than 1,000 euros, briefly making it the most valuable company in the world. ..

Hedge funds, who had gambled that the value of Volkswagen shares would fall are said to have lost between 10bn and 40bn euros. ..

The Financial Times published a related article titled, Hedge funds left reeling as VW races on:

Volkswagen's soaring share price seems certain to have inflicted heavy damage on some hedge funds and banks. Rough calculations suggest losses as of last night could be as high as €30bn ($38bn). ..

Data Explorers, a research company, shows that about 13 percent of VW's shares were lent out for short-selling….

"It is the worst investment in the history of financial markets,' says one fund manager. When Porsche revealed at the weekend that it had lifted its stake in VW from 42.6 percent to almost 75 percent using derivatives hedge funds panicked as it effectively cut the free float to 5.8 percent from 45 percent. ..

And here's a quick look at the price action. Note that even thought VW's available float was drying up, the stock price kept trending lower - until October 27th, 2008:

Related articles include:

IOC's Available Float

Turning again to IOC's available float, with 9.843mm shares (20.43%) held short, there are only 2.303mm shares (4.78%) remaining in the available float.

Keep in mind that VW's short squeeze was triggered when just 13% of shares were held short and the available float was cut to 5.8%.

Meanwhile, IOC's Top-10 public holders have been buying more shares - an average of +2.522mm shares (+5.24%) during each of the past four quarters, as outlined below:

As such, using basic arithmetic, if the Top-10 public holders' historical buying pattern (+2.522mm shares per quarter) continues, the available float could go negative (below 0%) by June 30, 2012.

And if IOC's Top-10 holders were to withhold or recall their shares (making them unavailable for short sellers to borrow), a short squeeze could ensue.

Final Thoughts

It's likely that most of the 9.8mm shares held short in IOC are held by professional investors. They probably know about the risk of a short squeeze, in general, and can calculate that there are 12.1mm shares held by investors other than Insiders (7.4mm shares) and the Top-10 public holders (28.7mm shares). They might also know that Phil Mulacek, IOC's Founder/Chairman/CEO, has never sold a share of stock (per SEDI filings). And there's a good chance they know that Richard Chandler, IOC's largest shareholder, has increased his ownership by more than 4.5mm shares (9.4%) in the past two months.

However, as some short investors have learned over time, not recognizing when the number of shares held short nears the available float can prove very costly.

(Additional sources: Bloomberg Professional,,,

Disclosure: I am long IOC.