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  • InterOil Corporation: Possible Fraud?

    We are adding InterOil Corporation (IOC) as a short to our ValueHuntr Portfolio, with the certainly that the price IOC is currently traded in the market is nowhere near the company’s intrinsic value. We believe that the huge price increase the stock has experienced in recent months is due to over-hyped press releases, which have deceived investors into believing that the company is worth its market value.

    Overview

    InterOil Corporation engages in the exploration and production of oil and gas properties in Papua New Guinea. The company owns four petroleum prospecting licenses covering approximately 8.7 million net acres, as well as two petroleum retention licenses located in Papua New Guinea. Though the company has produced hundreds of press releases related to their “explorations”, the company has not found a single pint of oil. Despite this, the company is trading at 9X book value, with a market capitalization of $3.5 billion, which is comparable to exploration companies in the region with proven reserves.

    Hyped Press Releases

    According to Barry Minkow, founder of the Fraud Discovery Institute, the recent 132% increase in IOC stock price is due to hyped/untruthful press releases. An analysis of the company’s recent press releases shows that a clever play on words has the company flying high on the stock market.

    A December 1, 2009 press release touted:

    “The Antelope field confirms Papua New Guinea as a world class gas resource base in close proximity to the largest and most developed LNG market in the world.”

     InterOil’s December 10, 2009 press release boasted about government approval to construct a liquefied natural gas plant in Papua New Guinea:

    “This approval is another major milestone in advancing the monetization and commercialization of our resources we have established at the world class Elk/Antelope fields.”

    The truth, however, is that InterOil has “undiscovered resources”, which cannot possibly be assumed to be company assets. Furthermore, calling a field “world class” isn’t the same thing as actually knowing how much of a natural resource exists there. InterOil is capitalizing on the confusion between undiscovered resources (which are unknown quantities) and discovered resources.

    Apparently all it takes for management to trick investors into buying up IOC stock is pretending they have officially discovered and certified resources, which the company is not even close to having.

    Not only has the company produced over 200 press releases updating investors about the “exploration progress”, but it has somehow managed to get away with extremely vague releases. For instance, the latest press release is 2 sentences long, and reads:

    “InterOil Corporation today announced confirmation of indications of oil in the Antelope-2 well in Papua New Guinea.  The Company is continuing to test whether the zone contains commercial quantities of oil and will announce the results of these tests when the evaluation has been completed”.

    So it would seem that the company is confirming a finding in their exploration. However, it seems that they are instead confirming that there are “indications” that there may be oil at their drilling site. But then again, if there are no “indications of oil”, why would the company start drilling in the first place?

    Possible Earnings Manipulation

    We use the Beneish model to evaluate the degree to which earnings of InterOil Corp. have been manipulated.

    The Beneish M-Score is a statistical model that uses financial ratios and eight variables to identify whether a company has manipulated its earnings. The variables are constructed from the data in the company’s financial statements.

    The eight variables are:

    1. DSRI – Days’ sales in receivable index
    2. GMI – Gross margin index
    3. AQI – Asset quality index
    4. SGI – Sales growth index
    5. DEPI – Depreciation index
    6. SGAI – Sales and general and administrative expenses index
    7. LVGI – Leverage index
    8. TATA – Total accruals to total assets

    Once calculated, the eight variables are combined together to achieve an M-Score for the company. An M-Score of less than -2.22 suggests that the company will not be a manipulator. An M-Score of greater than -2.22 signals that the company is likely to be a manipulator.

    With an M-Score of -2.02, our model indicates that InterOil is likely to be a manipulator. Variables with largest M-Score effect are the gross margin index (GMI) and the sales growth index (SGI).

    Email Threats

    Susuve Laumaea, Senior Manager for Media Relations at InterOil, has sent threatening emails to Barry Minkow, founder of the Fraud Discovery Institute. Among other things, she writes:

     “You are a scum of the earth, a creepy-crawlie who should have been locked away and the key thrown away too so that you rot away like the dung heap you are. You are a coward of the highest order….I can’t use you as crocodile feed because you are too poisonous … those alligators will die eating you, cooked or uncooked.”

    The emails can be viewed HERE.

    Undisclosed Press Releases

    According to the Fraud Discovery Institute, several press releases were never disclosed publicly, which violates SEC regulations. For undisclosed press releases see HERE.

    Conclusion

    We believe the recent 132% increase in InterOil stock price is completely disconnected from the reality of the business, and without merit. Though nothing is certain, we believe that the probability of price manipulation through vague/untruthful press releases is high. Therefore, we are adding IOC to the ValueHuntr Portfolio as our first short in the portfolio.

    Tags: IOC
    Jan 25 9:40 AM | Link | Comment!
  • Donate to Haiti and Become a Premium Member
    In solidarity with those affected by the earthquake in Haiti, ValueHuntr.com will be providing a free premium membership, including a subscription to our monthly ValueFocus Newsletter, to readers who donate more than $30 to the ValueHuntr Haiti Relief Fund below. This offer expires Friday,  January 22nd.

    For more information see: http://valuehuntr.com/2010/01/15/haiti/
    Tags: GE, KO, BRK.A, BRK.B, CHD, JNJ, GS
    Jan 14 11:21 PM | Link | Comment!
  • Tickets to Value Investing Congress

    Today we are excited to announce that readers of Valuehuntr will be able to receive a steep exclusive discount for the Value Investing Congress taking place on May 4 & 5, 2010 at the Langham Huntington Hotel & Spa in Pasadena, CA. If you want to hear from some of the best hedge fund managers in the game, then this is the conference to attend. Not to mention, it's a fabulous networking event and place to acquire wisdom to profit in this irrational market. But over 50% of all seats are already reserved, so readers must act fast.

    If you're unfamiliar with the Value Investing Congress, then here's what you need to know: One good investment idea could more than pay your cost of admission to this event and net you some great returns. The wisdom gained from listening to these great investors is truly priceless. For a slide show of last year’s event see HERE.

    Speakers at the two day event include many of the prominent players we track here on the site on a daily basis. Here is the list of confirmed speakers (more to be announced later) include:

    John Burbank, Passport Capital

    Patrick Degorce, Thélème Partners

    Bruce Berkowitz, Fairholme Capital Management

    Eric Sprott, Sprott Asset Management

    Paul Sonkin, Hummingbird Value Funds

    Mohnish Pabrai, Pabrai Investment Funds

    Thomas Russo, Gardner, Russo & Gardner

    Lloyd Khaner, Khaner Capital

    J. Carlo Cannell, Cannell Capital

    Whitney Tilson & Glenn Tongue, T2
     

    Click here to receive the over 30% discount to VIC

    You must use discount code: P10VH1 to receive the full discount. Hurry and register because this discount expires on January 21st, 2010!

    You've got exactly one week to get signed up with these savings. If you work for a firm, get approval to go and have your company foot the bill since this is one of the premier conferences out there. If you're an individual, we can truly say that the cost of admission is worth every penny.

    The regular price of the two day event is $4,295. However, Valuehuntr readers pay only $2,795. That's over a 30% discount and savings of $1,500!  If you're from out of town, the Congress has also negotiated lower room rates at the Langham Huntington for attendees.

    It's going to be an awesome and insightful event, to say the least. Make sure you get our exclusive discount for the Value Investing Congress here. Remember that you MUST use the discount code P10VH1 to receive the full discount!

    Please let us know if you have any questions or problems when trying to register with the discount code.

    Tags: BRK.A, BRK.B, LUK, MKL, GE, JNJ, GS, AXP, KO
    Jan 13 8:05 PM | Link | Comment!
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