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Barry verus Bertoni

|Includes:InterOil Corporation (IOC)

Barry Minkow from the FDI claims IOC is a "great Ponzi scheme". He commissioned a geologist, Bertoni, to proof these claims. Did he? Uhhh, not really...
This article appeared earlier as Daily Distortions 31, the shorts attack InterOil again 

While drilling proceeds smoothly at Antelope2, the following story came out. Barry Minkow, who we featured before and whose business model is to short stocks, write reports accusing the company in question of some misdeeds (at least on one occasion financed by a hedgefund) and cash in. He (and understudies Howard Sirota and Sam Antar) did that with Herba Life and USANA Health.

Not always successful, but it depends what you mean by success. Today's world is ruled by perception, and if you can create the perception that something is wrong, that's often enough to produce a desired effect. Authorities have found no wrongdoing at USANA and Minkew even had to retract all his accusations against Herba Life.

This time, Barry has hired a geologist by the name of Renato Bertani. He will, according to the newsstory out today, put a lot of question marks over InterOil's resources. How exactly he's going to do that from the comfort of his desk is quite another matter, but let us put some rather large question marks over that newsstory out today.

  • For years, the energy company has made encouraging announcements about its progress in finding natural gas at its key Papua New Guinea drilling project - talking of a "world class" find, or a "world record" flow of gas, or a flow so strong that stemming it was like "trying to stop the Mississippi."

Note how the impression is created that IOC has claimed they have big things for years, while in fact they've drilled only four wells in the Elk/Antelope structure. Indeed, InterOil argued, with the help of seismics and information from the earlier wells, that the structure is large, based on their geological interpretation of Elk/Antelope.

Fact is, the more they've drilled, the more their geological model proves to be right, even old foe Ross Smith Energy Consultancy, in a rather embarrassing about-face, had to admit as much.

Note also the quote from InterOil's CEO Phil Mulacek, about "stemming the tide of the Mississippi". This actually refers to the problems they had in controlling the gasflow at Elk1, the first discovery well drilled in 2006, read Mulacek's the quote in full:

  • The size of the discovery was so large, Phil E. Mulacek, InterOil's chairman and chief executive, informed an analyst, that simply controlling its output "was sort of like trying to stop the Mississippi." [NYT]

They had such problems in controlling the gasflows that they had drilling mishap which we believe was covered by an insurance company. After a few earlier disappointing discovery wells they were ill prepared for 100MMcf/d gasflows.

We also wonder what else one could call a 2000 ft net payzone with 8.4% average porosity and a 382MMcf/d flowrate with only 1/3 of the pipe open anything else than 'world-class?' In fact, it was recognized as such as Antelope1 (from which these metrics come from) made the cover of World Oil Magazine in May this year.

The newsstory announcing Barry Minkow hiring a geologist continues with:

  • Yet, despite InterOil's optimistic statements, it's never been able to report any proven, viable gas reserves under regulators' standards.

This is such a clear indication of a negative bias. For starters, only recently has InterOil received an independent resource assessment from Canada's premier outfit GLJ Petroleum Consultants. They put the resource at 3.4Tcf (P50), but it's important to realize that this figure only included data up to 31 December last year.

That means that almost all data from Antelope1 (the record vertical payzone, record flowrate, porosity) wasn't included. Antelope1 is by far the best well, so that number can only rise significantly with the inclusion of Antelope1 data. And indeed, there is a newer independent resource report from Knowledge Reservoir that put the P50 number at 6.7Tcf.

To argue that IOC has never been able to prove reserves when they don't (yet) produce any carbohydrates and have only just been evaluated by third parties is a bit of a hoax. We have written about the resource/reserve distinction before, but ponder over the following statement from the OilSearch yearend report:

  • When a final investment decision is taken, OilSearch will move approximately 580 million BOE from reserves to resources (P2).

A final investment decision will do something similar for InterOil. So basically, the argument from the shorts is circular. They won't build an LNG facility because they don't have reserves. But the truth is, if they decide to build the LNG facility, most of their resources will be instantly classified as reserves.

For amusement purposes we'll give you a taste of what some people write on the message boards about this:

  • "Does labelling gas in the ground resource, rather than reserve change, in any way, the assessment of the QUANTITY that's in the ground??" Yes it does. It makes it much more likely that the quantity is ZERO. [Bostonkenmore]

This is the same character that was featured in the first ten episodes of this 'Daily Distortion' series, but he seems to have moved up in his world, as it looks like he had early knowledge of this "news" coming out (see here and here). It certainly looks like he didn't want to provide a link to the story (links are not his forte anyway) as the story only came out later that day (August 11):

  • A yahooo message board is not the place to present evidence of fraud. Evidence of fraud is for securities regulators. Not a yahoo message board controlled by Interoil insiders. [Bostonkenmore]

We go back to the newsstory:

  • Now, two of the company's biggest critics contend that some of InterOil's rosy statements have violated securities regulations. And these critics speak from experience: They're both reformed financial criminals.

Is that experience relevant? Hardly:

  • Barry Minkow and Sam Antar, who now work to uncover corporate fraud, allege that InterOil misled investors when it indicated that drilling tests it has conducted at its gas find validate its plans to build a gas-processing plant that is critical to the company's future.

So their 'experience' as convicted financial criminals gives them insight into resource evaluation? Really? More insight than GLJ Petroleum Consultants, the premier independent resource evaluator that assessed Elk/Antelope as having 3.43Tcf even before including all the most important data from their best well by far, Antelope1?

The 3.43 is already enough for a single train LNG facility, but since it doesn't include the best data from Antelope1 the figure will be significantly higher. (Indeed, a later report by Knowledge Reservoir put the number at 6.7Tcf.) So we can't wait to see how that geologist hired by Barry Minkow, who is short in IOC and paid the geologist out of his own pocket, will arrive at any different conclusion.

And how is he going to do that? That's another interesting topic. Here is our friend Boston again:

  • Investors should know. None of the energy companies mentioned endorses Interoil or their finds. I would advise you NOT, to imply that Schlumberger has endorsed the company or its claims. GLJ, has only made resource evaluations based on data given to it by the company. If you mention this again, I will call Schlumberger and give them your name and let them know that you are using their name to promote a fraud. [Bostonkenmore]
  • Interoil and Interoil alone provided the data and most importantly its interpretation. No other firm has endorsed the data they have collected or its interpretation. [Bostonkenmore]

Our question would be: how would this hired geologist arrive at any radically different conclusion when it can only rely on the same data at best, and no independent data (we'll leave aside the nonsense about imposed interpretations by InterOil)? One could say that there are different "interpretations" possible, but that implies that one interpretation is better than the other.

Which one would that be, the interpretation of Canada's most reputable independent resource evaluator, or that of a hired hand of a shorting ex-con. Neither have access to any independent data, according to Boston, and the hired geologist has at best access to the same data, but probably a lot less. We'll leave you to answer that question..

We also strongly believe that many of the parties interested in parts of the InterOil business (see here for a summary) will bring their own geologist to go over the data. The report goes on with:

  • Minkow contends, that InterOil misled investors when it said in March that its testing "clearly confirms" its gas discovery has enough resource potential for the company to proceed with plans for the LNG plant. In that same statement, InterOil acknowledged that there is "no guarantee" that the gas it has found will ultimately be able to be extracted and sold commercially.

While the onus is on the critics to prove that GLJ is wrong to conclude that there is 3.43Tcf of gas (even before Antelope1), of course there is 'no guarantee' that it will be produced. InterOil needs government approval (pending) and outside parties to finance the LNG facility. Until that happens, there can't be guarantees, but funny enough, if that happens, much of InterOil's 'contingent resource' will change into 'reserves'. Funny because the shorts argue IOC won't be able to build the LNG facility exactly because they "only have contingent resources, no reserves."

The report goes on:

  • What can be said, though, is that this adds to the stockpile of questions about InterOil  - such as the recent concerns about whether InterOil had omitted information from its public disclosures about who helped it raise $95 million in a critical financing last year.

A "stockpile" of questions? The author could mention only one, very tangential, unproven issue of which even Boston argued that the SEC was not likely to take any action. Even Barry Minkow says on his websites that it is the authorities that determine whether any fraud has been committed..

  • It's also clear that the company still has nothing to show for its years of work - no proven, viable reserves, still. Years in which it's raised several hundred million dollars from investors, lenders and partners in a series of stock offerings and other financings, aided by those optimistic statements about its progress. InterOil has a market value of about $1 billion. If its claims about a world- class gas find prove valid, maybe it's worth that much, or more. But that's the question, isn't it? If.

Still has nothing to show for it's years of work??? Huh? Three wells flowing way more than all of OilSearch's combined, refinery moved to profitability, balance sheet cleared up, independent resource reports vetting its resource, long-term critics Ross Smith turning around, etc. etc.? Nothing indeed...

And then the market cap of $1B, which the author (a certain Michael Rapoport) claims would be the maximum, if it's claims are valid. No Mr. Rapoport, if IOC's claims are valid, it will be worth a multiple of this, as we've set out, for instance here.

Stocks: IOC