InterOil Resists an Orchestrated PR Attack

| About: InterOil Corporation (IOC)
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An orchestrated attack on a company by ex-cons involving undercover entrapment exercises, rigging message board systems, bloated PR and even YouTube videos... is that justified? The short answer is no. Here is the long answer.

The story raises serious questions about the usefulness of message boards (to put it mildly) and how safe are public companies against organized attacks even in a time when naked shorting has become more difficult.

The company in question is InterOil (NYSE:IOC), which has had a lot of success lately, with a record flowing (and vertical pay zone) Antelope1 well that has hit the cover of May's World Oil magazine (see here for the article). It has also moved to the NYSE, had its resource vetted by a third party and its refinery (despite operating at less than 2/3 capacity) is turning in modest profits (see the latest research by Raymond James and Nataxis Bleichroeder).

Most of the sceptics have disappeared as a result, witnessing the significant stock price increase and decreasing short count. The stock used to linger for over two consecutive years on the RegSHO list and had up to 6 million undelivered shares (June 2008), but most of that is gone.

However, there is a hard core short position that doesn't give up without a fight. What kind of fight, that became clear last Friday, when Barry Minkow's Fraud Discovery Institute (FDI) published an undercover 'interview' with Wayne Andrews, formerly Raymond James star energy analyst but now working for InterOil by a private investigator imposing as a potentially large investor trying very hard (but in vain) to entrap Wayne.

The PR fanfare created (press releases, a YouTube video) and the swamping of the Yahoo board and rigging of its rating system (positive posts suddenly bombed by previously unseen quantities of negative ratings) had a temporary effect in the morning of the options expiration Friday (coincidence?), but by the closing the stock was actually up.

Perhaps the excellent and reasoned explanation of InterOil's rather unique opportunities by Wayne, easily providing the best one-stop shop for research on the company had something to do with that, so this undercover exercise might have very well backfired.

Who are the perpetrators? The worrying thing is that they are known, it's the trio Sam Antar, Barry Minkow, and Howard Sirota (two of which have been sentenced for fraud and are now posing as fraud "busters"). It's not the first time they have tried a stunt like this.

The formula works as follows:

  • Antar or Minkow writes a report, supposedly discovering fraud at some company.
  • The reports are at least in part funded by hedge funds.
  • They short the stock.
  • They show up on message boards daily.

This ugly information came out of a deposition under oath from Barry Minkow (here and here, summary here), but Minkow's disclaimer on his own website already indicates quite a bit:

It must be understood and clearly disclosed that just because FDI says a company, especially a public company, is an apparent financial fraud in progress, unless law enforcement corroborates such findings it is a meaningless conclusion as the finder of fact is always law enforcement and the courts. Barry Minkow almost always holds a position in securities reported on, or profiled by, FDI websites. Neither FDI nor Mr. Minkow will report when a position is initiated or covered. Each investor must make that decision based on his/her judgment of the market. We always insist that anyone who relies on our reports, independently corroborate our findings before making any decisions

In fact, it sounds very much like the disclaimer of Stocklemon, which tried the same with InterOil three years ago, before it made the big discoveries and when it was financially less sound. Stocklemon stopped covering InterOil two years ago.

Sam Antar's reports invariably fail to have any legal consequences (for instance, despite enormous efforts against Overstock (NASDAQ:OSTK), where he and Sirota live on the message board, started only after its CEO begun campaigning against naked shorting), as Fortune noticed:

As a would-be fraudbuster, Sam E. has yet to notch his first kill. (Although in fairness he doesn't hold himself out to be a full-time 10-Q detective. "I don't have 40 people working for me like the SEC," he says.) He hasn't brought any companies down or caused any regulators to open any investigations.

Sam Antar announced, on the Yahoo message board (sic!) a "forensic accounting exercise" by starting off with asking for help from the board! Apart from competence issues, this raises serious doubts about motive. Why would someone without any idea about a company nevertheless publicly announces an investigation? We had some ideas which turned out to be spot on.

A month later and no such exercise has appeared, and Sam's many 'contributions' to Yahoo do not contain even a single morsel of information about the company nor about that forensic exercise...

Howard Sirota, who was Sam's legal council during the Crazy Eddie travails, also appeared on Yahoo frequently arguing that InterOil doesn't have reserves. Although technically true, but InterOil has 3.4Tcf of 'contingent resource' vetted by a third party and the only reason that gas isn't called reserves is because it isn't produced (yet), so it's a bit of a semantic issue (pointing that out on Yahoo typically invites the wrath of the shorts).

He even tries to make our website suspect because we don't live in the US (something we've never hidden), that paragon of financial rectitude.

Why now?

Apart from releasing that undercover interview on options expiration day, the timing is very suspect:

  • InterOil is still assessing the bottom of that record Antelope1 well, and things could very well turn very nasty for the shorts. Antelope1 already showed significant amount of condensates at the top of the enormous pay zone, but this ratio increases with depth, making a stripping plant viable which will provide a big early source of cash flow and significantly reduce the need for outside finance.
  • Even worse, there are signs there is oil, but the testing in the first side track didn't go very well, so they're now drilling a second side track. A commercial oil find would kill the shorts instantly, as InterOil has a refinery which at present, has to import crude from abroad. Liquids and/or oil could also significantly increase the value of what InterOil gets for selling of stakes in farm-out deals it's currently negotiating (it has 4.8M acres with many more promising structures).
  • The conversion of debentures, removing most of the debt from the balance sheet, is within striking distance, which can happen by Thursday the 21 (if the average daily price stays above $32.5).
  • Deals (like farm-out and off-take deals) are likely to happen any time after testing at Antelope1 has been concluded.

The stock already seems to be under steady accumulation (volume and price increasing), and it's the understatement of the year to note that the shorts could do without any of this happening.

We'll close by providing you a quote from that undercover Wayne Andrews interview, geologist by training, on the economics of the Elk/Antelope resource, comparing it with a similar project on PNG:

Let's try to put some perspective on valuation. Exxon (NYSE:XOM) has a project where they also are taking gas, these gas fields, and they're going to build a pipeline all the way down here to an area near Port Moresby where they've already bought land and they want to build an LNG project. There was a partner that owned some of the resources and part of the plant and they sold their interest to Nippon, a Japanese firm in December when oil prices were $35 a barrel and they got $800 million for 3.6% interest. I think our project is better than Exxon's. It's better because we've got all the infrastructure. Our wells here are averaging about one-third the cost. They're drilling wells for $75 to $100 million. Our wells are costing between $25 and $40 million. The initial productivity of our wells is several hundred million cubic feet a day. Up here, they're in the 8 to 15 million cubic foot a day range. So we're 20 times more productive at one-third the cost, 60-fold improvement in economics versus drilling in this sandstone reservoir up here versus the limestone that we've discovered here. So our project is low cost. I told you the gas is low cost. We've got the place to build the plant. Off-the-shelf technology, very simple project and we've had an overwhelming amount of interest in it and if we could achieve, you know, if you calculate what the valuation is based on the sale, 3.6%, that values our interest something in the $10 billion range and we're a 1.3 billion market cap company.

This quote also gives you some idea of the likelihood of whether this resource will ever be produced (and turn into 'reserves', an issue the shorts try to exploit at every turn)...

This orchestrated attack is so unsavoury, and even a long-time short turned against this campaign. It raises serious issues as to the usefulnes and abuse of message boards and the safety of securities markets in general, as these perpetrators were actively touting to get the law involved.