InterOil: Has The Stock Run Out Of Gas?

| About: InterOil Corporation (IOC)

The stock gained a lot of attention last year after a report on Business Insider. There was a big difference of opinion between Soros Fund Management with a large long position and Whitney Tilson's T2 Partner's with a large short position.

Lately, the news flow about hedge fund involvement in the stock has been slow. Google "Whitney Tilson IOC" and the last story I see is from January; Soros has been reducing its position throughout the year. I think that the waning interest in this stock indicates that the price will continue to trend lower.

The stock is down year to date to $56.05, a return of -15.75%. YTD Chart

Additionally, short interest has increased since the beginning of the year. Combined with the price action, the increase in short interest indicates to me the momentum has shifted back to the short side.

Recently, the stock made a classic double bottom, and had a bullish reversal.
Double Bottom
It looks like that bullish trend failed and volume has been fading along with the price. I perceive that to be a portent of an even lower price.

There has been no determination of the validity of the allegations made in the Business Insider piece and there may not be one for a few years. As evidenced by the large opposing positions in the stock, an investor might conclude that the stock will either be a gusher or will flame out. Until we reach that ultimate conclusion, I think that the price of the stock will be driven by short term technical factors.

One factor I look at to determine potential supply/demand imbalances is the performance of large holders of the stock. The largest mutual fund holder of the stock is Wells Fargo Advantage Small Cap Value Fund SSMVX 9.2%. The fund is down over 11% for the year and is trailing its benchmark, the Russell 2000 Small Cap Value Index which is down 8.5%. In addition, the fund is overweight energy compared to its benchmark with a 25% weighting in energy. Both factors increase the likelihood that this fund may decide to reduce its position in the stock, contributing to downward pressure on the stock.

Finally, for fundamentally focused investors there were some red flags raised in the latest quarterly report. 1) IOC had a large increase in inventories that seems disproportionate to the increase in revenues. 2) Trade receivables spiked to $97 million at June 30th from $48 million at year end. 3) Approximately $12.5 million over half of net income was a result of FX gains. If you normalize the recent trend in earnings, the resulting P/E is over 40x. Clearly, investors are not trading this stock on earnings. In the absence of news on the exploration/development front, any disappointment in operating results could lead to a short term hit to the stock price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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