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2011 Recap of InterOil

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From Whitney Tilson:

There are of course many fine Wall Street analysts, but in my experience they are outnumbered by those who do little more than parrot what management is saying, regardless of how absurd it is, and who hype any stock, no matter how overvalued.  Hence, my tendency to put quotes around the word “analyst” when I refer to Wall St. “analysts”.


It would be hard to find a better example of what I’m talking about then the conflicted rubes who’ve bought into the InterOil promotion hook, line and sinker (it remains one of our largest shorts).  For example, there was the classic by BNP Paribas’s Bradley Way, who in his 9/20/10 report referred to InterOil’s “reserves” 20 times (including 7 on the front page), despite the fact that by InterOil’s own admission, IT HAS NO RESERVES (just a fiction called “contingent resource estimates”).  Here’s another example: Raymond James’s “analyst” on InterOil Pavel Molchanov.  As InterOil misses deadline after deadline, Molchanov just keeps changing his story.  I wonder if there is ANY point at which he will figure out that this is just a gigantic promotion (with a $2.4 billion market cap today)???  Here are a friend’s comments:


As we approach the end of another year, the newspapers are full of features looking back over the past 12 months or more. With that in mind, I thought it might be of interest to recap some of the greatest quotes from Raymond James’s analyst on IOC, Pavel Molchanov. Remember, Molchanov is the onlysellsider currently writing about IOC as all the others are restricted. Today, IOC at long-last delayed their December 31, 2011 deadline for the Final Investment Decision (FID) on their midstream gas resource development project. And today, Mr Molchanov was quick to write that this was no surprise. But the news could come as something of a shock to those who have been following his advice over the past 15 months…


What follows are all direct quotes from RJ’s published notes on IOC. Note in particular that in June, Molchanov was saying that any further delay would be “exceedingly damaging for the stock”, yet today he says it will have “minimal substantive impact”. The latest note from RJ follows on after the quotes.



  • ·         While the company remains understandably reluctant to share details about the ongoing liquefied natural gas (LNG) negotiations, management expressly reaffirmed the previously laid out timeline — at least one strategic LNG partnership, including resource monetization, by year-end 2010. … management confirmed that the process is on track to meet the year-end target.
  • ·         Similarly, the final investment decision (FID) for the condensate stripping plant with Mitsui is also on track to be reached by March 31, 2011.



  • ·         On the strategic development front, InterOil continues to pursue several tracks, and we sense no change in timelines.
  • ·         We continue to see a gas resource selldown as a near-term catalyst, but we would caution investors that “nearterm” does not necessarily mean this year.
  • ·         Our Outperform rating reflects our positive stance on InterOil’s long-term cash flow potential and likelihood of near-term catalysts, including an LNG monetization.



  • ·         It is logical that the timetables for reaching a final investment decision (FID) on the two projects should also be aligned. Yesterday, management said that FID for both will happen simultaneously, by the end of June.
  • ·         The final documentation for the Energy World partnership is a few weeks away from completion, with FID set to follow by June.
  • ·         In the grand scheme of things, this minor tactical shift hardly merits its own research report, but we are well aware that InterOil is a stock that trades on minutiae. Insofar as this timeline has taken some investors by surprise, we’d be buyers on the weakness.



  • ·         IOC Down 17% in a Week: Market Running Away from Ghosts Yet Again



  • ·         Will FID be reached by year-end 2011? In our meetings, management unambiguously stated that InterOil and its partners are on track to reach FID by the end of the year. Barring some extraordinary turn of events, they are wholly comfortable with this timeline. Furthermore, we believe they recognize that, after several delays in the recent past, another delay this time would be exceedingly damaging for the stock.
  • ·         Will there be offtake agreements prior to FID? Offtake agreements are not a prerequisite for reaching FID, but management seemed comfortable that one or more offtake announcements will be made by year-end.



  • ·         Currently, we see multiple near-term catalysts within six months, including the final investment decision (FID), additional offtake deals, and the spudding of the Triceratops-2 well.



  • ·         The biggest risk we see here is timing.  If the PNG government were to require InterOil to bring in a project operator – in addition to, or in place of, existing partners – that would likely push out final investment decision (FID) past year-end.  A delay in that key catalyst is obviously unhelpful for investor sentiment, but again, it doesn’t alter the value of the gas.



  • ·         Not many InterOil investors are going to be surprised by today’s announcement, but this morning the company officially pushed back the deadline to reach the final investment decision (FID) on its integrated gas resource development (onshore LNG, floating LNG, and condensate stripping) to 1Q12. We’ve noted this possibility for weeks – including in our brief from Tuesday, “Papua New Guinea’s Constitutional Crisis is Over; Now, on to Real Issues” – and we reiterate that, in the grand scheme of things, an additional delay of a few months has minimal substantive impact. Thus, while investors are (understandably) frustrated with yet another delay, shares are down only modestly this morning, indicating just how unsurprised the market is by the announcement this late in December. (Yes, we realize that some investors owned the stock in anticipation of a quick “pop” ahead of December 31, though this is not a tactic we’ve ever recommended ourselves.) As we observed on Tuesday, InterOil is certainly not the first LNG developer to experience project delays, and it surely won’t be the last. …we fully expect management to announce both a strategic partner and FID in early 2012.

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