Monday, December 9, 2013

Interoil: both longs and shorts look like fools

Interoil is perhaps the most-disputed stock I have ever witnessed. The dispute is about the value of a huge claimed gas find in Papua New Guinea.

When short-sellers get together the conversation seems to inevitably turn to Interoil.

If it is a fraud (as many shorts will have you believe) it is a very long running one and one that can demonstrate impressive flows of gas (flares that make a huge noise and sometimes burn hundreds of feet high).

These flares make the shorts look - well - stupid.

If the gas is real then it has been uniquely hard to get a serious oil company interested. There has been announced deal after announced deal for about a decade - all of which have come to naught.

These deals and their subsequent failures make the Interoil bulls look - well - stupid.

The big announcement

On Friday Interoil announced its long-awaited deal with a major that may lead to the liquefaction of their huge claimed gas deposits in Papua New Guinea. The major is Total (the French supermajor). Total didn't figure very high in the gossip prior to this deal.

This is a big black-eye for the shorts. Total is committed to spending over half a billion dollars just to get options over the gas in this field. For the shorts this was not meant to happen. The stock may be down almost 40 percent on the deal but it is hard as a short-seller to find comfort in a big and presumably competent oil company stumping up real money to buy a gas field that you previously believed was worthless.

But it is also a big black-eye for the longs. Total is stumping up real money - but not much compared to what the bulls thought the field was worth. Incremental TCFs of gas beyond the minimums are sold to Total for $100 million a pop. My first thought when I saw that number: they left a zero off.

The stock was down hard for a reason. If the gas find is as good as Interoil claim it is then the management sold it for a song.

There are smart shorts and smart longs in this stock. I swear there are.

Today they all look stupid.

The shorts may claim victory - but they look stupid too.


Disclosure: Short. I made a profit but look stupid. Hey, its not how smart you are that counts.



Anonymous said...

The reason shorts look stupid is not the flares (not the thesis and you know that). It's the length this has continued and the borrow costs the last few years (was low pre 2010)

John Hempton said...

The borrow cost zipped up and I covered. I increased the position recently.

And yes - I was short regardless of those flares on a thesis that is very hard to demonstrate.

I traded well (lucky, not smart). And I am shocked, just shocked, that $TOT is dropping half a billion dollars or more on this.

Egg-on-my-face. Profitable egg- but egg nonetheless.

I expected no deal. And certainly not any deal with substantial up-front cash.


Anonymous said...

what a waste of gas.

John you mentioned you like analysts with scientific backgrounds. What experts did you contact before you shorted the stock?

Canadian oil sands companies do this. Some small company needs to spend billions to start something up, and they simply don't have the money, skills and expertise to do it. Is this also the case?

John Hempton said...

Anonymous... who did I contact? The geologist resident Sydney who owned (personal account) the acreage before Interoil pegged it.

And walked through the jungle every day for two years.

And abseiled down every cliff and took samples of the rock getting the right strata series.

And hence who knew what rock was there.

Better than anyone on Wall Street for instance.

Now what research do you do before you go long a stock or are you just going to patronize me behind your anonymous handle.



Anonymous said...

Nice blog entry. Both shorts and longs look stupid. Total's investment is certainly an affirmation that they believe the resource has potential to support an LNG project. They have backloaded much of the agreement to pay more if there truly is more gas then the conservative estimates have made. However, Interoil has received enough upfront cash to finance drilling operations going forward. I do think that it is a good deal for both. Not as great as the longs thought and not as bad as the shorts believed (if any deal was made).

I covered my short in the 60's after the first CC with the new CEO, Michael Hession. This guy is competent and realistic. I may have been able to have a better return in hindsgiht, but that was much easier for me to hold on to when Phil Mulacek was at the helm.

Looking forward I think results from drilling make this a scary stock to hold on to, short or long, from a risk-benefit perspective. Maybe Whitney Tilson is right about their being more downside, but I do not see it as being enough when weighed against this companies propensity to attract the momentum dollars.

Thank-you for your thoughts and candor.

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.