Just yesterday I wrote about the deal that InterOil announced and mentioned that I hoped Whitney would comment.
http://www.gurufocus.com/news.php?id=108210
I didn’t have to wait long as a friend forwarded me Tilson’s comments this morning. I has speculated why InterOil was issuing a press release about having entered an intention to enter an agreement. In other words, they haven’t actually entered a deal, they have simply agreed to discuss a deal.
I also wondered about the quality of the company who is the other party in the deal that is yet to be a deal. Tilson gets to that as well.
I have to admit. The longer I watch this the more it smells. Still no position.
Here is Tilson:
InterOil continues to boggle the mind:
· Regarding the BNP Paribas report that I called “the single worst piece of “research” I’ve ever read” in my Sept.21st email (for example, in the opening paragraph, the “analyst” calls IOC “a niche LNG player” – but IOC has no LNG!), a little digging reveals that BNP’s gushing report may have been motivated by more than BNP being on the hook for IOC’s rapidly rising working capital facility. Get this: it turns out that Edward Speal, an InterOil director for the past seven years (until he resigned in June “for personal reasons”), was CEO of Paribas Bank of Canada, head of Paribas' Energy Banking in Canada and is now BNP Paribas Head of Global Equities & Commodity Derivatives – Americas. He also has deep, long-standing ties to IOC’s lead outside director. Gaylen Byker. Hmmm…
· An email from a friend (who’s also short the stock) about insider selling, the recent BNP report, and IOC’s shelf registration:
Insider selling
There was a strange and possibly disturbing insider share sale for IOC. Per the Form 144 just filed, someone called Edward Speal, a former director of IOC, exercised 60k options and sold the shares for net value of $3.6m on September 16. Speal was director of IOC for seven years until June 2010 when he stepped down "for personal reasons" per the latest proxy. It is not the first time he has sold the shares - he last sold 18k shares in July.
The sale is not a great sign in itself. What makes it more unsettling is that Speal is also the recently appointed head of global equities at BNP Paribas. This would be the same BNP Paribas that is the provider of IOC's ballooning short-term debt facility, and whose equity division recently put out a poorly-researched Buy note on the stock. That Buy note looked like an attempt to shore up a client that needed some support - but it also may have shored up any residual holding of the analyst's boss.
$300m shelf filing
IOC issued a shelf filing for $300m securities yesterday. This adds to the impression that they are in need of cash. If they chose to issue all $300m as shares that would imply ~10% dilution.
Beyond the headline, I have looked through the document and nothing jumps out. Of course, newcomers to IOC might be put off by the standard warnings, namely:
Ø They do not have "any reserves, including proved reserves" under Canadian disclosure standards;
Ø Their LTM earnings coverage ratio was >1 due to EBIT being negative at ($0.7m);
Ø It may be difficult to sue them because they're incorporated in the Yukon Territory and its officers, directors, experts and assets are located outside the USA.
· Yesterday, InterOil released a press release (full text below) that begins:
InterOil Corporation (NYSE:IOC - News) (POMSoX: IOC) today announced that InterOil and Liquid Niugini Gas Ltd., its Joint-Venture liquefied natural gas project company with Pacific LNG Operations Ltd., have signed a binding Heads Of Agreement (HOA) with Energy World Corporation Ltd. (AX: EWC) to construct a two million tonne per annum (mtpa) land-based LNG plant in the Gulf Province of Papua New Guinea (PNG). The Train 1 LNG plant would process an estimated 1.5 trillion cubic feet (Tcf) of natural gas over 15 years with early stage capital expenditure estimates amounting to US$455 per metric tonne of LNG production. In return for its commitment to fully fund the plant, the HOA provides that EWC is to be entitled to a fee of 14.5% of the proceeds from the sale of LNG from the plant, less agreed deductions, and subject to adjustments based on timing and execution. The HOA sets out the major terms and conditions which the parties intend to include in the Train 1 Funding and Shareholder's Agreements, as well as a potential expansion of the plant's capacity from 2 mtpa to 3 mtpa.
First, I’ve never heard of the term “Heads of Agreement” so I Googled it. Basically, it doesn’t mean squat:
What Does Heads of Agreement Mean?
A non-binding document outlining the main issues relevant to a tentative partnership agreement.
Investopedia explains Heads of Agreement
It is the draft used by lawyers when drawing up the contract. It serves as a guideline for both parties before any documents are legalized.
Second, always be suspicious of a press release about an agreement between two parties in which one party isn’t quoted in the press release.
Third, a quick search reveals that Energy World Corporation Ltd. is a penny stock on the Australian stock exchange that closed today at 43 cents (www.google.com/finance?q=ASX:EWC). THIS is the company that’s going to “fully fund the plant”???
