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Whitney Tilson Thinks InterOil Intrinsic Value = Zero

November 29, 2011 | About:

From Tilson’s latest communication with investors: Speaking of our largest shorts, though I haven’t commented on it in a while, InterOil (NYSE:IOC) has gotten better and better as a short, as the company continues to miss deadlines on its unrealistic promises, which will likely never be fulfilled, yet the company still has a $2.7 billion market cap (vs. its intrinsic value of ZERO). The government of Papua New Guinea is finally waking up to this gigantic promotion and has demanded that the company find an “internationally-recognized LNG operating partner,” which is highly unlikely (see: http://seekingalpha.com/article/307654-3-problems-interoil-has-with-finding-a-major-partner).

Here is laundry list of what InterOil has promised by year-end:

- Secure FID with Mitsui for condensate stripping plant (CSP)

- Secure FEED and FID with Energy World Corp. (EWC) for modular LNG plant

- Secure FEED and FID with Flex LNG on floating LNG plant

- Sign definitive agreement with Noble Group for 1MTPA offtake

- Secure “internationally-recognized LNG operating partner”

- Sign additional HOA for 1-2MTPA offtake

With only a month to go in the year, the only one of these that IOC has delivered on is the last one, announcing last week that it had signed “a Heads of Agreement (HOA) with Gunvor Singapore Pte. Ltd., for the supply of one million tonnes per annum (mtpa) of liquefied natural gas (LNG).” Ah, but as is almost always the case, all is not as it appears at InterOil, as Gunvor, according to Wikipedia (http://en.wikipedia.org/wiki/Gunvor_%28oil_trader%29), has unsavory ties:

Following the major Wikileaks release of US State Department cables in November 2010, it was reported by the London Daily Telegraph[17] that the wealth of Russian Prime Minister Vladimir Putin is linked to a "secretive Swiss-based oil trading firm" called Gunvor. It said that John Beyrle, the United States Ambassador to the Russian Federation stated that close connections exist between Gunvor and the Russian Government and that he reported: "its secretive ownership is rumoured to include prime minister Putin."

The whole point of an offtake agreement is so lenders will lend the nearly $10 billion this project would cost – and who’s going to lend that kind of money against an agreement with a firm like Gunvor?!

There’s ZERO chance that InterOil will meet its year-end deadlines for all of these deals, which the company just acknowledged today, saying “the company was targeting late this year or early next year”:

InterOil sees investment decision on Gulf LNG project in months

PERTH | Mon Nov 28, 2011 5:41am EST

Nov 28 (Reuters) - InterOil Corp is on track to make a final investment decision on its $6-billion Gulf LNG project in Papua New Guinea in the next few months and expects to receive government approval for the project.

The Papua New Guinea government criticised InterOil's project plan earlier this year on grounds that it fell short of the project that had originally been approved.

"We are very confident that we are on track to build this plant with full support of the government of Papua New Guinea," Dinny Kutty, InterOil's chief accountant, said at an industry conference in Perth, Australia.

"I'm not going to give a date, but the government wants this project off the ground as soon as possible. It is providing huge economics to the country," Kutty said, adding that the company was targeting late this year or early next year, while the Papua New Guinea government wanted to see a final investment decision by the end of the year.

A spokesman for Papua New Guinea's state-owned oil company, Petromin PNG Holdings, was not immediately available for comment.

InterOil is also in the process of seeking an operating and equity partner with previous LNG developement experience.

"We keep the government in the loop to make sure there won't be any objections once the process is completed," Kutty said.

The project, which Interoil is developing with Pacific LNG in a joint venture called Liquid Niguini Gas Limited (LNGL), will initially produce 5 million tonnes per annum (mtpa), ramping up in stages to 7.6 mtpa and 10 mtpa.

The company currently has sold 2.3 mtpa, or less than half of the plant's initial capacity, through preliminary sales agreements, with 1 mtpa each going to Noble Group and Gunvor, and 0.3 mtpa going to the Philippines' EWC.

LNG developers typically try to lock in around 85 percent of sales contracts before making a final investment decision on a project.

"We are confident that there will be more (agreements) in the near future," Kutty said, adding that InterOil aimed to sell another 2 to 3 million tonnes in the next few months.

"There's definitely interest from the Asian region because there's a lot of demand for LNG," said Kutty, adding that the project would break even at a sales price of $0.70 per mmBtu, including revenue from condensates also produced by the project.

For more the most in-depth expose of IOC, see: www.businessinsider.com/interoil-ioc-major-momentum-or-just-a-castle-in-the-air-a-new-investigation-2010-4, which links to 12 pages starting here: www.businessinsider.com/interoil-ioc-major-momentum-or-just-a-castle-in-the-air-a-new-investigation-2010-4#the-background-1

For a more recent take, see: http://seekingalpha.com/article/307939-has-interoil-turned-into-a-full-blown-scam

About the author:


Rating: 3.3/5 (12 votes)


Getitrt2 - 6 years ago    Report SPAM
Even if one did not know that Tilson is short IOC and starts with a strong bias against the company, the fact that he starts out with the claim that this company with only 13% long-term debt on its balance sheet, midstream and downstream operating businesses with positive cash flow, 58% controlling interest in more than 9 Tcfe of independently confirmed gas and liquids resources, seismic studies and independent engineering reports indicating additional multiples of Tcfe on 3.9 million lease acres it is continuing to drill, and LNG project partners such as Mitsui and Samsung for projects nearing FID with recently confirmed PNG government support has "ZERO intrinsic value", should make it obvious how erroneous and even ludicrous his claims and "opinion" about the company are. Add to that the fact that experienced professional oil and gas analysts at Morgan Stanley and Macquarie Capital that know vastly more about the industry and InterOil than Tilson will ever know have top ratings and three-digit price targets for the stock, with even higher "intrinsic value" estimates, and it should be even more obvious.

Tilson claims that IOC "continues to miss deadlines on its unrealistic promises" without identifying what those supposed misses were. IOC does not make "promises" and set absolute "deadlines" for major complex events in a developing country any more than any other such company, but If he is referring to FID targets for earlier in 2011, those were not "misses". They were major changes in strategy and design that expanded the LNG projects from 2 mmtpa to 5 mmtpa with the addition of a FLNG project and new partner, accelerated LNG production by about two years, and tremendously reduced costs, to the great benefit of shareholders and the PNG government. The listed goals or targets for year end are not guarantees or "promises" as Tilson claims, but are major realistic goals the company is working toward with its partners that it does not have total control over but which are progressing well and appear to be on track for year end at this point. As Tilson concedes (but then tries to downplay), one of them has already been reached. He claims their is "ZERO chance" IOC will meet all the year end "deadlines". If the company reaches even half those goals by year end, it will be a major achievement, and I would not be surprised to see them reach them all. Tilson also cites a recent Reuters article where the reporter raises some questions with an accountant from the company, who was not authorized to speak for the company, at a conference in Australia; and the reporter inaccurately predicts an "investment decision on its $6-billion Gulf LNG project" in "the next few months". First of all, the current project FIDs are for is not a "$6 billion" project. Secondly, the quotations from the accountant on FIDs refer to "targeting late this year or early next year" and wanting to see FID "by the end of the year". The context the accountant refers to months in is that InterOil "aimed to sell another 2 to 3 million tonnes (of Lng) in the next few months". A representative from the company states that the year end targets for FIDs have not changed.

Tilson tries to turn IOC's new off-take agreement with Gunvor Singapore into a negative by casting aspersions on Gunvor because a prime minister of Russia may have some ownership, and banks might not provide any supposedly needed financing because of that. Say what? Gunvor is the world's third largest independent oil trading company, whose trading partners and clients include eight out of the top ten, and seventeen out of the top twenty of the world's largest oil and energy companies; and now IOC is going to be a significant supply partner. In June Gunvor received a $1.5 billion revolving loan which was oversubscribed with participation by major banks around the world. Recently Gunvor reached a deal to buy a major interest in a coal venture in Montana, being accepted as a major partner right here in the USA. Furthermore, Tilson claims Gunvor is key to lenders lending "the nearly $10 billion this project would cost". That is a false statement in every respect. This project will not cost $10 billion to begin with, and neither IOC nor Gunvor is seeking any lending for the current projects. The much less needed financing for the current projects has already been lined up by IOC and its partners. What is Tilson talking about? He is either badly misinformed or is just making it all up!

Tilson even has the dishonesty and audacity to state that the PNG government "is finally waking up to this gigantic promotion". Well, lets let the Prime Minister of PNG, who attended the agreement signing with Gunvor, speak for himself:

"Prime Minister O’Neill said that the Government was pleased to witness yet another positive event to signal InterOil Corporation’s seriousness and sincerity to move forward towards delivering a world class PNG project on time."

“I congratulate InterOil’s founding directors Phil Mulacek and Christian Vinson, their InterOil, Liquid Niugini and Pacific LNG for securing this LNG off-take agreement,” he said. This Government fully supports InterOil Corporation’s efforts to develop the nation’s second LNG project.

“The State is a partner in this project by virtue of its obligation to acquire up to 22.5 per cent equity as stipulated under the Oil and Gas Act. By fully supporting the interOil project, and their re-scoped development plans and schedules, this Government is clearly signaling to oil and gas industry stakeholders that any attempts to undermine and obstruct the progress of the second LNG project will not be tolerated,” Mr O’Neill reiterated.

“This Government fully supports InterOil Corporation’s decision to develop the LNG project, production and export facilities in Gulf Province. The project will be a much needed economic and social boost for development-starved Gulf Province."

What more is there to say? Would not any objective party have to conclude that Tilson's article is a deliberate extremely distorted and misleading one by a hedge fund manager who is short in the stock? Is that not a violation of the Securities and Exchange Act of 1934? What about the gurufocus contributor publishing it; what is his role?

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