Sporting just one star (out of a possible five) in our CAPS community, and with 55% of the investors there bearish on the company, you might think that InterOil (NYSE: IOC ) is a stock best avoided. Don't be hasty, though. It's sometimes very profitable to go against the crowd. Let's take a closer look at why you might want to buy, sell, or hold InterOil.
Based in Australia, the company is focused on exploring and developing oil and gas properties in Papua New Guinea. With a population of only around six million, you might think that's a small-potatoes proposition. But think again. Located near Australia, it's also not too far from Asia, including significant energy demanders such as China and India.
Since the stock is down about 22% over the past year, it must have some factors not in its favor. So let's first look at why you might want to sell it. For one thing, look at its financial statements: Its long-term debt has been rising in recent quarters, while its cash has been shrinking. Its earnings have been negative in many recent quarters, and its profit margins trail those of its industry.
Respected investor Whitney Tilson has heavily shorted the stock, too, citing missed deadlines and unrealistic promises, among other things. Chillingly, he notes, "We believe intrinsic value is zero."
In its favor, George Soros has recently been an investor in InterOil, suggesting that there's some promise there. That's likely tied to its $6 billion Gulf LNG project, expected initially to have a capacity of five-million tons per annum (mtpa) of liquefied natural gas (LNG), rising later to 10 million. Of course, InterOil will need to line up contracts with other companies to make the most of this, and it has begun to do so, reaching a total LNG supply commitment of 2.3 mtpa, from Noble Energy and others. A recent deal with China's ENN ups that to 3.8 mtpa.
If you're now confused, wondering whether to buy or sell, you might just hold -- hold on to shares you own or hold off on buying right now. A key reason not to give up all hope is that there's much promise for liquefied natural gas. That's evident in the number of energy companies developing LNG projects.
Cheniere Energy (AMEX: LNG ) , for example, is aiming to do a lot of LNG exporting from America, and has secured multibillion-dollar, multiyear contracts. Its terminal for this endeavor isn't even finished yet, and is expected to come on line in 2015. But still, as my colleague Aimee Duffy notes, "Consider that the LNG export joint venture project between Apache (NYSE: APA ) , EOG Resources (NYSE: EOG ) , and Encana (NYSE: ECA ) is further along in the permitting process than Cheniere's, but that project has yet to secure a single customer."
Meanwhile, ExxonMobil expects to export LNG from Papua New Guinea, while ConocoPhillips is looking to export it, too, to China and India. All this activity suggests that LNG is not going away any time soon, but it also points out that InterOil is not without competition. Its future success is far from assured. The price of LNG, too, will be a factor in the success of InterOil and others. Prices have been depressed lately, but may turn around.
To me, the risks outweigh the potential rewards here, so I'm steering clear. Those interested may want to keep an eye on InterOil, though, as its 2012 may be rosier than its 2011.
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