Buy, Sell, or Hold: InterOil

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.

Sell
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."

Buy
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.

Hold
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.

The verdict
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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Longtime Fool contributor Selena Maranjian holds no position in any company mentioned. Click here to see her holdings and a short bio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (2)

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  • Report this Comment On January 12, 2012, at 2:33 PM, 2timfoolery wrote:

    IOC is a great speculation at under $60. It is now on the cusp of making deals that will monetized its resources. The potential is fantastic.

    A good many smart investors bought in at $75 a year or more ago. The buyers were household names-- institutional investors-- and they have added shares since.

    The price/share was taken down 3 months ago with political unrest in Papua New Guinea, where its holdings are. Unrest has subsided now and the government seems to be onboard, in fact supportive of IOC's development plans. As final investment decisions (FIDs) and futher selldowns are executed, the "resources" in the ground will become "reserves," and the net asset value of the company can triple or more overnight. The price per share will follow in time.

    In contrast with this view, Whitney Tilson is no longer so "respected." His hedge fund--T2-- was off 22% last year. Some of his shorts really bombed on him, and his shorts on IOC are likely underwater. He apparently did not cover when the stock swooned in late September 2011. What's more, his strategies are unchanged. He is still fighting the tape.

    Do your own due diligence, but look carefully. In particular you should note that IOC's current business has nothing to do with its future, when the company moves from exploration to production. Its NG in the ground is the cheapest anywhere and is very close to Korea, China, and Japan-- the biggest LNG users.

    IOC is a small company with many big functional partners-- Mitsui, Samsung and many others. This gives it far more stability like a big cap, while it has the chance for explosive growth like a mini-cap.

    Price targets from the firms that follow it best are much higher-- 80 or 90-- maybe this year. The NAV figures could be $250 or more per share in the same timeframe.

    Do your own DD. Many thngs have to click to make this happen, but they seem to be coming together, maybe in the next 60 days.

  • Report this Comment On January 17, 2012, at 7:07 AM, rodessa wrote:

    According to the PNG government and to australians geophysicians, these reserves don't exist !!! IOC has for now only a permit for exploration, not for production, as reserves not proved, and MORGAN STANLEY,UBS & MARQUARIE not really searching a partner as always waiting the proof of the existence of the reserves !!! As written in Seeking Alpha and in other places, it seems a SCAM.it is not because Tilson has lost money in 2011 that he will not earn in 2012 with IOC ! Paulson too has lost bigger amounts in 2011, is he less respected for that ? and why wouldn't he earn big amounts in 2012 ?

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