Will Natural Gas Pay Off for InterOil?

Next Monday, InterOil (NYSE: IOC  ) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

InterOil has huge natural gas holdings in Papua New Guinea, with its Elk and Antelope gas fields having huge potential to supply fuel to the Asia-Pacific region. But the company has gone through plenty of ups and downs recently. Let's take an early look at what's been happening with InterOil over the past quarter and what we're likely to see in its quarterly report.

Stats on InterOil

Analyst EPS Estimate

($0.12)

Year-Ago EPS

$0.19

Revenue Estimate

$331.46 million

Change From Year-Ago Revenue

(2%)

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

What will happen with InterOil's earnings this quarter?
In recent months, analysts have gotten less optimistic about InterOil's future earnings prospects. They've widened their first-quarter loss estimates by a dime per share, with full-year 2013 loss projections $0.35 per share higher than they were three months ago and with full-year 2014 profit consensus cut by more than half. Yet the stock has soared, rising more than 25% since early February.

InterOil isn't well-known, but it has huge potential in the global natural gas market. From its 4 million acres in Papua New Guinea, strategically located within a stone's throw of China, India, and other lucrative Asian energy markets, InterOil has an estimated 6 trillion cubic feet of recoverable reserves, albeit without that full amount having been proven.

Yet InterOil faces substantial challenges. Because Papua New Guinea has little existing energy infrastructure, the company will have to spend money to boost production, build a transportation network to get gas to an export terminal, and then create a facility to convert the dry gas into transportable liquefied natural gas. That last step holds plenty of risk, as ExxonMobil (NYSE: XOM  ) has had to spend substantially more than it originally anticipated on a similar LNG facility in Papua New Guinea. Meanwhile, ConocoPhillips (NYSE: COP  ) has a similar project near its extensive gas assets in western Australia and has seen similarly large cost overruns that have added billions to the cost of the projects.

The next step for InterOil will be for the company to find a partner to provide enough capital to build out its facilities and convince the government of Papua New Guinea to approve the LNG project. Yet the fact that CEO and founder Phil Mulacek retired at the end of April threw an added wrench into the works, especially with the company having adopted a poison-pill takeover-defense plan immediately after the announcement.

In InterOil's report, watch for any confirmation of rumors that Royal Dutch Shell (NYSE: RDS-A  ) may become InterOil's partner on its LNG project. Shell should have ample assets to reassure the Papua New Guinean government that the venture has the financial capacity to move forward, removing one more barrier from what InterOil hopes will be profitable days to come.

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