What: August was a rough month for InterOil's (NYSE: IOC) investors as the company's stock price dropped 15.6% during the month. Fueling the fall was the company's worse-than-expected second-quarter results as well as continued uncertainty over its Papua New Guinea project amid the weakness in commodity prices.

So what: InterOil reported second-quarter results midmonth. The company reported a loss of $0.66 per share, which missed the consensus estimate by $0.27 per share. However, its current financial results aren't all that important as it is an exploration company and not a production company.

Its main development is the Elk-Antelope gas field in Papua New Guinea, which it believes is large enough to support a two-train liquefied natural gas project. In fact, recent test results from the field suggest that it's sitting on a world-class gas reservoir. The company continues to move forward with the project and took a big step forward in August as it transferred operatorship to French energy giant Total (NYSE:TTE) at the beginning of the month. Assuming everything goes according the plan, the project will deliver first gas in 2021.

What the market continues to be concerned with is the fact that a lot could go wrong between now and 2021. As oil prices remain volatile it will have an impact on the future pricing of LNG from that facility, which could impact profitability. In other words, InterOil is taking a big risk and that has investors nervous given the volatility in oil and gas prices.

Now what: A lot is riding on this one project, and while InterOil has a world class partner in Total, there is a big risk that the project might not deliver as promised. Because of this, investors need a very long-term outlook and an iron stomach as InterOil's stock will likely remain extremely volatile.

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