A Decision Deadline for InterOil Corporation (IOC)

There are one-hit wonders, and then there are those stocks that get hit only to come back for bigger and better gains in the future.

Who falls where takes more than just looking at a stock’s price. The fact that natural gas driller InterOil Corporation (NYSE:IOC) saw its stock rise 7% over the past month, though it’s still down 40% from its 52-week high, means we need to dig a little deeper to see whether there’s any reason to expect this run-up to continue.

A mighty temblor
Drilling for gas in Papua New Guinea (hereafter abbreviated as PNG) hasn’t been an easy process for InterOil, which has to deal with parochial interests and greedy prejudices to bring its LNG operation to fruition. The government keeps grabbing at a greater share of the project, and the driller recently agreed to cede half of the gas supply from its Elk and Antelope fields in a bid to move it forward.

In reality, though, it shouldn’t matter who InterOil sells its output to. It might not have originally planned to monetize its resources by selling to the government, but so long as PNG can pay for it — and with a recent $3 billion loan from China to rebuild its roads there’s no reason to think it can’t — having it as a buyer is a net positive. Reserving output for local consumption is almost a cost of doing business in some countries.

While regimes in Argentina and Venezuela have regularly forced oil companies to direct a portion of their output to local markets, even in markets like Australia the aluminum industry is pushing the government to enact such set-asides so that it can have access to cheap gas. The size of the stake PNG wants might raise some eyebrows, but not the concept behind it.

Greedy fingers
Yet InterOil has been plagued by delays from the government, which accused the company of changing the agreements they originally had in place (it finally relented). The gas driller ultimately agreed to split the production equally if it could just get the plans approved; what may be the saving grace for InterOil is that the proposal gives it the right to the first half of the production output. It gets its money upfront, with the balance going to the government.

Of course, what price the government will pay is another matter. What may help determine that is the private sector partner that it signs up. After receiving several proposals from major oil companies and utilities, InterOil has set a firm deadline for them to get their final proposals in: Feb. 28. InterOil will then take up the offers in early March to see who gets the right to help build its PNG facility and get the output. Just remember, these are proposals and not actual bids, so whether any come through or are found to be sufficient remains a wild card for investors. But with early results from its Antelope-3 well looking positive, there may be greater interest in the opportunity.