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.

InterOil Corporation (IOC)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.

One step forward, two steps back
Investors have learned to be disappointed in InterOil. Drilling delays have hampered progress, rumors of a partnership with Royal Dutch Shell plc (NYSE:RDS.A) never panned out, and Exxon Mobil Corporation (NYSE:XOM) will be firing up its own LNG operation in PNG next year.

But one of the “bidders” for InterOil’s resources is Korea Gas, also known as Kogas, which has substantial experience in building and operating LNG facilities. It’s the biggest supplier of LNG to South Korea and the world’s biggest buyer. Asia may prove to be the biggest market for gas exporters and InterOil may like the potential Kogas represents.

Others recognize the opportunity in Asia, too. Apache Corporation (NYSE:APA) wants to build an export facility in northwestern Canada with Chevron Corporation (NYSE:CVX) which also bought half of a pipeline project to supply the terminal, underscoring how Canada’s vast oil and gas resources makes it a huge rival to plans others are developing. Asian markets provide a pricing premium compared to those in North America.

A short story
As the proposal deadline nears, the number of shares sold short continues to mount as expectations of further disappointment grow. Nearly 11.5 million shares were sold short at last count, translating into more than 18 days to cover (the Fool believes anything over seven is a lot).

Should the driller receive the bids it’s looking for (and the deadline it set suggests the proposals at least are hopeful), the shorts could be left holding the bag as the stock runs up and the rush to cover those short positions leads to a squeeze.

While I’m not confident enough in the short thesis to actually go that route — surprises do happen — InterOil’s history has not been one that instills confidence, even if sometimes it hasn’t been the company’s fault. That’s not enough, however, to warrant an investment here, at least not by diving in headfirst. Because such industry giants like Kogas have publicly expressed an interest, I’m thinking InterOil will pull it off. I’m going to rate the stock to outperform the broad market indexes on Motley Fool CAPS as a way to track my mildly bullish stance, yet let me know in the comments box below if you agree that InterOil finally gets a chance to grab the brass ring, or will investors once again come to know the hollow disappointment its delivered so many times in the past.

The article A Decision Deadline for InterOil originally appeared on Fool.com and is written by Rich Duprey.

Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of Apache.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!