As a new addition to Chicago's Invest for Kids conference, an emerging manager panel was featured, focusing on managers who are early in their careers and running small firms. One of these panel members was Ari Levy of Lakeview Investment Group, who offered up a short pick, putting InterOil Corporation (NYSE:IOC) on the chopping block. InterOil has a market cap that exceeds $3 billion, but Levy sees no value whatsoever in the company, stating that "the company has made misstatements to investors causing the stock to be grossly overvalued...burning hundreds of millions of shareholder capital in the last decade without identifying or producing a commercial well." InterOil was a short idea of Whitney Tilson’s as far back as January.
Levy believes that InterOil has made misstatements to investors and embarked on complex land deals—frivolously spending investor dollars, not to mention the robust marketing campaign used to continue to fool shareholders. Levy reiterates that the company has no proven or measurable reserves. The natural gas explorer’s key property in Papua New Guinea saw positive flow rates in the beginning, but these flow rates have since disappeared and any evidence of gas has become virtually non-existent. Levy notes that this is not uncommon for the territory, where flow rates appear robust, but end up being duds.
Additionally, despite InterOil’s claims to have applied for permits to further explore the land to uncover the gas, Levy’s firm contacted the key government agency in Papua New Guinea directly, confirming on two occasions that no such applications had been filed. Levy also noted that no less than six other energy companies have explored for gas on the same land and have since given up.
We believe you could take your money and better invest it in any of the other top oil and gas companies, such as Chevron Corporation (NYSE:CVX), Hess Corp. (NYSE:HES), BP PLC (NYSE:BP), and Suncor Energy Inc. (NYSE:SU). All of these oil and gas companies pay a dividend, with Chevron and BP having high dividend yields, at 3.4% and 5.3%, respectively. All four of these companies also trade well below the industry average P/E of 16x, with Suncor the highest at 11x and BP the lowest at 7x.
Chevron’s production fell 3% in 2011, but sees new developments adding to production at 1% per year through 2014, and then 4% per year for 2014-2017. Chevron has restructured its downstream operations and plans to spend 87% of its 2012 CapEx on exploration and production activities. Hess actually expects production up 35% in 2012, but sees gaps in cash and CapEx that will require asset sales. This has put some pressure on the stock given the rebalance may lead to slower production. Better performance will come about as a result though, and full year CapEx is expected to be scaled back going forward to better meet cash from operations. Check out the recent earnings analysis of Hess.
BP is still recovering from the 2010 Macondo incident. The oil-gas company is now working on smaller, but more efficient projects, leading to higher margins. The long-term production plan shows growth at 1% over the next five years. BP is also a Taconic Capital top pick. Suncor’s 2Q oil sands production was up 1.1% from 1Q, and up 27% year over year. Total production is expected to be up 2% in 2012, with 6% growth in oil sands.
For InterOil, although other fund manager positions are very modest, Levy’s short bet on InterOil is betting against the fund managers that have long positions in InterOil, such as Ken Griffin, D.E. Shaw and Israel Englander. Check out all the funds owning InterOil. An InterOil short bet should be considered speculative, although Levy makes a good case, with the exploration company missing 2Q results by 1200% and expecting to see full year EPS down over 250% from last year.