INTEROIL IS A VERY CONTROVERSIAL oil and gas company. Lately, there has been a lot of excitement about the company reaching a potential deal with a major partner to operate it's Papua New Guinea gas wells.
However, I continue to believe that a major operator will never sign with IOC. So much recent damage has come to the company, such as reports it's refusing to show Royal Shell its well data, liquidity problems, and news that George Soros liquidated his position, that it won't be able to recover.
I have recently done a lot of research on the company and have dug up some interesting information from various sources. Some of these are experts in the field of oil and gas exploration, others are experienced investment analysts. I am sharing some of what I learned.
InterOil's CEO, Phil Mulacek, claims that InterOil and Royal Dutch Shell are in negotiations over making Shell the operator of InterOil's Elk-Antelope gas fields in PNG. Royal Shell's CFO, Simon Henry, also claims that they have had discussions over "quite some period of time."
However, now things don't seem quite right. Mr. Henry is quoted as saying: "At the end of the day we haven't been in the data room and we're not in an ongoing discussion. It's very difficult to have an interest in the asset that the license holder (InterOil) doesn't want to talk to you (Shell) about."
There is strong evidence that the wells don't have the gas that IOC claims. First off, the company still has not done an SEC-compliant resource estimate. This is after three years of discovering the Antelope-1 and Antelope-2 wells in 2009, and four years of discovering the Elk-4 well in 2008. Instead, the company got an independent resource estimate from Candian firm GLJ.
Secondly, IOC has been drilling in an area of PNG around the Puri Creek that has been known to contain hydrocarbons. Companies have tried to drill in this area for decades, but to no avail. If IOC had really managed to find significant oil or gas in this geography, then it will be the first company in history to have been commercially successful.
Here is a newspaper article of a partnership between BP and a company called Vacuum Oil from 1958, which initially looked like the company had stumbled upon quite an oil well. You can see that this well was also in Puri Creek and it had generated quite a bit of excitement in the stock (some things don't ever change).
But then, as shown in this article, it was found that the first great oil flow was never found again. The rest of the well was just water-bearing.
Another company called Kundu Petroleum drilled a well in the 1980s, but eventually went bankrupt.
In addition to these examples, much more exploration has been conducted and wells drilled with no commercial success in the carbonate reservoirs around Puri Creek. There is just too much water where oil and gas were expected to be. Over the decades, oil and gas companies have always let their licenses expire in Puri and moved further west to explore PNG's sandstone reservoirs.
I believe there are no more outs for InterOil at this time. The PNG government has pressed it to find a major partner, the company appears to be trying, but delays continue.
It should give an investor no comfort that the PNG government continues to support InterOil. InterOil is the only oil and gas company they have to work with in the Puri Creek areas. It's like if you had someone around to clean your yard and he was doing a bad job, but you had no one to take his place. You would have no choice but keep him around.
InterOil has reached it's peak, got everyone excited, including the media, only to let everyone down with a thud. As more and more IOC investors start getting skeptical, you can expect the stock to slowly drift down from here.