Stocklemon Reports Interoil Corp
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“If you wish to be a success in the world, promise everything, deliver nothing.” Napoleon Bonaparte
With a market cap of over $1 billion, InterOil Corp is attracting much attention as being an interesting oil and gas play in the remote region of Papua New Guinea. Yet, Stocklemon believes that profits for InterOil will be as remote as the region in which they operate. InterOil as has associated itself with stock operators of questionable character and has yet to deliver on one promise or meet an expectation. It is the opinion of Stocklemon that InterOil is a lemon because of its history of promotion and its lack of fundamentals that would support this lofty stock price.
What Is InterOil Corp?
InterOil is an odd corporate beast. Its home exchange is Sydney, but the ASX only trades its chess depositary instruments, which convert into shares at the ratio of 10:1. The main shares in InterOil are traded on the Toronto Venture Exchange and most recently traded on the American Stock Exchange.
As a business model, InterOil claims to be vertically oriented, bringing together exploration, refining, and distribution assets in Papua New Guinea. However, we will see that each of these business units is far less than it has been made to appear.
Meanwhile, a number of individuals of dubious repute are involved with the financing and promotion of the company. Stocklemon is a believer in the Cockroach Theory: if you find one, there will be many more. This report exposes enough cockroaches to warrant a call to an exterminator.
Analyst Coverage
The only major firm that has current coverage on InterOil Corp is Raymond James. Analyst Wayne Andrews rates IOC a “strong buy” as stated in his report dated September 30, 2004. In his report Andrews projected InterOil would lose .02 cents a share during the preceding quarter. Yet, on November 15, InterOil reported a quarterly loss of .12 cents..THAT IS A 500% MISS IN EARNINGS and Raymond James upgraded the stock on what they called a “good quarter” and never mention the companies earnings miss.
Could this possibly be because Raymond James managed the convertible debenture offering that was announced only 4 weeks before this analyst report? Or could it be that the debenture holders just last week converted the debt to common stock? Where is the “Chinese Wall” that is supposed to exist between research and banking?
Another brokerage firm used to cover InterOil. This was Jennings Capital (Canadian Brokerage Firm). Jennings estimated InterOil’s 2004 net income at $56.9 million with an EBITDA of $69.4 million. These projections could not have been further than the results that we are seeing .another major disappointment from InterOil.
jenningscapitalresearchreport.pdf
Something is Rotten Here
In the company’s most recent F-10 filing, we read of a $4.5 million dollar loan that was dated June 23, 2004. Yet, nowhere in the filings in either the US, Canada, or Australia do we read of the terms of the loan. Why would a company the size of InterOil need a loan for $4.5 million? What is most interesting is to see who facilitated the loan…none other than Carlo Civelli’s Clarion Finanz.
Carlo Civelli, the mysterious Swiss Financier has been involved in some of the most notorious natural resource stocks in the past decade. Most notable was his involvement with Delgratia Mining, which was the second largest mineral scam ever (after Bre-X). The collapse of Delgratia wiped out $750 million worth of stock market value. Mr. Civelli’s involvement was best described in the below article from the Financial Post.
Mr. Civelli was also involved in Pinewood Resources which was supposed to find oil in the Gambela Region of Ethiopia. His involvement is described in the below article from Stockwatch.
Pinewood now trades on the pink sheets under the symbols PWROF at the price of .19 cents.
It appears as if every stock Civelli has been involved with has taken a major turn for the worse. This is a list of the stocks that Civelli has been involved with over the past 10 years and their current trading price. This list does not include those stocks which have been delisted or those that trade only in Canada.
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Mr. Civelli is no stranger to Canadian regulatory authorities:
http://www.bcsc.bc.ca:8080/
comdoc.nsf/allbyunid/4273f5
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But the list of nefarious characters does not stop there. The firm that has been presenting InterOil on their road shows is Lighthouse Captial LTD. According to the disclaimer below Lighthouse Capital is the investor relations firm for InterOil.
http://www.edgewaterresearch.com/IOCoverview
The principal of Lighthouse who has been “promoting” InterOil is Carl Caserta. Mr. Caserta has been bringing InterOil around Wall Street attempting to attract buyers to the stock. Casserta has an interesting history of his own. In 1990, Carl Caserta was sued by the SEC, which barred him from any association with a broker, dealer, or investment advisor.
In 1998 Caserta involved himself in Ivana Trump’s failed internet retailing venture. Barron’s referred to Caserta as a “questionable character”. The full article can be read here.
Not at all coincidentally, in the opinion of Stocklemon, simultaneous with the insertion of these individuals, InterOil has quickly gone from a $200 million market cap, where it has spent the most of the last 5 years, to a valuation of $1 billion in four months.
Carl Caserta’s name appears only once in SEC filings of the last five years: in conjunction with the infamous Warp Technology Holdings (OTCBB:WRPT), a Carlo Civelli-operation that collapsed to pennies nearly overnight. Therefore, Stocklemon assumes that Civelli and Caserta have a prior relationship and are collaborating in the promotion of InterOil.
But Does InterOil Have a Business?
InterOil released a lengthy press release along with their earnings on November 16. http://biz.yahoo.com/prnews/041116/nytu090_1.html
They discuss everything financial except a couple of minor details, like a NET LOSS OF ($2,977,850), and cost of sales and direct operating expenses which are 94% of revenues.
Distribution
InterOil achieved its first operating revenue in May and June of 2004 of $12.6 million. Nearly all of the revenues from InterOil have been from the gas stations they acquired from British Petroleum. So what was the cost of this acquisition that accounts for all the revenues of InterOil? According to the company’s 6-K filing,
“The purchase price was $12.2 million for these BP assets and inventory, of which $1.0 million has been paid, with the balance of funds payable on March 1, 2005.”
Exploration
The exploration business of InterOil leaves a lot of holes. These are direct quotes from the company’s 6K filing in November.
“We currently do not have any oil or gas reserves that are deemed proved, probable or possible pursuant to National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities. We have drilled one exploration well, suspended the drilling of two exploration wells and one exploration/appraisal well.”
“We have not discovered on our licences any oil or gas reserves that are deemed proved, probable or possible. Our exploration activities on these licenses has been suspended while we seek to finance and acquire drilling equipment with a drilling capacity sufficient to reach the total depths we believe are appropriate to explore our licenses more effectively.”
Unfortunately for InterOil, even when drilling was active, things did not seem to be going so great as explained in the below article from the Australian Financial Review.
http://afr.com/articles/2003/10/16/1065917550934.html
As far back as 2000, InterOil “gushed” about its exploration business, stating in its annual report: “This year InterOil established the foundations for a strong exploration programme. InterOil is now the second largest acreage holder in PNG.”
http://mail.interoil.com/presentation/ar2000.pdf
The eerie thing is that 4 years later, the promises of the 2000 and 2004 are nearly indistinguishable.
EMPTY PROMISES
InterOil has a history of promises that do not turn into revenue. Read the story below from 3 years ago when they company announced a major oil find…whatever happened to the revenues attached?
Refining Business
InterOil commenced their refining business this past summer and it is still not running at full production. They have yet to prove the business model of the refinery and have made nothing but empty promises about the potential of the refinery. The 40-year old refinery was bought in 1994 and CEO Mulacek first promised that it would start processing crude in 1995….10 years ago
The company then anticipated the opening of the refinery in 1999
The refinery then got delayed until 2002
Another 2002 promise
http://forests.org/archive/png/oilrefcl.htm
It is now 2005 and the company still does not have the old refinery working at full capacity. It is the opinion of Stocklemon that InterOil has a lot to prove before Wall Street just “takes their word for it”.
The InterOil refinery used to be a joint partnership with Enron, until Enron took themselves out of the partnership in 1998 and allowed InterOil to buy their interest for a nominal fee .what a concept: a joint venture that even Enron wanted out of.
Conclusion
Stocklemon believes that IOC is an overhyped stock promotion that has a history of making promises and underperforming on expectations. InterOil has associated itself with stock operators of questionable character and terrible track records. It is the opinion of Stocklemon that this goes directly to corporate credibility. In part 2, Stocklemon will review the history of management and the many problems with the business model of InterOil.until then, Cautious Investing To All.
Disclaimer- The principals of Stocklemon currently maintain a short position in InterOil for all of the above reasons. All information provided in this report is public information and was derived from hours of hard work and attention to detail.