Monday, March 29, 2010

Raymond James on InterOil: Move Along, Nothing to See Here (IOC)

UPDATE: "Morgan Stanley on InterOil: "Mischaracterization of the Investment Debate: Stock Set to Outperform in April" (IOC)".
Original post:
Mr. Wayne Andrews got a mention in our Friday post "Whitney Tilson: Score! In a Move that Stunned Wall Street (and Soros and Goldman) InterOil has Problems (IOC; GS)". In the BloggingStocks link we see:

...Equally interesting is that prior to joining InterOil as a PR person, Andrews was an equity analyst who covered the company.

Hedge fund manager Whitney Tilson is short the company and in a recent email newsletter noted that Interoil could be could be "one of the largest stock promotions ever, going on right under [the SEC's] nose..."

What's especially interesting about this latest Interoil news mention is this line from a New York Post piece: "InterOil spokesman Wayne Andrews said that although the company isn't currently making money on its oil and gas exploration, and that a plant may take to 2015 to build, the stock is not overvalued."

It is extremely unusual for a corporate spokesman of a public company to argue to the media outright that the company's stock is not undervalued. Ken Lay and Jeff Skilling used to do that in the days of Enron but, in the post-Sarbanes Oxley world, it never happens.

In one of the followup posts "InterOil Won't Comment to NYSE On Today's Unusual Market Activity" (IOC)" the company told the Big Board:

InterOil Corporation (NYSE: IOC), states that its policy is not to comment on unusual market activity or rumors...

I don't care who you are, that's funny.

Anywho, here's Mr. Andrews' former employer on Friday's action via ShareholdersUnite:

Raymond James on InterOil March 26

Well worth reading on a day like this…

IOC: Our Thoughts on Civil Lawsuit Being Contested by the CEO

♦ IOC shares fell sharply today following a media report about a civil lawsuit being contested by the company’s Chairman and CEO Phil Mulacek from a group of former investors. The lawsuit revolves around the allocation of shares when InterOil was originally being formed approximately a decade ago, alleging that there was fraud in that process. Specifically at issue is InterOil’s purchase of the refinery that was subsequently installed in PNG. The case is set to go to trial later this year.

♦ Although the shares have obviously reacted very strongly to today’s media report, it is important to point out that the lawsuit is not new and has, in fact, been disclosed in InterOil’s past regulatory filings (see, for example, details on page 43 of the Annual Information Form for 2009). The case is titled Todd Peters et al vs. Phil Mulacek et al (284th District Court of Montgomery County, Texas). Mr. Mulacek is the principal defendant, and InterOil is also named as a defendant.

♦ While we are not in a position to assess the validity, or lack thereof, of the substantive allegations, our sense is that this appears to be a “nuisance lawsuit” based on matters that allegedly took place a decade ago. InterOil’s exploration success in recent years and resulting gains in the share price have obviously made it a more tempting target from the standpoint of the plaintiffs. We believe that the most likely outcome is a settlement between the two sides, though it is difficult to gauge at this point the potential monetary value of such a settlement.

♦ Obviously, this lawsuit represents an unpleasant distraction, and some legal “overhang” for IOC shares may persist until the lawsuit’s ultimate resolution. That said, we believe that there is an element of overreaction in today’s sell-off.

We would underscore that our Market Perform rating is premised not on the legal overhang but rather our concerns about the execution and financing risk in the company’s multi-year gas commercialization roadmap, balanced by the longer-term valuation upside.