Tuesday, September 21, 2010

Boyd and Interoil

Roddy Boyd, in his blog, The Financial Investigator, has a fascinating post on The Interoil Math. Interoil is an oil and gas producer that, Boyd says, "recently raised cash at exorbitant rates and appears to be internally valuing its assets way below what the market appears to think they are worth."

So, on such revelations, its stock price should be tanking, right?

Ummm ... no. The stock price rose sharply in the middle of the day Wednesday, September 15, and held level at close to $64 a share through Thursday and Friday, and resumed moving north on Monday.

"To be sure," Boyd continues, "the bull’s case is both elegant and obvious: If there is oil and natural gas is in Papua New Guinea, and in the volumes suggested on the company’s properties, shareholders are in for an instant windfall to the tune of several dozen points worth of price appreciation."

And if my car had a propeller, it would be The Spirit of St Louis.

Provable reserves as I noted last November are hard to come by.Separately: any company that found them in Papua New Guinea would still have to be willing and able to spend the money to exploit them. Yet Interoil is cash strapped -- sufficiently strapped to need to pay those card-card-like interest rates we mentioned above.

Interoil will naturally tempt short selling. Of course, if you do go down that road, you take enormous chances, even if your underlying case is strong. Such intriguing recent books as CONFIDENCE GAME, whatever else they do, make this clear. I don't recommend shorting -- indeed, I don't recommend anything at all. [Except this: for roughly 99% of investors who have an interest in the equity markets, the best course is a simple passively managed fund, tracking some broad-based index.] Still, Interoil is the sort of spectacle that makes one wish there was more shorting activity in the financial world than there is. The number of nest eggs that have to be sacrificed to prove the prophetic powers of P.T. Barnum is unnecessarily high.


Art said...

There are those people who believe in the science of geology and the practise of geotechnical engineering, and there are those who still believe life began on earth less than 20,000 years ago. By suggesting "if" gas and oil exist in Papua New Guinea Boyd seems clearly to be part of the latter group.

Christopher said...

And there are those people who recognize the practical limitations of the science of geology. Predicting earthquakes down to the day and the nearest city would be a great life-saving achievement. IF it could be done. There's that "if" again.