As InterOil drills, stock spirals downward

Uncertainty over natural gas exploration results has cast a cloud over Houston-based InterOil Corp.'s attempts to build a mammoth liquefied natural gas project in Papua New Guinea, with statements this week appearing to shake investor confidence in the company.

Tuesday, shares in InterOil fell $12.57, or 27 per cent, on the Toronto Stock Exchange - a drop that preceded the company saying in a press release early yesterday that exploration at its highly anticipated Elk-2 well, offshore Papua New Guinea, hasn't yet located a commercial discovery. InterOil stock fell a further $6.53 - or 19 per cent - to $27.96 yesterday, with some observers crying foul over the high levels of share trading seen prior to the release of the drilling information. The stock fell $4.31 (U.S.) or 14 per cent to $26.02 yesterday on the American Stock Exchange.

Christopher Thomas of stock-trading tracker Measuredmarkets Inc. said that even though trading patterns in InterOil stock are frequently unusual, the volumes seen on Tuesday were "way off the beaten path."

Neither Market Regulation Services Inc., which regulates the Toronto Stock Exchange, nor the U.S. Securities and Exchange Commission returned calls seeking clarification on the unusual trading patterns, while InterOil also was unavailable to comment. However, Pavel Molchanov, an analyst at consultancy Raymond James Inc., said the activity could be attributed to comments made by InterOil management to an investor meeting in Toronto on Tuesday, in which company staff said drilling results would be fully known four weeks later than previously expected.

"That led to inferences that appeared adverse for InterOil's process and so negative for investors," he said.

A consortium led by InterOil that includes U.S.-based Merrill Lynch and Switzerland's Clarion Finanzis is attempting to develop a LNG plant at Napa Napa in Papua New Guinea adjacent to InterOil's 32,500 barrels-a-day oil refinery, that could ultimately cost between $4- to $6-billion and could be in service by 2012.

InterOil's Elk fields are expected to provide some gas for the development, but the press release yesterday didn't provide investors with any surety over their prospects. In a release that contained much technical data but little in the way of interpretation, InterOil said the Elk-2 well had identified a large gas column, but that fractioning in that column is limited, making it hard for the gas to flow.

Despite the market reaction to the news, there's still a case for viewing the results as positive, Mr. Molchanov said. "It's a mixed bag as a report, but there's still hope that the resource could be productive."

source:www.theglobeandmail.com