InterOil: Deal or No Deal? Does it Matter?

Fraud Discovery Institute (co-founded by convicted felon turned fraud fighter Barry Minkow) is skeptical about a report in the Sunday Chronicle in Papua New Guinea claiming that InterOil (NYSE: IOC) entered into a Preliminary Commitment Agreement with Mitsui for developing phase one of the Elk/Antelope LNG project, subject to final ratifications.

According to Fraud Discovery's press release:

Over the past year, media outlets—citing no or anonymous sources—have reported that no less than five companies appeared to be ready to ink deals with InterOil (NYSE: IOC) to help finance a liquefied natural gas (LNG) plant in Papua New Guinea, which InterOil estimates will cost up to $7 billion.

The media sizzle of “imminent” LNG partners mirrors an InterOil-style pattern of prematurely pumping up company “news” that never quite pans out.

[Snip]

“Getting a preliminary letter of intent from any one of these companies that contains multiple ‘outs’ for either party can be likened to getting a pre-qualifying letter from an online lender when attempting to secure financing for a home,” added Mr. Minkow.  “Funding a 6 billion dollar LNG plant is another matter entirely.”

In addition, InterOil and Mitsui have not made any official confirmation about the "Commitment Agreement."

Are InterOil's potential partners living on hope?

Many short sellers, including Minkow believe that InterOil is fraudulently reporting potential oil and gas reserve estimates to manipulate the market price of its shares. The company still has no proven reserves as defined by SEC disclosure rules. Business Insider cites another short seller who claims that InterOil's own geologists say that the company is "lying" to Wall Street about its oil and gas finds.

Does it really matter if InterOil has a deal?

In any case, whether or not InterOil has found a real partner does not mean any confirmation of its claimed oil and gas finds. Back in my criminal days at Crazy Eddie, we always thrived to do business with the biggest dopes on Wall Street and elsewhere. Gullible investors living on hope are a criminal's wet dream. If InterOil's oil and gas claims don't pan out, its partners and investors will be left holding the bag.

InterOil's suspicious "heads of state" deal, later no deal with Petromin and China National Offshore Corp

On April 16, 2009, Bloomberg reported that Petromin, InterOil, and China National Offshore Corp, also known as CNOOC, reached an "initial accord" on a "proposed liquefied natural gas project" in Papua New Guinea:

China National Offshore Oil Corp., the country’s biggest offshore petroleum explorer, agreed to work with InterOil Corp. on a proposed liquefied natural gas project in Papua New Guinea.

The initial accord commits the Chinese company, InterOil and the Papua New Guinea-owned Petromin PNG Holdings Ltd. to agreeing commercial terms for the financing of the government’s stake in the project, Petromin said today in an e-mailed statement.

[Snip]

“Both InterOil and Petromin have commenced discussions with a number of major oil and gas companies to bring in a strategic partner to the InterOil project who will underwrite the project,” Petromin Managing Director Joshua Kalinoe said in the statement. “The heads of agreement now allows China National Oil to participate in that process.”

Note: Bold print and italics added by me.

A Raymond James report citing the Bloomberg article claimed that InterOil confirmed a "signed" agreement with Petromin and China National Offshore Oil:

InterOil has confirmed to us that such an agreement was indeed signed, while underscoring its preliminary nature. The agreement was in fact signed earlier this week in conjunction with the visit to Beijing by PNG’s Prime Minister Sir Michael Somare. We would point out that this is not the first time a visit by Sir Michael to a major economy has led to heightened interest from a large international energy company in the development of PNG’s energy resources.

Conflicting report by InterOil

However, on April 20, 2009, Upstream reported that InterOil contradicted earlier reports it was involved in the agreement with Petromin and China National Offshore Corp:

Papua New Guinea's state-owned company Petromin said it has signed an agreement with China National Offshore Oil Corporation (CNOOC) on co-operating in Liquid Nuigini Gas' planned liquefied natural gas project.

Petromin said the heads of agreement also included gas reserves owner InterOil, but an InterOil spokesman said InterOil was not involved in the agreement; rather it was a direct arrangement between Petromin ands CNOOC.

Note: Bold print and italics added by me.

Will history repeat itself? Reports of a deal, afterwards, no deal? In any case, criminals love investors or partners living on hope. Prospective partners may end up with a lot less oil and gas than they bargained for.

Written by,

Sam E. Antar

Disclosure:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes, simply because I could.

If it weren't for the efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.

I do not own any InterOil securities, long or short. However, I assisted Fraud Discovery Institute in researching InterOil. Barry Minkow has publicly that he has held short positions in InterOil securities.