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Why InterOil (IOC) Gushed Losses on Friday

NEW YORK (TheStreet) -- InterOil (IOC) fell sharply on Friday after shares resumed trading following its announcement it would sell a 61.3% stake in its Papua New Guinean natural-gas fields to Total SA (TOT - Get Report).

Total's acquisition, worth as much as $3.6 billion, will address development and expansion of the Elk-Antelope site's reserves with payment pending appraisal drilling and certification. The French oiler will pay $613 million upfront. Additional payments will be made upon completion of its appraisal and whether its estimates of between 5.4 trillion and 9 trillion cubic feet of gas can be farmed.

Investors fled the stock en masse triggering a waterfall of selling once trading resumed in the afternoon. The accepted cause was that a maximum $3.6 billion valuation was seen as too little for the undeveloped Elk-Antelope site, believed to potentially hold the largest natural-gas depository in Asia. Until a full valuation can be determined by 2016, investors who stick with the stock will stomach more than a year's uncertainty over exactly how much InterOil will benefit. 

In a conference call which lacked much further clarity, InterOil CEO Dr. Michael Hessian told investors the company wouldn't know an actual figure on the deal "until we do the appraisal of price of wells in the ground."

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Adding to any confusion as to exactly what the agreement entails, Total released a separate statement noting its 61.3% stake could be reduced if it found a "strategic partner" willing to take a 19.3% interest. This detail was not included in InterOil's statement.

One detail in agreement, InterOil granted Total exclusive rights to negotiate a farm-in to three additional Papua New Guinean exploration licenses. The deal is expected to close in the first quarter of 2014.

The Australian gas explorer has been seeking a partner to assist in funding the project since its inception four years ago. In May, it said it had entered into discussions with Exxon Mobil (XOM) but no agreement has since been announced. Exxon is currently developing a rival $19 billion liquefied natural-gas project in Papua New Guinea. 

By market close, InterOil had plummeted 37.4% to $55.50, while Total edged 1.2% higher to $59.18.

TheStreet Ratings team rates InterOil Corp as a Hold with a ratings score of C. The team has this to say about their recommendation:

"We rate InterOil Corp (IOC) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, solid stock price performance and notable return on equity. However, as a counter to these strengths, we also find weaknesses including feeble growth in the company's earnings per share, unimpressive growth in net income and poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The current debt-to-equity ratio, 0.39, is low and is below the industry average, implying that there has been successful management of debt levels. Despite the fact that IOC's debt-to-equity ratio is low, the quick ratio, which is currently 0.55, displays a potential problem in covering short-term cash needs.
  • IOC, with its decline in revenue, slightly underperformed the industry average of 5.4%. Since the same quarter one year prior, revenues slightly dropped by 6.1%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • Compared to its closing price of one year ago, IOC's share price has jumped by 52.74%, exceeding the performance of the broader market during that same time frame. Looking ahead, however, we cannot assume that the stock's past performance is going to drive future results. Quite to the contrary, its sharp appreciation over the last year is one of the factors that should prompt investors to seek better opportunities elsewhere.
  • InterOil Corp has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has suffered a declining pattern earnings per share over the past two years. During the past fiscal year, InterOil Corp reported lower earnings of 2 cents a share vs. 34 cents a share in the prior year.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income has significantly decreased by 218.4% when compared to the same quarter one year ago, falling from $5.34 million to -$6.32 million.
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