Bull Case – IOC

My fellow poster BarryZee and I are going to try something different this weekend.  We’ll each take one side of a current investment debate, and argue for a strategy associated with it.

This week’s topic (InterOil Corp of Texas and Australia) was the subject of some of the best web photos I’ve seen in a while, when the IOC Antelope-2 gas well was tested and flared.

Pictures on the next page, and the bull case for the investment.

Here are a couple of the photos that made their way around the web as IOC’s utterly remote natural gas well Antelope-2 handily beat the Guinness record for rate of flow from a single natural gas well (a record set earlier this year by its sister well, Antelope-1).

Greg Davis Photography
www.gregdavisphotography.com

Greg Davis Photography
www.gregdavisphotography.com

Pretty spectacular stuff, but as BarryZee will no doubt emphasize when he explores the bear case, there isn’t anything vaguely resembling an LNG plant or port nearby.

In fact, the only roads in the area are dirt roads IOC built through a few miles of rain forest to move the drilling rigs (broken into parts) up from a nearby river.  Otherwise, this is trackless rain forest, the kind of wilderness that swallows roads and human development in a matter of weeks.

And this isn’t like setting up in Western Canada or New Orleans when it comes to hiring help.  Unless you really want to bring back the lost arts of shrinking human heads or making “long pig” roast, all the skilled labor will have to come from half way around the world, along with just about everything else the roughnecks need.

But still, when I read that this one well is flowing at the equivalent of 129,000 barrels per day of oil, it didn’t take long to multiply by the price of a barrel to know that it is big enough on its own to justify very large infrastructure expenditures to access the world market.

Once they do, of course, this will also be the largest and closest source for clean portable energy for Southern China.  The shortened round-trip delivery time alone will make a few LNG carriers economically viable.

I listened (finally) to an investing friend who has loved this stock since it broke above $12 a share, so I made the plunge last week right before the announcement, which was scheduled for the next day.  Of course, knowing how much I don’t know about this business, I simultaneously wrote covered calls.

Now the December 55’s I wrote are deep in the money, but I’ll be happy with the three-week double-digit return.  Some of position even provided the “mad money” I described using to take a flier on AHR, and unwind was only a buck or so premium vs. the $5 premium collected when I did the buy-write.

After the announcement, the stock took off, and the Wall Street analysts fell over one another raising their projections.  As of last Friday, the First Call analyst consensus price target had soared to $98 a share.

It made sense to me at that point to buy some more around $61 to $62 a share, and write March 65’s for around $10.  Call it away from me if you like, my adjusted basis is down in the low 50’s.   The more times I make 25% or 30% in a third of a year, the more mistakes I can make up for in my life and my investing.

I might even keep some for the long haul, because my cyber-buddy investor guesstimates the break-up value of the company at a whopping $250 a share.  Hopefully the shares I keep (if I do) will be paid for by some, but not all, of the trading profits from the same stock.

For me, just like with the Elan shares I’ll be losing for $5 each in two weeks, and those I might lose at $7.50 next month, I’ll keep making lemonade from the volatility lemons, and hold the stock for a while if I’m wrong.

hh

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3 Responses to Bull Case – IOC

  1. GeorgeR says:

    With the big short interest and high volatility with IOC, it’s a wonderful buy-write and short puts stock. I also waited too long to get long, but am trying to play catch up with the foregoing strategy.

  2. Shots captured 12/1/09 by Greg Davis

  3. Tony Morley says:

    Outstanding shot, http://www.archeanmedia.com.au did some similar aerial work in Papua New Guinea for ExxonMobil and Oilsearch.

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