Friday, April 06, 2012

InterOil (IOC) under heavy pressure on PNG election delays, major downgrade


Shares of InterOil Corp. (NYSE: IOC) are getting hammered early Thursday after long-time bull Pavel Molchanov at Raymond James flipped on the stock and downgraded it.

Molchanov took his rating from Outperform to Market Perform citing a vote by Papua New Guinea's (PNG) parliament to postpone the country's general election by six months. 
He notes that this is entirely beyond the company's control and management cannot be held responsible. Nonetheless, it is a major setback.
The analyst said he was "stunned by this news," as this has never happened before in PNG's history.
He cites three specific consequences that could be negative for InterOil.

1. given management's prior insistence that the election would be a catalyst for getting LNG project approval from the government, this appears to create an additional six-month delay until the final investment decision.
2. the explicit threat of economic sanctions from Australia (and perhaps other countries too) could scare away prospective partners.
3. Third, and most importantly, the damage to PNG's reputation as a stable, democratic country could be severe, and at a minimum it raises the relevance of "country risk" in how investors perceive the InterOil story.
Molchanov also removed his $80 price target and is taking a wait-and-see approach. Despite this, his proved NAV estimate remains $103 per share, and he sees no reason to change it at this time.
Shares of IOC are down 11 percent to $49.49 on the election delays and downgrade.

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