By William Lobdell

In seven years of exploration in Papua New Guinea, Houston-based InterOil Corp. (NYSE: IOC) has yet to find any proven commercial gas or oil, but it has discovered another type of resource that’s brought the company hundreds of millions of dollars: the press release.

The stock of InterOil—a company that has never turned an annual profit—has skyrocketed nearly 289% in the past year (as of Feb. 2, 2010), fueled largely by hopeful reports contained in 16 press releases during the past 18 months.

In the releases, the company said its work in Papua New Guinea, a poverty-stricken nation north of Australia with some of the least-explored lands on earth, has produced a “world-record gas flow” and “indications of oil” at one test well, the country’s largest vertical gas and gas liquids reservoir, and, on Jan. 20, 2010, “indications of oil” at another well. 

Despite the seven years of announcements trumpeting imminent discoveries of proven oil and gas reserves, InterOil hasn’t yet produced a barrel of oil or any sellable natural gas.

Since 2003, InterOil’s stock has jumped, at its peak, an average of 10.3% the day the press releases were issued. For instance, the stock rose 20% in a single day after a press release on June 26, 2006 announced that InterOil “had a gas and gas liquids discovery” at one of its test wells. More recently, when InterOil announced on Jan. 20 its latest “indications of oil,” the stock jumped more than 12% that day. (See highlights of the press releases at the end of this story or click here.)

An iBusiness Reporting analysis of a half-dozen other publicly-owned oil and gas exploration companies’ press releases in 2008-2009 show they rarely issued media statements solely to tout potential finds, but instead mainly publicized proven resources—commercially viable oil and gas.

One company, Devon Energy, requires its website visitors to acknowledge that they know the difference between “proven” and “unproven” reserves before they are allowed to access any company press releases. As required by law, energy companies can only report on certified oil and gas reserves in filings to the Securities and Exchange Commission on company operations. In other materials, including press releases, the corporations can speculate on resource potential, reserve potential, probable resources, possible resources, contingent resources, prospective resources and exploration target size.

In a written statement, InterOil declined to address questions about the intentions of its press releases, but wrote that its exploration has resulted in Papua New Guinea gas reservoirs being recognized as among the highest quality in the world, and that InterOil has drilled three productive discovery wells and a fourth well has shown “great potential.”

“We look forward to continuing to prove our critics wrong and remain committed to delivering value for our shareholders, providing safe and efficient operations for our employees and continuing to be a good partner to those with whom we do business,” according to a company statement that you can read in its entirety here.

InterOil’s press releases—some of which give investors the impression that the company has found or is on the brink of confirming world-record reserves—have aided the company’s dizzying rise in stock, giving a corporation with large annual losses and no proven commercial oil and gas a market capitalization of $2.86 billion (as of Feb. 2). The majority of its $702 million in annual revenue comes for an oil refinery it owns in Papua New Guinea.

In anticipation of finding natural gas in Papua New Guinea, InterOil announced several years ago plans to build a liquid natural gas (LNG) plant on the island’s coast for an estimated $6 to $8 billion. (A LNG plant is needed to bring natural gas to market.) To date, the company has not announced any investors or financing, despite reportedly owning a field with a “world-record” gas flow (the company’s website prominently features a certificate from the Guinness World Records).

“We are very pleased with the high level of interest we have received from a number of potential partners, which we believe reflects the strength of the opportunity the IOC project is offering,” according to a company statement about plans for the LNG plant. “However, we will not be commenting on the potential timing for an agreement other than to say that we will do what makes most sense for the project, our company and our shareholders.”

Howard B. Sirota, a New York-based litigator specializing in stock market and corporate fraud, said the company hasn’t delivered on its hype.

 “InterOil has attracted and then repelled (Texas oil and gas executive) T. Boone Pickens and Merrill Lynch, since replaced by Wells Fargo and (billionaire) George Soros,” Sirota said. “Similarly, regarding its proposed LNG deal, InterOil has leaked or floated the name of every major Asian energy giant as a bidder, but to date there are no bids whatsoever. IOC had projected a done deal by the end of 2009.”

Evan Calio, an analyst at Morgan Stanley who is pushing InterOil stock, said in a Sept. 18, 2009 report that said the dominant risk facing InterOil would be if it couldn’t get a LNG plant built quickly. “Failure to secure financing [for the LNG plant] and a gas sales contract ahead of much of its competition would critically damage [InterOil’s] prospects,” he predicted.

Others have wondered how much natural gas needs to be discovered to support a second LNG plant in Papua New Guinea (Exxon is building the island’s first plant, and P3 Global Energy Co. Ltd. of Thailand has plans for a $11-billion plant, according to Oil and Gas Investor).

The speculative stock market play on InterOil, which closed at 66.65 on Feb. 2, has sparked intense debate.

“With the lack of information coming out of Papua New Guinea, the stock continues to be a Rorschach test of sorts, trading on pure investor emotion and momentum a good deal of the time,” said Bill Luby, a private investor writing last week for Seeking Alpha.

InterOil supporters include Soros and Morgan Stanley, which on Jan. 11 issued a report raising its price target on the company from $80 to $115. 

“Overall, we see further upside in share price as the company transforms from an early stage frontier exploration story to a global hydrocarbon producer …,” the report states.

Morgan Stanley’s “bull case includes value for an oil discovery, where we expect results in 30+ days.”

Critics include two ex-cons-turned-fraud investigators Sam Antar of White Collar Fraud and Barry Minkow of the Fraud Discovery Institute (which funds iBusiness Reporting), and the ValueHuntr who recently recommended shorting the stock on the Motley Fool investment website.

Minkow, who also holds a short position with InterOil, accused the company in a December press release of being “nothing more than hype.”

This triggered an unusual response from the e-mail account of Susuve Leumaea, InterOil’s senior manager for media relations.

“You are a gutless coward of the highest order,” he wrote. “… Do not be afraid on account of me being a descendant of cannibals … no, no, believe me, I will not cannibalise [sic] you or feed you to the swamp crocodiles ...

“I can’t use you as crocodile feed because you are too poisonous .. those alligators will die eating you, cooked or uncooked …”

“Who gave you the authority to investigate InterOil, you piece of shitty non-entity? You are nothing more than an internet pireate [sic], a low-life manipulator who is out to profit by your dishonest, fraudulent, slanderous and cowardly methods. Up yours.”

In his e-mails, Leumaca didn’t specifically counter any of Minkow’s assertions. You can read the e-mails here.

Leumaca and InterOil officials declined to comment the e-mails.

The company’s panache for hype was also revealed during a conversation last May with Wayne Andrews, InterOil’s vice president of capital markets. He was recorded on audio tape by a private investigator—posing as a potential major investor—working for the Fraud Discovery Institute. (Read the transcript here or listen to it here.)

Andrews said, “I’m probably not supposed to tell you what I think the share price can do [because it’s against SEC regulations], but I can tell you when I was an analyst, I covered the [InterOil] stock. I would talk to portfolio managers and used to tell them I believe this is a several hundred dollar stock in the next three to five years.”

In the recording, Andrews also predicted a market cap for InterOil in coming years in the $10 billion range [it was $1.3 billion at the time], and told the undercover investigator that the company had 3 trillion cubic feet of certified gas resources, though company states in public documents that it has no proven finds.

InterOil officials declined to say if they considered Andrews’ conversation problematic.

InterOil’s use of press releases (click here see them) to excite investors about potential gas and oil reserves—none of which have yet panned out—began seven years ago when the company began exploration in Papua New Guinea.

In a July 28, 2003 press release, a company executive said, “The presence of live oil is the evidence that we needed to confirm our view that the Eocene is a prospective oil zone in Papua New Guinea and demonstrates the Puri-1 oil flow was not an isolated anomaly. Specifically, these cores demonstrate reservoir, seal, structure/trap and oil at Moose.”

The stock jumped 18% on the day of that press release, but the Moose field hasn’t produced commercial oil or gas resources.

On June 26, 2006, InterOil announced a gas and gas liquids discovery at a test well called Elk 1 and its stock jumped as high as 25% that day. But to date, Elk 1 has produced no gas resources.

On Feb. 1, 2009, with InterOil’s stock sliding from a record high of 85.05 to 59.11 within a few weeks, the company issued another press release highlighting the promising test results from another well. InterOil’s stock jumped 6% that day.