CFO out at Houston E&P company

Gleeson Van Riet has resigned as CFO of SilverBow Resources, effectively immediately. He has been replaced by Chris Abundis, currently General Counsel of the company. Mr Abundis will perform the CFO duties in addition to his current role.



SilverBow is based in west Houston and has a market capitalization of $148 million. The company operates in the Eagle Ford basin in South Texas. It was formerly known as Swift Energy which filed for bankruptcy in December 2015. After the company emerged from bankruptcy in April 2016, it changed its name to SilverBow.

Mr Van Riet was appointed CFO in March 2017. Prior to that he was the CFO of Sanchez Energy. For his severance package he will receive a payment of one year’s salary ($390,000) and one year’s target bonus ($292,500).  He will also receive an acceleration of time-based restricted stock units. These were valued at $85,000 at December 2018.

Mr Abundis joined the company in 2007 and has been the General Counsel since April 2016.

It’s not clear what triggered the departure of Mr Van Riet. The share price has halved since the start of the year, but that’s in line with other E&P companies. The company is not especially leveraged and generated a small positive free cash flow in the third quarter.

However the company did disclose a material weakness in internal controls in the second quarter pertaining to deferred tax accounting. This remained a weakness in the third quarter.

SEC filing – SilverBow CFO

 

Houston biotech company completes IPO

CNS Pharmaceuticals, a biotech company, has completed its initial public offering. It has its head office in the Galleria area. The company raised $9 million by selling 2.1 million shares at $4, at the low end of its range of $4-$5.

The company is listed on the Nasdaq with a ticker symbol ‘CNSP’ and has a market capitalization of $67 million.



CNS doesn’t have any revenues yet and is developing anticancer drugs for the treatment of brain tumors. Based on preclinical data and positive results of the Phase I clinical studies conducted at MD Anderson Cancer Center, the company believes its lead drug candidate, Berubicin, could significantly help in the treatment of glioblastoma, a type of brain cancer that is considered incurable.

Berubicin was discovered at MD Anderson by Dr Waldemar Priebe, the founder of the company. Dr Priebe initially licensed the drug to Reata Pharmaceuticals. However they allowed their investigative drug application with the US Food and Drug Administration (FDA) to lapse for strategic reasons.

The money, along with a $5.8 million grant given to a sub-licensee, partially owned by Dr Preibe, will be used to commence the Phase 2 trials of Berubicin.  However the company will need to raise a further $7 million to complete the trials.

CNS becomes the fifth Houston-area IPO this year, following Sunnova and Castle Biosciences in July, Landcadia Holdings II, and Soliton.

You can see the complete list of Houston-area public companies on my blog here.

https://www.prnewswire.com/news-releases/cns-pharmaceuticals-announces-pricing-of-initial-public-offering-300954480.html

 

 

 

Harris County judge charged with fraud

Judge Alexandra Smoots-Thomas has been indicted on allegations of wire fraud. Since 2009, she has served as the presiding judge for the 164th District Court for the State of Texas. She has jurisdiction of Texas civil cases located within Harris County.



Beginning in early 2013, the indictment alleges that Smoots-Thomas used funds donated to her campaign for personal expenses unrelated to the campaign. She then hid her misuse of these funds by filing false campaign finance reports with the Texas Ethics Commission and concealing her activity from her campaign manager.

The indictment lists 7 transactions for a total of $24,890 where Smoots-Thomas allegedly used the campaign account for personal use. $11,809 was used to pay a home mortgage and $9,942 to The Regis School for tuition. An airfare, a Prada handbag and a ring from Zales comprise the other transactions.

Each of the seven counts of wire fraud carries a possible sentence of up to 20 years in federal prison as well as a maximum $250,000 fine.

Smoots-Thomas was the presiding judge over the initial phase of the TechnipFMC – McDermott lawsuit involving COO Sumit Mukherjee. Smoots-Thomas was replaced as the judge on the case just before the parties were set to go to trial as she was diagnosed with breast cancer. She is still receiving treatment for the cancer.

Smoots-Thomas indictment

https://www.justice.gov/usao-sdtx/pr/local-judge-charged-fraud

Houston E&P company appoints new CFO

Penn Virginia Corporation has appointed Rusty Kelley as its new Chief Financial Officer, effective November 13, 2019. He replaces Steve Hartman, who is leaving the company as previously previously reported in July.



Penn Virginia filed for bankruptcy in May 2016 and moved its headquarters from Pennsylvania to west Houston as part of that process. It emerged from bankruptcy in September 2016.  In October 2018 the company announced that it would be acquired for $1.7 billion (including debt) by Denbury Resources. However that deal collapsed in March due to shareholder opposition.

Mr Kelley was previously the CFO of Extraction Oil & Gas, a public company based in Denver, from July 2014 to September 2019. Prior to that he worked as an investment banker for Moelis & Company and Goldman Sachs. He will have a base salary of $400,000.

Penn Virginia currently has a market cap of $411 million and an enterprise value of $933 million. That’s way below the $1.7 billion that Denbury agreed to pay. Given his investment banker background, I presume Mr Kelley has been brought in to help sell the company.

SEC filing – Penn Virginia new CFO

 

 

McDermott CFO resigns after worse than expected results

McDermott International has announced the resignation of CFO Stuart Spence, effectively immediately. Chris Krummel, currently the Chief Accounting Officer, has been promoted to the CFO position.



It’s been approximately two weeks since the company announced that it had obtained $1.7 billion in additional financing (at 12% interest rates) to tackle its liquidity crisis. In the same press release, the company also announced that the senior management were granted retention bonuses. Mr Spence was granted $1.3 million, with a third of that payable immediately.

McDermott announced third quarter results even worse than forecast last month in its refinancing presentation. Free cash flow for the quarter was a negative $146 million compared with negative $86 million in the presentation.

The SEC filing by the company makes no mention of the severance package, if any, that would be granted to Mr Spence. If he has truly resigned voluntarily he would be required to repay the retention bonus already paid out.

Interestingly, the company has signed contracts with the senior executives that only spell out severance payments in the event of a change in control. There is no formal provision for severance in the event of an involuntary termination without cause. When the predecessor to Mr Spence left in 2014 he received a lump sum payment of $640,000. His salary at the time was $515,000.

Mr Krummel joined the company in October 2016. He was previously the Chief Accounting Officer of Cameron International. No compensation was disclosed for Mr Krummel.

SEC filing – McDermott CFO resignation

Oilfield Services company misses interest payment as bankruptcy looms

Photo by Joshua Doubek

Key Energy Services has announced that it has engaged Moelis & Company as its financial advisor and Sullivan & Cromwell as its legal advisor to analyze various strategic alternatives. The company also elected not to pay interest on its $250 million term loan. The interest was due October 18, 2019. This caused a default on the loan.



On October 29, the company entered into forbearance agreements with its lenders in which the lenders agreed not to exercise any rights related to the loan default until the earlier of December 6, 2019 or the occurrence of certain early termination events.

Key operates the largest well service rig fleet in the US. It also provides fishing and rental tools, coiled tubing and fluid management services. It is based in downtown Houston.

For the six months ended June 30, 2019, the company had revenues of $222 million and a net loss of $42 million. At that date, it only had $6 million in equity.

2016 Bankruptcy

Key entered into a pre-packaged bankruptcy agreement in October 2016. As part of that deal, its $1 billion of debt was reduced to $250 million (due in December 2021). The term loan had an average interest rate during 2018 of 12.42%. No wonder the company is seeking strategic alternatives!

Big loss for Platinum Equity

$338 million of the original debt was owned by Platinum Equity, a large PE firm based in Beverley Hills. After the restructuring, Platinum ended up with 50% of the equity of Key. After emerging from Chapter 11, the total equity of the company was valued at $252 million. The current market capitalization is $10 million (47 cents per share). So Platinum is sitting on a big loss. Even their $2.75 million annual advisory fees are now in jeopardy. Platinum subsequently acquired $30 million of the term loan so they will have some say in the restructuring.

Goldman Sachs stake

Back in May, Goldman Sachs disclosed it owned 1.5 million shares, or 7.5% of the company. The shares were acquired between February and April 2019. At the time Goldman said it planned to engage with Key’s management and board to discuss issues including corporate structure, board compensation, dividend policy and transactions such as asset sales or mergers “as a means of enhancing stockholder value”. In June, Goldman disclosed it had reduced its stake to 4.4%.

Robert Drummond, the CEO at the time of the bankruptcy, left in May 2018 to become the CEO of Keane Group. They have just merged with C&J Energy Services. Later that year, Key tried to merge, in an all-stock deal with Basic Energy of Dallas. Basic rejected the merger offer.

SEC Filing – Key Energy loan default

80-year-old man convicted in $19 million medicare fraud

Bobby Rouse Sr, an 80-year-old former Houston man, has pleaded guilty to conspiring to pay and receive kickbacks and money laundering related to the Medicare program.



Mr Rouse becomes the 14th and final person convicted in relation to the scheme. Rouse and three others were part of the executive team for Continuum Healthcare LLC. They owned the Westbury Community Hospital (now closed) in Houston. The company also owned mental health centers in Hornwood, Baytown and Missouri City.

Each location operated a partial hospitalization program (PHP), a short-term intensive treatment program but without 24-hour daily care. Numerous people were referred to treatment in exchange for payment. However the vast majority did not qualify for PHP services because they were not experiencing an acute psychotic episode or were actually suffering from dememtia or Alzheimer’s.

Six of the defendants owned personal care homes while four were marketers for Continuum. Each admitting payments to refer the patients, receiving amounts ranging from $130,000 to $2.6 million each.

In all, Continuum billed Medicare approximately $189 million for fraudulent PHP claims and Medicare paid $66 million on these claims. Mr Rouse admitted to causing Medicare to pay $18.8 million based on false and fraudulent claims. For Mr Rouse, the scheme ran from March 2005 through May 2012.

Mr Rouse will be sentenced in January 2020. He faces up to 10 years in prison and a possible $250,000 maximum fine.

Ten of the defendants were originally indicted in 2014 though Mr Rouse was not charged until 2017. This followed an investigation by the Houston Chronicle back in 2011.

https://www.justice.gov/usao-sdtx/pr/final-defendant-convicted-189-million-health-care-fraud-scam

Houston MLP delisted after $6.5 billion takeover

Buckeye Partners has been delisted after its takeover by IFM Global Infrastructure Fund was completed. The $6.5 billion deal was originally announced in May 2019.



The original Buckeye Pipe Line Company was founded in 1886 as part of Standard Oil and became a publicly-owned independent company in 1911 after Standard Oil was broken up. In 1964, the company was acquired by a subsidiary of the Pennsylvania Railroad. In 1986, it was reorganized into a master limited partnership (MLP) and went public the same year.

Buckeye has 6,000 miles of pipeline and 115 liquid petroleum products terminals in the US and the Caribbean. In 2018, it had revenues of $4.1 billion. The company has its head office in Greenway Plaza.

Breakup of Standard Oil

Standard Oil was established by John D Rockefeller and Henry Flagler in 1870. In 1911 the Supreme Court ordered it to be broken up into 34 smaller companies. This included;

  • Standard Oil of New Jersey – later merged with Humble Oil to become Exxon
  • Standard Oil of New York – later merged with Vacuum to become Mobil
  • Standard Oil of California – renamed as Chevron.
  • The Ohio Oil Company – renamed as Marathon.

Background to the deal

In early 2018, the Board of the partnership decided to pursue strategic alternatives given that publicly-traded MLPs were out-of-fashion with investors. The company had discussions with various interested parties through May 2019.

IMF agreed to pay $41.50 per unit, all in cash. That represented a premium of 27.5% over the closing price of the partnership units prior to the announcement.

Equity awards vest

Equity options have vested on completion of the transaction and will be settled in cash. That means that CEO Clark Smith will receive $16.9 million and CFO Keith St. Clair $5.6 million. 7 other members of the executive management team will receive between $2.2 million and $4.8 million each.

If senior executives are also terminated as a result of the merger, they will also receive severance (annual salary plus target annual cash bonus). For CEO Smith that would be $2 million, for St. Clair that would be $1.2 million. The deal closed Friday without any terminations in the senior management group.

You can see the updated list of Houston-area public companies here

SEC filing – Buckeye takeover

Building Products company appoints new CFO

Quanex Building Products has appointed Scott Zuehlke as its new CFO. He became the interim CFO in June 2019 after previous CFO Brent Korb was let go.



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Quanex has a market cap of $635 million and is based in the Galleria area. The company designs and produces energy-efficient windows and doors fenestration products in addition to kitchen and bath cabinet components.

Mr Zuehlke has been with the company since 2016. Prior to that, he was VP, Investor Relations at Halcon Resources. The company had been conducting an executive search but elected to promote from within instead. Mr Zuehlke will receive a base salary of $330,000.

The company also appointed Mark Livingston as its new Chief Accounting Officer. He joined the company in February 2019, having previously served as the CAO of Omega Protein Corporation until it was taken private in December 2017.

Quanex also made similar moves with its General Counsel. It promoted Paul Cornett from the Deputy Counsel role and terminated the employment of Kevin Delaney who had been in the role since 2005. Mr Delaney will get a severance of $562,500 (representing 18 months’ of salary) and a pro-rata bonus for 2019.

SEC filing – Quanex Building Products – new CFO

Oilfield service companies complete merger

Two Houston-based oilfield companies, C&J Energy Services and Keane Group, have completed their merger. When the deal was originally announced in June 2019, the merger was valued at $1.5 billion. At completion, the companies were worth about $1 billion. The shareholders of each company will own 50% of the equity in the combined company.



The combined group will now be called Nextier Oilfield Solutions and have a stock ticker ‘NEX’. The board will consist of 12 directors, six designated by each party. The chairman is Patrick Murray (ex Chairman of C&J) and the CEO is Robert Drummond (ex CEO of Keane). The C&J CFO, Jan Kees van Gaalen becomes the combined group’s CFO. Greg Powell, the Keane CFO, becomes Chief Integration Officer.

For the six months ended June 30, 2019, C&J had revenues of $1 billion and adjusted EBITDA of $102 million. Keane’s figures were $849 million and $147 million respectively.

Synergies

The companies expect to achieve $100 million in cost synergies within 12 months. $45 million will come from sales, general and administrative expenses. $45 million will come from reduced material spend with $10 million of savings from consolidating real estate.

Mr Powell will serve as the Chief Integration Office for the earlier of (i) 18 months or (ii) the date at which the company achieves $100 million in annualized savings. He is eligible for a performance bonus of $2.6 million upon the achievement of specified performance criteria tied to the realization of synergies.

Background to the deal

In July 2017, Murray, the C&J chairman first met with Scott Wille, a director of Keane and employee of Cerberus to discuss the potential benefits of consolidation in the oilfield services sector. (Cerberus is the PE firm that bought Keane in 2011 and took it public in January 2017).

In the middle of 2018, Keane had discussions with another unnamed competitor about a business combination. When that deal fell apart, discussions with C&J began in earnest in November 2018. Keane briefly resurrected discussions with the unnamed competitor in early 2019 before deciding the merger with C&J was the better deal.

The deal almost fell apart at the end of May 2019 due to C&J’s insistence that it have a 52% / 48% equity split. It was resolved by C&J giving its shareholders a special pre-merger dividend $1 followed by a 50/50 split.

 

SEC filing – completion of merger