Category Archives: E&P

Mineral and royalty interests company files for IPO

Fortis Minerals LLC, based in downtown Houston, has filed for an Initial Public Offering (IPO). Although the filing with the SEC states the company plans to raise $100 million, that is likely a placeholder. Renaissance Capital estimates the company could raise $400 million.

Fortis plans to list on the NYSE under the symbol NRI.



The company owns oil and natural gas mineral and royalty interests in the Permian Basin and the Stack play located within the Anadarko Basin of Oklahoma. The company was formed in 2016 with the backing of PE firm, Encap Investments.

For the 12 months ending 30 June 2019, the company had revenues of $138 million and adjusted EBITDA of $113.8 million.

Acquisition Joint Venture

The company also has formed an acquisition Joint Venture with Encap that could cause some conflicts of interests. Encap will own 100% of the capital interests in the JV while Fortis will own a carried interest, entitling the company to a percentage of distributions by the JV.

The JV will only consider acquisition opportunities brought to it by the company. Fortis states that the JV will only buy properties that represent attractive long-term value  but which would not be expected to increase cash flows in the short term following acquisition. However, Fortis may acquire these properties at a later date.  Encap will control the board of the JV.

The company states that they and the JV may jointly pursue an acquisition where the company would predominantly acquire interests in properties expected to be developed in the short term and the JV would predominantly acquire interests in acreage anticipated to be developed on a longer time horizon.

Management team

The CEO of the company is Christopher Transier. He was formerly the CFO of Escondido Resources. The CFO is Brad Wright. He was previously the Managing Director – M&A and Strategic Planning at Plains All American Pipeline.  With the exception of Scott Dole, Chief Accounting Officer, who is 62 years old, the rest of the management team are 36 years old or younger.

Just because the company has filed its registration statement, there is no guarantee that it will complete its IPO. If it does, I will add it to the list of Houston-area public companies. You can find that list here.

SEC filing – Fortis S-1

SEC charges former CEO of Houston company with creating fictitious CFO

The Securities and Exchange Commission (SEC) has announced fraud charges against Tom Simeo. He is the former Chairman and CEO of Houston-based Viking Energy Group. The charges are for making materially misleading disclosures regarding Viking’s purported CFO.

Viking Energy is traded over-the-counter. At the time of the alleged fraud, it had a market cap of around $5 million.



Company had no CFO

The SEC alleges that Simeo, a resident of New York, created the false impression to the public that Viking had an experienced financial professional involved in its operations and financial reporting as its CFO, when in reality, the Company had no CFO.

According to the complaint, between November 2014 and May 2016, Viking’s public filings falsely disclosed that Guangfang “Cecile” Yang was Viking’s CFO.  Internal control certifications required by Sarbanes-Oxley falsely represented that Yang had performed an evaluation of Viking’s internal controls over financial reporting.

According to the SEC ‘there is no evidence that Yang performed any activities as Viking’s CFO from at least November 2014 through Yang’s resignation in July 2016. Indeed, other than a single email to Simeo from someone purporting to be “Cecile,” neither Viking nor Simeo has produced any documentary evidence that anyone from Viking, or its auditors, had ever communicated with Yang’.

Chinese Incubator 

Simeo served as Chairman of Viking from August 2008 until May 2017. Until 2014 Viking operated as an incubator for Chinese companies. Simeo’s former wife introduced him to Yang in Shanghai in 2013 and hired her as the company’s CFO shortly afterwards.

At the time she was appointed, Yang provided to Simeo a ‘standing resignation letter’ and a power of attorney in favor of Simeo, authorizing him to affix Yang’s signature to any and all documents that Yang was required to review and sign as CFO.

In 2014, Simeo converted the business to an Exploration and Production company. In 2016 he moved the head office from New York to Houston.

False Biography

Simeo provided Yang’s unverified resume to Viking’s outside counsel to use in the senior management biography disclosed in the annual report. The biography claimed that Yang had;

  • worked at KPMG from 1998 to 2006,
  • participated in audits of the Sinopec and China Mobil IPO’s,
  • a business degree from the Hult International Business School in London

According to the SEC, she didn’t work at KPMG for the years listed, she didn’t work on the IPO’s and she never graduated from the business school.

According to the annual reports, Ms Yang received no compensation over than a grant of 25,000 shares worth $3,914 in 2014.

$2 million raised from investors

During this period, the company raised approximately $2 million from investors. Viking and Simeo continued to disclose Yang as the company’s CFO until the securities had been sold.

https://www.sec.gov/litigation/litreleases/2019/lr24599.htm

 

 

Alta Mesa files for bankruptcy – CFO gets $600k bonus

Alta Mesa, the struggling E&P company, has finally filed for bankruptcy. Four days prior to the filing, the company advanced a bonus of $600,000 to both CFO John Regan and General Counsel Kimberly Warnica.

In the past year, the company has issued a string of bad news along with hefty compensation packages for senior executives.



Background to the acquisition

By way of recap, Silver Run Acquisition, a blank check company went public in March 2017 at $10 per share. It was run by James Hackett, ex-CEO of Anadarko and backed by Riverstone with a $1 billion equity check. In January 2018, it completed the acquisition of Alta Mesa for $1.9 billion and Kingfisher Midstream for $1.4 billion. Both those businesses were privately held.

Silver Run renamed itself Alta Mesa Resources and traded under the ticker AMR. Somewhat confusingly, the legal entity of the Alta Mesa operating business is called Alta Mesa Holdings and also files annual and quarterly reports with the SEC. The management team of the acquired Alta Mesa were tapped to run the public company. Mr Hackett remained as Chairman.

Timetable of events

  • In March 2018, the company announced EBITDA and production estimates would be significantly lower than the estimates provided in the acquisition proxy statements.
  • 2nd quarter earnings announced in August 2018 were also disappointing.
  • CFO Michael McCabe announces his retirement in November 2018. His last day was in March 2019. Base salary $450,000 – Cash severance payment $1.4 million.
  • CEO Harlan Chappelle, COO Michael Ellis and Chief Technology Officer Gene Cole ‘were given the opportunity to resign’ on December 20, 2018. Under the terms of their employment contracts they were entitled to severance. Combined salaries $1.8 million – cash severance payments $8.7 million.
  • In December 2018 Mr Hackett hires 3 consulting executives from Meridian Energy for a monthly fee of $245,771. The consulting firm could also earn a quarterly bonus of $872,950 and a semi-annual bonus of $2.1 million, assuming certain performance metrics are met.
  • John Regan is hired as the new CFO in January 2019. Base salary $450,000.
  • In February 2019, the company lays off 25% of its head office staff in west Houston.
  • Also in February, the company discloses it will delay reporting its annual report due to problems with its internal controls over financial reporting.  It also announces an expected impairment charge of $3.1 billion.
  • Craig Collins – COO of Midstream is fired in March 2019. He was hired one year before. Salary $450,000 – cash severance payment $1.4 million.
  • The company draws down the remaining $86 million of its $370 million revolving credit line in April. That was just after it paid out all the severances noted above.
  • Subsidiary Alta Mesa Holdings files its annual report in May 2019. In it, the company discloses that the SEC is conducting a formal investigation ‘into, among other things, the facts involved in the material weakness in our internal controls over financial reporting and the impairment charge’.
  • In August, the parent company finally files it annual report. The list of internal control weaknesses is too long to mention here…

Bankruptcy

The company does not have a pre-packaged bankruptcy agreement in place. The bankruptcy was triggered by the lenders exercising their right to conduct an optional re-determination ahead of the next scheduled one in October 2019. That set the new base at $200 million, well below the amount currently borrowed.

New CEO and more bonus payments

The day before bankruptcy, Mr Hackett, who had been serving as interim CEO, amended the agreements with the three consultants and appointed one of them, Mark Castiglione, as CEO. The agreement eliminated the quarterly and milestone bonuses. In return, the three executives were advanced a combined bonus of $1.8 million.

Mr Hackett will remain as Chairman of the company.  Its shares were trading at 8 cents when it announced bankruptcy.

Mr Hackett has also taught a course on ‘Moral Leadership in Economics’ at both the University of Texas and Rice University.

SEC filing – Alta Mesa bankruptcy

 

 

ExxonMobil being sued for Frac bashing vertical wells

XTO Energy, based in Spring and a subsidiary of ExxonMobil, is being sued in Harris County because its fracking operations have allegedly damaged nearby vertical wells in a different formation.

Plaintiffs Modelo Energy (owner) and Capital Star Oil (operator) have approximately 90 vertical wells in the Fashing Edwards field in South Texas. The wells have been producing for many decades and the surface pressures are around 100 psi. XTO also operates some wells in the same field.



However XTO also operates horizontal wells in the Eagle Ford formation which lies roughly 250 feet above the Edwards formation. These wells are fracked and pressures in the formation can exceed 10,000 psi.

In 2016, Modelo complained to XTO that its wells were being ‘frac bashed’ by the underground explosions XTO was setting off in its horizontal wells. On August 16, 2018, an XTO frac explosion travelled into the Edwards formation. This caused the surface pressure at one of Modelo’s vertical wells to spike to 5,054 psi. This resulted in a surface blowout of natural gas, condensate, water and solids.

Modelo alleges that 12 of its wells are damaged. In addition, the water that escaped into the Edwards formation has reduced the ultimate recovery of gas from the formation. Modelo also alleges that XTO refuses to clean up the waste and pollution. XTO continues to frac in the formation.

Modelo & Capital Star are seeking damages in excess of $3 million.

Rusty Hardin, a famous Houston lawyer who has taken on many high profile and celebrity cases, is representing the plaintiffs.

Frac hits are becoming more common as the number and length of horizontal wells increases. A report from 2017 in The Oklahoman stated that 450 older vertical wells had been damaged by fracking.

XTO Defendant – Modelo

 

 

 

Bankrupt E&P operator hires new CFO

Halcon Resources, which last week filed for Chapter 11 bankruptcy, has hired Ragan Altizer as its new CFO. He replaces Quentin Hicks, who announced his intention to resign on July 9, just four months after being appointed to the role.



On August 9, Mr Hicks was appointed the CFO of Gulfport Energy, an onshore E&P operator with its head office in Oklahoma City. Mr Hicks replaced Keri Crowell. She left with a severance package of one year’s salary ($362,500) and a one-year consultancy contract worth $30,000 a month. Ms Crowell had been the CFO since January 2017.

Mr Altizer was previously the CFO of Ajax Resources, a private E&P operator that sold its assets to Diamondback Energy in October 2018. New Halcon CEO, Richard Little, was previously the CEO at Ajax.

Mr Altizer will receive a base salary of $350,000. He will also receive a guaranteed pro-rata bonus for 2019 of 100% of his base salary. Mr Altizer will also be eligible for equity awards in due course.

SEC filing – Halcon CFO

Halcon Resources files for Chapter 11 (again)

Halcon Resources finally files for Chapter 11 (again). It’s a pre-packaged deal in which $750 million of debt will be eliminated. The debt holders will own 91% of the equity after the re-organization.



Note that in Q1, the company paid $11.3 million in severance to the former senior executives who resigned on mass.

SEC Filing – Halcon bankruptcy

CFO Quentin Hicks resigns after 4 months

 

E&P company now based in Houston after merger

Amplify Energy has completed its merger with Midstates Petroluem in an all-stock merger-of-equals.  The deal was announced back in May.

Midstates was publicly-traded and was based in Tulsa, OK. Now that the Amplify management are running the business, it has its head office in downtown Houston. The publicly-traded entity is now called Amplify Energy.



Amplify Energy is the successor reporting company of Memorial Production Partners, which was publicly-traded until entering Chapter 11 bankruptcy in January 2017. Amplify’s production assets are mainly in East Texas/North Louisiana, the Rockies and California.

Midstates also entered Chapter 11 bankruptcy in April 2016, emerging six months later. The business mainly operates in the Mississippian Lime formation in Oklahoma.

Fir Tree Capital Management, a New York investment firm is the single largest shareholder in both companies. It owns 35% of Amplify and 23% of Midstates. Two executives from Fir Tree are on both boards.

Before the deal was announced, shares were trading at $13. They are currently trading at $4.36 giving the business a market capitalization of $186 million and an enterprise value of $409 million.

The CEO of Amplify is Ken Mariani. He joined in May 2018. Prior to that he was the President at Enervest, a Houston energy investment firm. Martyn Willsher is the CFO. He was appointed to that role a year ago and was previously the Treasurer at Memorial Production Partners.

The management team of Midstates have left the company and received golden parachutes. CEO David Sambrooks received $2.9 million in cash and equity that was worth $2.4 million when the deal was announced but less than $1 million now. Chief Accounting Officer Richard McCullough received $0.7 million in cash and equity now worth $0.2 million.

The list of Houston-area companies can be found here

 

Carrizo management set for large payout in takeover

Callon Petroleum has agreed to buy Carrizo Oil and Gas in a $3.2 billion all-stock deal.

Callon (market cap $1.46 billion) has its head office in west Houston. It has oil and gas properties in the Permian Basin. Carrizo (market cap $971 million) has its head office in downtown Houston and mainly has operations in the Eagle Ford Basin.



Following the close of the transaction, Callon shareholders will own approximately 54% of the combined company, Carrizo shareholders 46%. Post-close, the company will be run by the Callon management team.

Management team payouts

The four members of the Carrizo management team are in line for large payments. According to the recent proxy statement they will get over $21 million as part of any change of control. CEO Chip Johnson will get $7.8 million, COO Brad Fisher and CFO David Pitts $5.2 million each, while General Counsel and VP of Business Development Gerald Morton will get $3.1 million.

The proxy statement also notes that, in February 2019, the Compensation Committee of Carrizo adopted a new Change in Control Severance plan. This changed some of the terms of the plan. While this didn’t significantly affect the payments due to the CEO, it did increase the severance due to the other three executives by about $700,000 each.

Cutting costs to reduce debt burden

Callon expects to generate annual operational synergies of $65 to $80 million and general and administrative savings of $35 to $45 million. The G&A savings amounts to two thirds of Carrizo’s overheads.

Both companies have a lot of debt. Callon has $1.4 billion of debt, and a debt to EBITDA multiple of 2.4x. Carrizo has $1.8 billion of debt, and a similar debt to EBITDA multiple. Neither company is generating positive free cash.

Dismal shareholder returns

Carrizo is selling for $13.12 a share. However, just last August, the company priced a public offering of 9.5 million common stock at $23 per share. In June 2014, the company had a share price of $69 and a market cap of over $3 billion.

According to Bloomberg, over the past five years, Carrizo shareholder returns have been negative 84% (compared to the sector average of negative 64%). Callon’s return has been negative 41%. Meanwhile the S&P 500 has returned a positive 69% in the same time period.

The transaction is expected to close in the fourth quarter. If the deal doesn’t close, termination fees may be payable (Callon to Carrizo $57 million, Carrizo to Callon $47 million).

https://www.prnewswire.com/news-releases/callon-to-acquire-carrizo-in-all-stock-transaction-300884540.html

 

 

Houston E&P company hires new CEO after year-long search

Evolution Petroleum Corporation has hired Jason Brown as its new CEO after the previous CEO, Randy Keys, stepped down in May 2018.



Robert Herlin, the founder of the company, who had been serving as the interim CEO, will remain Chairman of the Board. He had been the CEO for 12 years before Mr Keys was appointed in December 2015.

Mr Brown is the founder of LongBow Energy, a private E&P company. He was previously a co-founder of Halcon Resources, where he was VP of Corporate Development between Sept 2011 and July 2014.

Mr Brown will receive a base salary of $325,000. He also received $325,000 of restricted stock that will vest over 3 years.

Evolution (market cap $218 million) has its head office in west Houston. The company has revenues of $41 million, which primarily comes from a 23.9% stake in the Delhi field of Northeast Louisiana, where Denbury Resources is the operator.

Unusually the company has only four employees as it has chosen to outsource its property accounting, human resources and administrative functions.

Evolution Petroleum – SEC filing

 

Houston Executive sentenced to 18 years for defrauding investors.

Daniel Walsh, 60, a Houston executive, was sentenced to prison for 18 years after reaching a plea deal in his fraud trial in Wichita County, TX.



Walsh, the CEO of Western Capital, based in Houston, pleaded guilty to money laundering. He was originally indicted in 2013 for stealing $492,000 from 12 investors.

Walsh told investors that the money would pay for drilling and testing of two wells to be drilled in High Island, Galveston County. Instead he used the money to pay his personal expenses, including a $6,000-a-month mortgage.

He initially raised money for the High Island wells from 2007 to 2009. However, Walsh had been in trouble before. In 2005, the Pennsylvania Securities Commission entered an Emergency Cease and Desist order against Walsh and Western Capital for selling unregistered investments in two oil wells near Victoria, TX.

Walsh apparently operated oil and gas joint ventures from 1994 up until 2005 without complaints to the Texas State Securities Board. Then the agency began investigating him in 2005.

Texas State Securities Board – press release 07-12-19