Oilfield Services company appoints new CEO

Flotek Industries, based in NW Houston, has appointed John Gibson as its new CEO. He replaces John Chisholm who steps down after seven years as the CEO. Mr Chisholm is also stepping down from the Board.



Mr Gibson joins from investment bank Tudor Pickering Holt where he was Chairman of Energy Technology. Between July 2010 and May 2015, Mr Gibson was the CEO of Tervita Corporation, a Canadian environmental and oilfield services company.

Flotek supplies chemicals for use in drilling and completion of oil wells.  It currently has a market capitalization of $115 million. That’s about the same as the amount of net cash on the balance sheet ($107 million at 30 September).  The cash position arose from the sale of its consumer and industrial chemistry technologies for $175 million in January 2019. The company hasn’t made an operating profit since 2015.

Gibson compensation

Mr Gibson will receive a base salary of $500,000. He will also be granted 570,000 restricted stock units that will vest over the next five years. Mr Gibson is also granted an option to purchase up to 1 million shares at $1.93 per share. This option also vests over the next five years. An option to buy a further 2 million shares at $1.93 per share will vest in stages, according to the stock price. If the stock remains above $7.20 for 20 consecutive trading days, 100% will vest.

Severance payment

Neither the press release nor the SEC filing mentions what severance payments are owed to Mr Chisholm, if any. According to the annual proxy statement filed earlier in 2019, Mr Chisholm is entitled to a payment of $3.6 million (two times base salary and target bonus) if he is terminated without cause. The company filed an amended employment agreement with Mr Chisholm in October 2019. This agreement states that any severance will be paid over 24 months.

SEC filing – Flotek CEO appointment

Founder of school academy charged in financial conspiracy

Richard Rose, the founder and Superintendent of Zoe Learning Academy has been indicted on 18 counts on charges of conspiracy, mail fraud, theft of government funds, money laundering and false bankruptcy declarations.



Zoe Learning Academy was an open enrollment charter school and was based in the Greater Third Ward area of Houston. It also had a campus in Duncanville, a suburb of Dallas.  The school started in 2001 and operated until it abruptly closed in September 2017.

Rose is alleged to have diverted funds from the charter school to fund personal expenses such as settling a personal lawsuit, paying personal legal expenses and buying a timeshare in Honolulu, Hawaii.

Rose was also the pastor of Life Tabernacle, a church on Cullen Boulevard. In 2013 Mr Rose was sued by a financial investor for not making payments on a $2.8 million real estate loan for the church. Mr Rose settled for $75,000 and allegedly used funds from the charter school to pay it. He also used $30,000 from the school to pay his legal expenses.

According to the indictment, Rose failed to disclose to the Texas Education Agency that the school paid more than $1 million for bus services to a company owned by Rose’s brother. He also failed to disclose payments to his wife of $60,000.

When Rose filed for Chapter 7 bankruptcy in October 2017, he stated that the Academy’s revenue was $263,000, when, in fact it was in excess of $2.8 million. He also stated that the Academy had not made any payments to insiders in the year prior to the Academy filing for bankruptcy.

Rose indictment

State of Texas agrees to pay $15 million to resolve errors in administering food stamp program

The Texas Health and Human Services Commission has agreed to pay the federal government $15.3 million to resolve allegations that it violated the False Claims Act in its administration of the Supplemental Nutrition Assistance Program (SNAP). SNAP was known as the Food Stamp program until 2008.



Under SNAP, the US Department of Agriculture provides eligible low-income individuals and families with financial assistance to buy nutritious food. Although the federal government funds the benefits, it relies on the states to determine whether applicants are eligible and to administer the scheme.

Furthermore states are required to perform quality control to ensure that eligibility decisions are accurate. The federal government also pay performance bonuses to those states that report the lowest error rate and the most improved error rate. The state of Texas contracted with Julie Osnes Consulting LLC (based in South Dakota) to provide advice and recommendations designed to lower its quality control error rate. The federal government alleged that the recommendations injected bias into the quality control process, resulting in the state receiving performance bonuses in 2010, 2013 and 2014 for which it was not entitled.

This is the fourth state that the Federal government has settled with. All hired Osnes Consulting. The other states are Virginia ($7 million), Wisconsin ($7 million) and Alaska ($2.5 million). The government has also settled with Julie Osnes herself ($0.8 million).  The state of Mississippi is also under investigation.

Although the details concerning the Texas program have not been released, from reporting in other states, it is alleged that the consulting firm would pressure state employees to either reclassify errors as correct or omit them from the sample.  The states would select a quality control sample and the federal government would audit a subset of the state’s sample.

https://www.justice.gov/opa/pr/texas-health-and-human-services-commission-agrees-pay-over-15-million-resolve-false-claims

 

Proppant supplier delisted from NYSE

Carbo Ceramics has been delisted from the New York Stock Exchange (NYSE) because its share price is too low. It was trading at 30 cents (market cap $9 million) at the time of the delisting. Going forward, it will be traded over the counter.



The company has its head office in west Houston and makes proppants, primarily for fracking.  It started out making ceramic proppants and went public in 1996. At its peak in 2011, the company had a market capitalization of almost $4 billion. Ceramic proppants are considerably more expensive than natural sand. Although the company tried to protect itself by supplying natural sand as well, it has been hit hard by the downtown.

In November, the company disclosed that its largest customer planned to discontinue purchases of frac sand under its existing contract. (Its two biggest customers in 2018 were Halliburton and Keane Group). The company has significant fixed costs associated worth this contract such as rail car leases and a distribution facility. The company estimated that it will incur $8 million to $10 million in cash costs to exit these leases and other supply contracts, associated with the contract. As a result, the company issued a going concern warning.

The company has not made positive annual EBITDA since 2014.  At the end of September, the company had cash balances of $40 million. Against that, it has a fully-utilized $65 million credit facility with the Wilks Brothers (who sold their pressure pumping business in 2011 for $3.5 billion) that matures in December 2022. It also has leases with a present value of $58 million.

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

SEC filing – Carbo Ceramics delisting

 

Callon completes $750 million takeover of Carrizo

Callon Petroleum has completed its takeover of fellow Houston E&P operator, Carrizo Oil and Gas. The combined companies own 200,000 net acres in the Permian and Eagle Ford basins. As a result of the deal, Carrizo’s shares have been delisted.



The deal was originally announced in July 2019. At that time Callon had a market cap of $1.46 billion and Carrizo $1 billion. At deal close, the market caps were $1 billion and $750 million respectively.

As originally announced, the deal called for Carrizo shareholders to receive 2.05 shares of Callon stock for every share held. However Paulson & Co, a shareholder with a 10% stake, complained that Callon was paying a premium for Carrizo which was ‘unwarranted’. In October and November, ISS and Glass Lewis, two proxy advisory firms, recommended that Callon shareholders vote against the deal.

As a result, later in November, the terms were revised down to 1.75 shares of Callon stock. In addition, under the original terms, Callon management (the acquirer) were eligible for severance benefits as a result of the merger. The revised agreement removed these benefits.

Callon expects to save between $110 million and $170 million from combining the companies. Corporate overhead account for $35 million and $45 million, with the rest coming from operational synergies.

Carrizo had started talking to potential merger targets in the summer and fall of 2018. They did not hold their first meeting with Callon until January 2019.

All the executive officers of Carrizo stepped down as a result of the merger. The top five executives will receive severance payments of $26 million, of which $15 million is cash, the rest vested equity.

Greg Conaway, the Chief Accounting Officer of Carrizo (and not one of the top five executives) has been appointed to the same position at Callon.

SEC filing – Callon Carrizo merger

Another big oilfield services merger announced

Apergy Corporation, based in The Woodlands, has announced that it will merge with the upstream division (aka Nalco Champion) of Ecolab. The combined company will remain in The Woodlands.

Apergy was spun off from Dover Corporation in May 2018 and is primarily involved in Artificial Lift.  Ecolab, based in Minnesota, had originally announced in February 2019 that it intended to spin off Champion through an initial public offering. Champion primarily manufactures oilfield chemicals.



The company will be the second largest production-focused oilfield services company, behind Baker Hughes. Proforma revenues are $3.5 billion, 80% of which is derived from production.

The combined company will have an enterprise value of $7.4 billion, including just over $1 billion of debt. Apergy shareholders and existing Ecolab shareholders will own 38% and 62% of the combined company, respectively. Apergy is paying $3.9 billion in newly-issued shares and $492 million in cash to Ecolab.

The combined companies are assuming $75 million of cost savings. Including these savings, the transaction represents 9.5 times 2020 estimated EBITDA.

Apergy CEO Soma Somasundaram and Apergy CFO Jay Nutt will be CEO and CFO of the combined company. Deric Bryant, the EVP of Ecolab’s Upstream business will become COO.

The transaction is expected to close in the second quarter of 2020.

The announcement comes one day after Superior Energy agreed to spin off its US completions business and merge it with Forbes Energy.

Apergy – Investor Presentation

Oilfield Services company to spin off US completions into new public co

Photo by Joshua Doubek

Superior Energy Services has announced that it will merge its US completions business with Forbes Energy Services in an all-stock transaction. The combined entity will then be spun off into a publicly-traded company. It will have its headquarters in Houston.



Superior operates in four segments: Drilling Products and Services, Onshore Completions and Workover services, Production Services and Technical Solutions. It has its head office in downtown Houston. Like many oilfield service companies, it has been suffering from a high debt load. Net debt was about $1 billion at September.

Forbes is also a US completions business with its head office in Alice, Texas. The business filed for Chapter 11 in January 2017 and the bondholders exchanged their debt for common stock.

The Newco – no name has yet been announced – will have proforma revenues of $831 million, of which $210 million will come from Forbes. It will have adjusted EBITDA of $77 million. However Newco expects to achieve $23 million in synergies, of which $15 million will come from Corporate expenses.

Superior will own 52% of Newco and will also transfer $250 million of debt to it.  The CEO of Superior, David Dunlap will become the CEO of Newco. A CFO will be named later.

The remaining businesses of Superior will have revenues of $806 million. CFO Westy Ballard will become CEO while Chief Accounting Officer James Spexarth will become CFO.

The transaction is expected to close in the first quarter of 2020.

In further good news for Superior, its shares will begin trading again on the New York Stock Exchange on December 26. Back in September, I wrote about the shares being delisted for low stock price. The company has now completed a one-for-fifteen reverse stock split.

SEC filing – Superior spin-off

Drilling Contractor appoints new CFO

Noble Corporation has appointed Stephen Butz as its new CFO. He replaces Adam Peakes who left in September.

The company is an offshore drilling contractor. It has its registered head office in London but its operational head office is in Sugar Land.



Mr Butz has relevant experience, having been the CFO of fellow drilling contractor, Rowan Companies from December 2014 until its merger with Ensco in April 2019. Between 2005 and 2014 Mr Butz worked at Hercules Offshore in various financial roles including CFO. Prior to that, he even served as a consultant to Noble.

Mr Butz will receive a base salary of $550,000 and a cash sign-on bonus of $1.1 million. After the appointment was announced, the share price of the company rose 15 cents to $1.08. The company has a market cap of $233 million and debt of $4 billion.

Mr Peakes was paid $450,000 and received a severance of $1 million.

SEC filing – Noble Corp CFO appointment

Judge rules Government must pay damages to upstream Harvey victims

Senior Judge Charles Lettow of the US Court of Federal Claims has ruled that the federal government is liable for damages incurred during Hurricane Harvey.

The ruling specifically applies to 13 test properties that were part of a two-week trial in May 2019. These properties were owned by private citizens and located in a (normally) dry reservoir upstream of the Addicks and Barker Cypress dams. However 10,000 homes in the neighborhood were affected.



History of the dams

After two major floods in 1929 and 1935 caused extensive damage to downtown Houston, the Addicks and Barker Cypress dams were built in the 1940’s to help protect downtown Houston. The dams (levees) were built about 18 miles west (upstream) of downtown. However certain aspects of the design, such as a levee on Cypress Creek (upstream of the dams) were never built.  Even then, the government calculated that the land liable to flood in extreme storms was greater than the area acquired by the government for flood control purposes.  At the time, the government didn’t consider this a big deal as the land behind the dams was used for ranching and rice farming. Land was purchased by the government for between five and ten dollars per acre.

Hurricane Harvey

During Hurricane Harvey in September 2017, the Army Corps of Engineers closed the gates at the dams to prevent flooding downtown. Over a four-day period, over 30 inches of rain fell in Harris County. This resulted in 154,000 homes being flooded in the county.  However the actions prevented an estimated $7 billion of damages in downtown Houston.

The judge ruled that these actions amounted to the ‘taking’ of personal property for the benefit of the federal government. This requires the government to compensate landowners under the US Constitution’s Fifth Amendment.

Next steps

The immediate next step is that the court proposes to adjudicate damages for five of the thirteen test properties. Each side will propose three properties for consideration for damages by January 21, 2020. The court will then select five properties from the six put forward.

Separate downstream case

There is a separate legal case concerning properties downstream of the Addicks and Barker dams that were flooded when the Army Corps intentionally let out water during Harvey that threatened to spill over the dams.  According to the Wall Street Journal the judge in that case recently ordered the government and plaintiffs’ lawyers to discuss a settlement.

Federal ruling – Upstream Addicks and Barker dams

 

 

Newly merged oilfield services group replaces CFO after two months

Nextier Oilfield Solutions, formed from the merger of C&J Services and Keane Group in October 2019, has announced that CFO Jans Kees van Gaalen has left the company. He will be replaced by Kenny Pucheu, who was the VP of Finance of Keane prior to the merger.



Mr van Gaalen was the CFO of C&J, though he only joined the company in September 2018. Greg Powell, the former CFO of Keane, became Chief Integration Officer, while the CEO of the combined group is Robert Drummond, ex CEO of Keane.

According to documents filed as part of the merger, Mr van Gaalen will receive a cash severance payment of $2.7 million. His base salary was $500,000.

Mr Pucheu joined Keane in 2016. Prior to that he spent 15 years with Schlumberger. He will receive a base salary of $375,000.

The current market capitalization of the combined group is $1.3 billion. That’s below the value at the time the deal was announced in June 2019 ($1.5 billion) but above the value when the deal closed ($1 billion).

SEC Filing – Nextier CFO transition