RE: RE: RE: RE: RE: So It's all agreed ,you all th Hi sysaphus
If I can recall, news of the Royal Bank of Scotland issue came in December of 2008 and a buyer was announced in March of 2009. It did not take very long for the administrator to find a buyer of the assets. Most following at that time felt Premier Oil stole the assets.
A few speculators that bought in at the lows and sold when the the buyer was announced, did well as the share price gained 60% on the announcement. No consulation to those who had been holding from the highs however.
I dug up this old article about Oilexco for you, which has some striking similarities to what is going on with Northland.
jmo
I’m going to write about that in my next article but first I want to reflect on the lessons from the collapse of OilExco in 2008, and here I am going to draw a on a report that can, if you wish, be down-loaded from Richmond Energy Partners.
It should be recalled Oilexco’s spectacular fall into bankruptcy and subsequent sale from administration to Premier Oil was by far the largest corporate failure in the UK oil sector in recent years. Oilexco had an enterprise value of $4.2bn at end June 2008 and its equity was valued at over $3.8bn. The $505m sale proceeds are insufficient even to cover its ~$560m debt, let alone its trade creditors, and the equity is worth nothing.
How did it happen and what lessons can be learned from the debacle?
I am going to quote directly from Richmond’s report:
“Setting aside the oil price and the credit crunch the root causes of Oilexco’s demise would seem to be:
- A weak board with the lack of the key experience to challenge a strong willed CEO
- Inadequate technical due diligence, particularly reservoir engineering, both by the company and the lenders to the company
- A seeming complete lack of cost control with regard to drilling operations, developments and company overheads
- A lack of financial risk management
- Overexcited equity investors and equity analysts who blindly rewarded activity and news flow with higher and higher valuations.
Were there warning signals?
Oilexco was listed in Canada as well as in London and reported quarterly to Canadian standards. Consequently, its debt and contract obligations were laid out in a transparent manner and so it was not that the issues were hidden.
It also reported reserves audited annually by an ‘independent’ Canadian consultant.
Canadian reporting is much more transparent than in the UK, where reporting requirements are less strict.
We liked the Oilexco business model, we admired the ability to move quickly and we were bullish about their reserves and resources.
However, in our last assessment of Oilexco in June 2008 we also noted the following:
- ‘An impossible company to value due to insufficient asset level disclosure’
- ‘High cost of appraisal drilling - $38/bbl capex and opex’
- ‘Oilexco is valued by the market at $62/bbl at the extreme high end of the peer group’.
- We were worried about Oilexco ‘Drilling dumb holes just to use rig slots’.
To this list we can now add:
- Excessive G&A costs which had jumped to over $14/bbl production
- Committing to contracts on the assumption that finance will be available.
What are some Lessons Learned?
- If something looks too good to be true in the oil business – it is. The warning signs of lax financial management were there in the company reports.
- Suitably experienced, powerful independent directors are essential to keep over-confident CEOs in check.
- There is no substitute for thorough technical due diligence – check that it is in place and don’t assume the banks will do it before they lend.
- High G&A costs are symptomatic of a lack of regard for cost management.
- Don’t confuse activity with actual value creation.
- Check commitments are financed.
- Be wary of small companies going it alone – partners slow things up but give an extra layer of assurance. There is an old African saying – ‘If you want to travel fast, go alone. If you want to go far, go accompanied’.”