Bonavista Energy Corp BNPUF

Deep Dive ... Confidence in Management

[RetailRube]

When investing in energy companies, I watch for an affliction that I call "Drilling Addiciton".  I learned about this from an investment in a little BC company called Tiverton Petroleum many years ago.  Tiverton kept disposing of producing wells to get the funds to buy and drill more exploration land.  It was making zero progress.  Eventually, their Board of Directors stepped in and stopped the CEO.  They wound up the company after shareholders started to complain.

Is Bonavista management and Board of Directors capable of adapting to a materially different investment picture?  Do they have the nerve to start running down their reserves, paying down the debt and giving what remains to shareholders?

At the most recent AGM, shareholders voted 30m shares as "withheld" for Mr. Keith MacPhail.  This was 24% of votes cast.  (Only 48% of eligible shares cast their vote.)  The year before, only 4% were withheld for Mr. MacPhail.  The stock price was about $1.20 just before this year's AGM.  Next year's AGM will be much worse.

Shareholder discontent almost never shows up first as a withheld vote.  Major shareholders ask for lunch meetings to discuss their concerns.  Sometimes these meetings turn into dissenting shareholders and proxy battles.  But it always starts with an investor discussion with Board members.  I guarantee you there is stuff going on behind the scenes.

I worry that all the key players in Bonavista have been around since the founding of the company in 1997.  Mr. MacPhail was the President or CEO from the start until quite recently.  Who is going to play the role that the Board played in Tiverton Petroleum?  I don't see anyone.  This concerns me.

But Mr. MacPhail has a lot of skin in the game.  10 million shares.  He has incurred huge personal financial losses.  And he knows the company intimately and has the external contacts.  Maybe he can do it.

Managers who have done re-structurings will tell you it is easier to implement radical change in a company if you have a clearly-defined crisis.  It has to be easy to explain the "Need to Change".  Otherwise the employees are never quite rowing in the same direction no matter what you do.  Their recent going-concern disclaimer fits the "crisis" label.  Now let's see what bold steps the Bonavista Board of Directors implements to get this fixed.  So far they have announced almost nothing.  Suspending the dividend is trivial.