Chinook Energy Inc. Common CNKEF

The AIMCO SNAFU - Part Three - A letter to Ms Angevine

[PeterM1]

AIMco, the Alberta government-controlled investment manager, launched Chinook Energy in 2010. Its shares were placed at about $3.00 a share and it debuted on the Toronto Stock Exchange at $2.42. By January 2016, however, these shares were trading at just 50c. So in June of that year, it was announced that Chinook would dispose of its diversified asset base to “Create a Well Capitalized Montney Focused Growth Company”. Back then the “New” Chinook, as it was to be called, had a production of 2,987 boe/d and a net surplus of $21 million. Last quarter the New Chinook had a production of 2,256 boe/d and was in debt to the tune of $7 million. Its shares are trading at 5c. In short, CKE had been a disaster both for AIMco, which controls 37.1% of the company, and investors alike.

That said, CKE still has some first-class assets. The fundamental problem, in my opinion, has been some second rate management of these assets. Back in early 2017 while all Chinook neighbours prudently secured adequate pipeline contracts to enable them to ship future production CKE had not. The net result has been that while it's neighbours, all of whom have had to face the same external challenges as CKE, were able to increase production with netbacks ranging from $4.43 to $10.96. Over the same period, CKE production has decreased and in the last quarter its netback was a negative ($3.65) 

As it a very focussed operation, it should not be difficult for an investor or potential purchaser to make a reasonable estimate as to the value of CKE and it’s profitability with improved management. Its principal assets and liabilities are not that complicated or extensive:

 

Asset	Approximate value	Per share
Brierly Umbach operations including gas plant with estimated potential production from  13 (11.23 net) existing wells  of 10,000 boe/d at $4,000 plus estimated production of 2,000 boe/d from vertical wells at Martin Creek.	$45,000,000	20c
5K 12” pipeline from Martin to Aitkens Creek including existing processing facility at Martins Creek	$50,000,000	30c
Net developable land with Montney rights -  approximately 50,000 acres at say $3.500 an acre. (Excludes 87,288 acres of non Montney land and land allocated to Brierly / Umbach operations)	$175,000,000	78c
Deferred Tax Assets $428 million at .10c in the $	42,000,000	18c
Less debt of $7 million and $33 million decommissioning obligations	(40,000,000)	(18c)
Estimated net break up value	$272,000,000	$1.23

  

Using a before-tax NPV of 10%, CKE puts its net asset value at $154 million (.98c per share) but this excludes the value of the pipeline and the deferred tax assets. Also excluded from both the above estimates are the additional reserves that could be booked following the encouraging results of the two recently drilled exploratory wells at Martins Creek.

These are rough numbers and only guesstimates at best. Investors should not rely on them - and nor should they have to. The Board of Chinook is specifically required in their mandate to provide this sort of information in a consistent, transparent and regular fashion.

Establish a communications policy or policies to ensure that a system for corporate communications to all stakeholders exists, including processes for consistent, transparent, regular and timely public disclosure, and to facilitate feedback from stakeholders.

Could not be clearer than that. But for starters try to find any presentation since this Board took office that provides the above basic information in “transparent” fashion. You won't unless you want to dig through old SEDI reports and Information sheets. Then try to discover in each quarter any ”regular” and “timely” reports about the number of egress contracts in place or the potential production from its existing wells - both key elements in determining the profitability and value of the company. When you give up on that one, try to figure out what is going on with one its more valuable assets - the 12-inch pipeline to Aitken Creek that runs through the heart of the gathering area for Altagas new propane export project (RIPET). Try to make some sense of all the vague mentions of new connections going no one knows where, for whom and for what purpose. 

 AIMco should ask themselves this question. If they were a minor shareholder in CKE would they be satisfied with the standard of reporting the shareholders are getting? Is this the standard that their colleagues at Alberta Securities Commission would like to see for the companies under their jurisdiction? 

The person who is specifically mandated to ensure that this policy is correctly implemented is our Chairwomen - Ms Jill Angevine.

The Chairman shall act as a liaison representing shareholders and the Board to management and representing management to the Board and shareholders.

That's is what Ms Angevine is being paid for and this is what got her an award of over half a million free options. So being an ordinary shareholder and concerned about some past and present goings-on at Chinook I thought I would submit a couple of questions to her about some issues of concern. I feel sure most other shareholders will share these concerns. 

(1)  What was the cause of the Briely compression station going over budget by  $3.8 million? If it was the fault of a party outside of CKE, has any effort been  made to reclaim the excess costs incurred from them?

(2)  With regard to the Aitken Creek 12 inch pipeline, please provide detailed  information (including the names of the parties involved) on the contracts CKE  has negotiated in the last three years for: 

  (a) additional connections to the pipeline specifying each location.

      (b) use of the pipeline 

(3)  What is the existing maximum potential production from :

   (a) The Brierly horizontal wells

  (b) The Martin Creek vertical wells.

(4)  What firm commitments has CKE secured for shipping its future production? 

(5)  According to a post on the Stockhouse Bullboard by CanadianFemme on June  02, 2018, CFO, Jason Dranchuk, was reported to have commented that it could  be advantageous for CKE to be delisted. Regarding this, have any of the  members of the Board or management had preliminary discussions with any  person or entity about taking CKE private before the announcement of the  Strategic Review? If so, with whom?

(6)  One could reasonably expect that, with CKE trading at about 5c a share,  ordinary shareholders will probably not receive more than 10c for their shares if  CKE is taken private. However, in such an event, both the Board and  management would probably still retain their share option rights. As of the last  report, over 5.6 million such options have been allocated with an exercise price  of just 20c a share. Following privatization and the sale of the underlying                    assets, these could each be worth up to a $1.00 apiece given a break value of          over $1.20. This would mean that the Board and management, as insiders,                could be receiving a very substantial benefit not accorded to the outside                    ordinary shareholders - who had nothing to do with the mess CKE is in today            and had to pay for their shares. While this possibility exists, this poses a                    fundamental conflict of interest between the Board and outside shareholders?          In the interests of both ethics and equity, does  this conflict not require that                theStrategic Review should properly be conducted by outside shareholders?

(7) If the Board intends to award themselves and management further options  this year, could you please explain on what grounds such an award could be  justified given the recent performance of CKE?

I posed the same first four questions to Ms Angevine in an e-mail that I sent here  in February 2018. I never received a reply to that and nor do I expect a reply to this. Those of you who are shareholders might want to give it a shot and send her a copy of this post. I encourage you all to do so. Alternatively one could send it to Aimco and I encourage you to do that as well. AIMco would have the  answers …….or at least they should. 

Here are the addresses

 

Ms Angevine         [e-mail] 

    [e-mail] - for attention Ms Angevine

 

AIMco  [e-mail] 

    [e-mail]

    [e-mail]