The timing of a couple of my Seeking Alpha articles this year has been rather strange. On July 14 I wrote this article
titled “Arcan Resources (OTC:ARNBF
) – I smell a takeover”. The very next day Crescent Point Energy released this
which informed the world that they had acquired almost 20% of Arcan Resources.
Late last week I wrote
about how Venoco (VQ
) was starting to look very attractive at current share prices, only to learn on Monday that Venoco’s CEO and Chairman had decided to make this offer:
I am pleased to offer to acquire all of the outstanding shares of the common stock of Venoco, Inc. (the “Company”) at a cash purchase price of $12.50 per share. I believe that this offer is fair and in the best interest of the Company and its public shareholders and that the shareholders will find the proposal attractive. The offer represents a premium of 39% over the Company’s most recent closing stock price on August 26, 2011 and a 27% premium to the average closing price in August 2011.
My first thought on seeing this news was that I wished that I had bought a boatload of Venoco shares late last week so I could enjoy the subsequent 40% pop. My second thought was that I sure would not be happy with CEO Marquez if I was a long term Venoco shareholder.
If you exclude the darkest hours of the financial panic from October 2008 through June 2009, you will notice that Venoco’s share price has been over $15 per share over that entire time period. Heck, even near the end of July 2011 the share price was $15 per share. Given that most shareholders likely bought some or all of their shares of Venoco above $15, and given that only a month ago the share price was almost $15, how can this $12.50 offer by CEO Marquez be viewed as anything other than an attempt to lowball his shareholders (his partners)?
I mean it isn’t as if the Venoco share price has been languishing at $8 for a couple of years. It has only been under $10 for a couple of weeks! As recently as July 22, 2011 the stock price was $14.75.
CEO Marquez provides some valuation comments about his offer in his letter to the Board of Directors:
Moreover, my proposal represents a total enterprise value to 2012 EBITDA multiple of 5.3x (using I/B/E/S consensus estimates) compared to the current median trading multiple of the Company’s peer group of 3.9x 2012 EBITDA (using I/B/E/S consensus estimates).
I think it is very nice to provide some valuation metrics to show that the offer is fair. However, having listened to CEO Marquez present recently at an oil and gas conference, I find him using these valuation metrics as being less than honorable. Why?
Because two of Venoco’s key and very valuable assets (at least according to Marquez) don’t currently produce a meaningful amount of oil or gas and are therefore not reflected in the EBITA figures.
The first asset is Venoco’s very large acreage position in the Monterey shale. At 214,000 acres the Monterey position Venoco holds could eventually produce multi-hundred million barrels of oil for the company. Don’t take my word for it. This is what Marquez said two weeks ago at the Enercom presentation.
The second asset is the Hastings field in Texas which currently is not producing, but clearly has significant value, as selling it was supposedly a key part of Venoco’s debt reduction plans.
So having Marquez quote valuation multiples that value these two assets at zero is more than a little hard to stomach. What complicates all of this is that Marquez owns 50.3% of Venoco, so this isn’t a simple matter of a shareholder proxy. There is reliance on the Board of Directors who most assuredly is tight with the man making the offer. I would expect a wave of shareholder lawsuits will already have been filed so hopefully the Board of Directors looks out for the minority shareholders and protects them from this lowball offer.
What this offer could do, though, is start the bidding process from other interested parties and get Venoco shareholders a fair price. Most likely suitors would be Occidental Petroleum (OXY
), which has the largest Monterey land position, and Chesapeake Energy (CHK
), which is rumored to have entered the Monterey and is the 800 pound gorilla in the world of unconventional oil and gas production.
But again, with Marquez owning more than 50% of the shares, who is going to be motivated to bid for the entire company? He controls the decision. So what we have here is the CEO and Chairman of a company waiting for Venoco’s stock price to dip to absurdly low levels. Then within a week of hitting those levels he rushes in and tries to buy the entire company out from under his shareholders. I’m sure there are more than a few large shareholders with average cost bases over $15 that will no longer be on friendly terms with Mr. Chairman and CEO.
I was considering Venoco as an investment. But I no longer am as even if this offer is declined, I have no interest in entrusting my capital to someone who is not the least bit focused on the best interests of his shareholders. If Marquez is willing to try and lowball his long term partners like this, who knows what else he might be willing to do.
Disclosure: I am long CHK.