OMNI Energy Services: Why Buy More?

There is something very ominous going on with Darcy Klug's lawsuit against Omni Energy Services (OMNI). See AP article excerpt below describing the lawsuit:

Klug's suit, which was filed in federal court on December 12, 2007, by attorneys Andre' F. Toce and Joseph Arshawsky, details the dramatic turnaround in the company's fortunes led by Klug and president/CEO James C. Eckert and the company's subsequent refusal to pay them promised compensation…

Under their employment contracts and related incentive compensation agreements, Klug and Eckert were to receive their equity incentives upon any of several specified "triggering events." But each time one of those events occurred, the company and the board of directors, being guided by Sciotto, refused to make good on their obligations to the two executives.

The first triggering event occurred in June 2006 when a majority of the independent directors changed, a change that should have led to payment of the compensation packages.

Then in June 2007, investment banker Citigroup, which had been retained to explore strategic alternatives, brought to OMNI several qualified buyers interested in purchasing the company at a premium to its stock price. This, too, required OMNI to pay the incentives in full. But the board failed even to analyze the proposals, and OMNI refuses to pay Klug.

Klug is seeking a judgment from the defendants in the amount due under his incentive compensation agreement, $16.83 million, plus interest and attorneys' fees. This value is based on the stock price on June 30, 2006, when payment of the equity incentives was first triggered.

Can someone please explain why Klug bought an additional 36,000 shares at $5.0599 on 11/19/2007? Klug's holdings as of the latest filing are now 835,338 shares. We haven't seen a copy of the docket yet, but there is definitely something more going on.

Other articles on the web claim the suit alleges that management is in cahoots with others in a short selling scheme. As these rumors did not disclose any sources or references, we will have to disregard them for now until we see the docket.

The suit in U.S. District Court, Western District of Louisiana, Lafayette Division, is assigned case number 6:07-CV-02149 to United States District Judge Tucker L. Melancon and Magistrate Judge C. Michael Hill.

Stay tuned.

Disclosure: Affiliate is long some shares, nothing to write home about. We don't cover OMNI on a regular basis and were recently asked to look into this.

Comments

[jasper:]

I bought this microcap as a sleeper and added to it more than I should. For a while I though I was really smart. Appreciate you guys giving straight talk and hope that you follow up. Can you talk more about short interest? How severe..percentage has been huge, yes? Any merit to seeing short interest change over time with other events?
If citi group wanted it before, probably still worth the price? My shoot from the hip guess for Klug's purchase is that he wanted to help stabilize price and show good faith to other shareholders. Naive guess?

2007 Dec 24 11:31 AM

[jasper:]

Another possibility to consider on the darker side is that management wants to buy the company themselves at a cheap price and either keep it and/or later sell it. I'm heavily involved in another microcap where this dynamic is dead on. While more hope than reality, Klug may force the issue and stockholders could have a double or more from current price. But, a big risk...hoping that you guys will contribute to seeking alpha again..and keep us informed with your straight talk.

2007 Dec 24 12:50 PM

[CrossProfit_:]

jasper,

Your sleeper has come to life. Bottom was at 3.30+/-, traded at 4.75 for a while and is now heading back up.

CrossProfit

Disclosure: long.

2008 May 20 02:49 PM

[CrossProfit_:]

Update after earnings 08/08/08

Looks like the dismal 1st quarter is behind now as the second quarter is a marked improvement. The loss posted in Q1 still weighs on the 6 month and full year figures.

Funny, after hours 300 shares sold at -10%! If anything, the May price of $4.75 reflected further losses for another quarter which didn't materialize. At an estimated $0.30 EPS for 2008 (below company figures) and $0.50 for 2009 (also below company estimates), OMNI should start heading back up again from $5.25 to the 7 range.

The target is as follows: once EPS 0.50 is a given, x17 = 8.50 based on growth rate to be confirmed on a quarterly basis. Management has already stated that CC and guidance will now be given on a quarterly basis starting with Q3.

Bottom line: Q2 had 0 revenue growth yet profitability returned. Management had stated the reason there was a loss posted in Q1 but the market didn't buy it. Management has been proven to be correct and now states that there was additional one time charges in Q2 related to the Q1 mess, resulting in a lower EPS for Q2.

Once again, assuming that we don't buy management's explanation (probably will be proven wrong again next quarter) we still get to 0.30 for 2008. If proven wrong, then we are at 0.38.

Obviously, under 5 PPS OMNI is a buy. If you don't believe management, fair value is around 6. If you do, then it's 7.

2008 Aug 08 03:40 AM