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John Petersen
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John Petersen is the executive vice president and chief financial officer of ePower Engine Systems, Inc., a Kentucky-based enterprise that has developed, built and demonstrated an engine-dominant diesel-electric hybrid drivetrain for long-haul heavy trucks that promises fuel savings of 30 to 40... More
My company:
Fefer Petersen & Co.
My blog:
ipo-law.com
  • My First Supply and Demand Rodeo 27 comments
    Dec 25, 2011 2:26 AM
    Holidays can be fun because they leave time to go through ancient archives to find data that you knew you once had but somehow misplaced. This morning I found historical pricing data on my first client with a major supply and demand imbalance and thought the story might be instructive.

    WRT Energy was a gulf coast natural gas producer that had a great technology and $2 million in stockholders equity when it got talked into doing a Vancouver shell deal in the late 80s. Despite the promoters promises of unlimited fundraising capacity, the Canadian company was plagued by a depressed stock price, horrid supply and demand imbalances and a tragic inability to attract needed capital.

    I started working with them in the mid-1991 and ultimately took a job as their Executive VP. I developed a long term plan to clean up the supply and demand problems by re-placing about 40% of the stock with selected block purchasers and moving the company to the US market. It took the better part of a year to register the company under the Exchange Act and move the stock out of the hands of the willing sellers and into the hands of block purchasers who understood what we were trying to accomplish and what the long term business potential was.

    On October 12, 1992, we implemented a 1 for 5 reverse split and moved the stock from the VSE to Nasdaq. After the move we learned that a couple of the block purchasers who had assured me they were long-term holders were actually shoveling stock out the back door as quickly as they could. It took another couple months to bring them under control.

    The following chart adjusts all prices to account for the reverse split and applicable currency exchange rates; shows how WRT suffered through a year of dismal market performance while the sloppy supply and demand dynamic was being rectified; and shows how the stock performed once the supply and demand problems were resolved.

    While WRT was not able to attract significant capital when it was stuck in supply and demand hell, we raised $8.7 million in the first half of '93 and $30 million in the second half. In late-'94 we got talked into a $100 million high yield debt offering that proved to be catastrophic when natural gas prices collapsed shortly after the offering was completed and the properties we bought couldn't throw off enough cash to carry debt service costs. WRT ultimately ended up in Chapter 11 and the properties I bought are now the core operations of Gulfport Energy.

    WRT was a seven digit loss for me, but a priceless lesson in supply and demand dynamics and the dangers of debt financing.
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  • DRich
    , contributor
    Comments (4421) | Send Message
     
    >JP ... I hope Axion's chart looks this good in 2012, or at least 2013. Maybe we can recover to 2007 prices this coming year, consolidate and ... who knows. It would be nice to follow this price line as well as this chart pattern. Fingers & toes are crossed.
    25 Dec 2011, 03:03 AM Reply Like
  • John Petersen
    , contributor
    Comments (29438) | Send Message
     
    Author’s reply » I've been through this drill several times, but didn't keep detailed price tracking data on most of them. The pattern has been very consistent with prices that remain at uncomfortably low levels until the supply and demand balance is resolved. Until Axion came along, WRT was the longest and hardest clean-up I'd seen. Axion's been an order of magnitude more difficult because of the sheer immensity of the 2009 private placement.
    25 Dec 2011, 03:06 AM Reply Like
  • bazooooka
    , contributor
    Comments (2322) | Send Message
     
    John,

     

    For WRT, how much of the float did you need in strong hands to create the dynamic that resulted in the 1992 bottom? Would you say that the float lock-up was the biggest factor in creating the subsequent pop?

     

    Also, what kind of market cap and volume numbers are we talking about here? A near 4Om raise in 1993 seems impressive for a small-cap.
    25 Dec 2011, 12:39 PM Reply Like
  • John Petersen
    , contributor
    Comments (29438) | Send Message
     
    Author’s reply » As I recall, the float was very small after the reverse split, as in a couple million shares. The real key, however, was getting the float out of the hands of traders and taking two large holders that owned about 40% of the company out of the picture entirely. We literally had to manage a private resale of restricted securities.
    25 Dec 2011, 04:42 PM Reply Like
  • bazooooka
    , contributor
    Comments (2322) | Send Message
     
    A great oldie but goodie story. Why was it that it couldn't attract capital when it was cheap? Was it because of liquidity concerns? I can't imagine their story would change much between late 92 and early 93. I guess the big boys are just like us small timers and they'd rather average up as they fear missing the train.

     

    ""While WRT was not able to attract significant capital when it was stuck in supply and demand hell, we raised $8.7 million in the first half of '93 and $30 million in the second half. ""
    25 Dec 2011, 11:06 AM Reply Like
  • John Petersen
    , contributor
    Comments (29438) | Send Message
     
    Author’s reply » Small companies that go public by means of an IPO alternative like Axion's reverse merger always have a hard time attracting serious money until their stock begins to perform. Supply and demand imbalances are very common and most investors want to sit on the sidelines until an active, stable and sustained market develops.

     

    Once the supply and demand imbalances are resolved and some meaningful performance is demonstrated, everybody who's been watching from the sidelines starts to worry that the train will leave the station without them. Executives who used to spend a week out of every month looking for investment bankers to pitch suddenly find themselves juggling investment bankers who are out hunting for their next deal.

     

    At 12/31/91 WRT's stockholders equity was $2 million. At 12/31/92 it was $4 million. By 12/31/93 we'd done two back to back public offerings and equity was $43.4 million. By 9/30/94 equity was $53.2 million, which is part of what gave my younger and more arrogant self confidence that WRT could carry $100 million in debt.
    25 Dec 2011, 11:32 AM Reply Like
  • jakurtz
    , contributor
    Comments (1909) | Send Message
     
    Impressive.
    Was their any major change in revenue during this time or business developments? Or just the same steady progress that showed a trajectory toward a revenue ramp?
    25 Dec 2011, 11:20 AM Reply Like
  • John Petersen
    , contributor
    Comments (29438) | Send Message
     
    Author’s reply » We didn't turn a real profit until '94, but from '92 on we were making solid progress buying properties and bringing long-dead wells back on line. It was a good technology story, but nowhere near as good as Axion's.

     

    Our president was a former Schlumberger logging engineer who'd built a set of powered radioactive logging tools that worked inside cased wells. Our business was buying fields on their last legs, doing inexpensive work overs on long dead wells that hadn't been plugged and producing formations that were deliberately bypassed in the '30s, '40s and '50s when oil was $3 a barrel and gas was a nuisance. We limited our operations to the Louisiana Gulf Coast and typically spent about a quarter million per well. We also had a 95% success rate in finding something because the geology of south Louisiana has up to 30 known productive horizons in deep wells.
    25 Dec 2011, 11:36 AM Reply Like
  • mrholty
    , contributor
    Comments (820) | Send Message
     
    John - Very interesting story. What happened to WRT. A quick google search shows two different things:

     

    1. Sold to Chesapeake in 1997 or 1999?
    or
    2. BK and missing money of $2.6M that went to the caribbean illegally.

     

    #2 is interesting but if #1 is correct. I'd love your though on Aubrey if you meet him. As a former cheasapeake shareholder I'm long sick of his stories.
    26 Dec 2011, 12:34 AM Reply Like
  • John Petersen
    , contributor
    Comments (29438) | Send Message
     
    Author’s reply » WRT's properties went to Gulfport Energy, not Chesapeake.

     

    I left WRT and went back to the practice of law during the road show for the debt offering. I loved working for the small fast growing company but hated the administrivia and procedure of the big company it was becoming by late '94.

     

    In April '95, I ended up in the hospital for a balloon angioplasty at the tender age of 44. Since I didn't want to die young I spent most of '95 putting 8,000 miles on a bicycle and I didn't get to participate in the decisions that ultimately lead to the bankruptcy filing in early '96.

     

    I built the company and made several million dollars in the process. It got torn down by the "grey hair management team" the investment bankers required us to bring in as a condition of the $100 million high yield debt deal.
    26 Dec 2011, 01:20 AM Reply Like
  • mrholty
    , contributor
    Comments (820) | Send Message
     
    Thanks for the color. Doing a search came up with some weird results. I like learning from why companies fail instead off the few that succeed.
    27 Dec 2011, 08:45 AM Reply Like
  • John Petersen
    , contributor
    Comments (29438) | Send Message
     
    Author’s reply » There were some odd times at WRT after I left and it gives me some comfort to be able to say "I wasn't there during those days," but the reality is the problems all arose as a consequence of rapid growth and too much debt and I was a member of the board that approved the $100 debt offering.

     

    I don't know why it is, but my failures always seem to be far more educational than my successes.
    27 Dec 2011, 09:13 AM Reply Like
  • mrholty
    , contributor
    Comments (820) | Send Message
     
    The business model of WRT as you described it is similar to one of my friends, he's simply on a much smaller scale.

     

    Back in 2000/01 when oil bottomed out he went all around Texas and bought the rights to a bunch of shuttered oil wells with the landowners for 20-30 years.
    Some had been shut for 20 years. He and a buddy got two going pumping something like 10 barrels a day. Created enough cash flow to invest in others. Ended up getting a bunch of these wells going. Ultimately sold out to someone and he's now renting trailers up in North Dakota to guys working in the energy booms. Positive cash flow after 4 months.
    27 Dec 2011, 10:16 PM Reply Like
  • John Petersen
    , contributor
    Comments (29438) | Send Message
     
    Author’s reply » It was a good business, particularly in South Louisiana where up to 30 pay zones per well are common and the industry deliberately bypassed gas sands and thin oil sands in the '30s, '40s and '50s because they weren't economic. We used a work over rig to drill back down to another economic era, used our cased hole logging tools to confirm the things we suspected from a reinterpretation of the original electric resistance logs, and typically brought on 50 to 100 barrels a day from somebody else's dead well.
    28 Dec 2011, 01:22 AM Reply Like
  • mrholty
    , contributor
    Comments (820) | Send Message
     
    Its strange to think about but the first oil discoveries were not too far from our little battery plant. Oil City, PA is about 70 miles from New Castle. I read Rockefeller's biography a few years back and there was a solid history of the oil industry with it starting in PA. They abandoned PA when they no longer could just put a hole in the ground. I've long wanted to start a business/exploration to see if you could do what you did in S Louisiana but going back to much older wells.

     

    Over Christmas I spoke to former geologist for Exxon who thought I 'wasn't crazy' which is a step up from normal.
    28 Dec 2011, 09:52 AM Reply Like
  • DRich
    , contributor
    Comments (4421) | Send Message
     
    >mrholty ... Reworking of old "depleted" oil fields is a booming business here in Texas. The Permian Basin, around Midland, was considered "worked-out" a decade ago but there are many companies re-drilling and horizontal drilling and bringing abandoned wells back on-line (albeit at lower output because the gas driving the oil through the rock is gone). There is no reason that Pa. can't do the same.

     

    Back in the 1920's, the largest oil field in the USA was discovered in Ranger, Tx but the wildcatters let the gushers blow-off for weeks & months. This destroyed the field. People have been trying to figure out how to get it back into production ever since. There is estimated to be 3(?) billion barrels stuck there. There are other oilfields, like Corsicana, that have similar history. I worry that the N.Dakota oil boom is not doomed to the same wildcatter mentality. It is estimated that current recovery technology can only get 30% of estimated reserves.
    28 Dec 2011, 11:16 AM Reply Like
  • John Petersen
    , contributor
    Comments (29438) | Send Message
     
    Author’s reply » My old partners in Houston are drilling new wells in the Humble dome for the first time in decades.
    28 Dec 2011, 11:30 AM Reply Like
  • mrholty
    , contributor
    Comments (820) | Send Message
     
    Do you know of anybody looking up in Western PA? The Eastern part of the state has the shale/nat gas plays but the original oil boom was in west part of the state. Initially drilling tech was simply digging a well as oil was litterally coming out of the ground. It only lasted for a few years and they moved to Texas as land was cheaper. It seems that there should be some decent wells there but the infrastructure isn't there. When they left western PA they were still shipping in wood rail cars with 30% leakage on the trip to NYC.

     

    Personally, I'm looking in the next few years to buy some homes in northern Wisconsin in the expectation that the state will approve a mine up there and production will start in 3-5 years. Hopefully it gets approved and city takes off. Homes are selling up there for $30k.
    28 Dec 2011, 11:43 AM Reply Like
  • John Petersen
    , contributor
    Comments (29438) | Send Message
     
    Author’s reply » My contacts in the oil industry have fallen by the wayside over the last 15 years and except for what I hear from old friends, I know nothing about who's working where anymore.
    28 Dec 2011, 11:47 AM Reply Like
  • DRich
    , contributor
    Comments (4421) | Send Message
     
    >JP ... I look for an event like that spike in Sept '92 to happen when Axion outgrows its in-house manufacturing capacity. When that happens it will mean that a 1st Tier battery fab was on-board and the business model is confirmed or the other alternative would be the listing on NASDAQ (hopefully). That's the point I see Mr. Market to pay attention.

     

    Until then, under what conditions would debt be a viable choice over share count expansion? I'm not a fan of debt and shy away from ratios greater than 30% of capital (unless FCF can support it). Been burned several times on my specs but continue to do it cautiously. I'm curious about what would make debt a more rational choice than equity expansion to a BoD. I've never understood how a small company makes this determination. Is this just a survivalist decision? take the road of least resistance?
    Just curious and speculate on this often.
    25 Dec 2011, 11:54 AM Reply Like
  • John Petersen
    , contributor
    Comments (29438) | Send Message
     
    Author’s reply » I look for the spike to happen when the determined sellers run out of stock. I've seen the phenomenon several times in my career and it was never attributable to a business development. It's a pure supply and demand phenomenon that happens without regard to business fundamentals.

     

    Like the cat who sat on a hot stove lid, debt scares the hell out of me until a company has enough FCF to support debt service in a worst case scenario (like planning on $2.25 gas and getting $1.25). I've never had a client that borrowed money and didn't live to regret the decision. I don't have a problem with preferred equity or for that matter convertible subordinated debt with easy terms, but real live debt that has to be repaid sends shivers up my spine.

     

    Back in the day, the investment bankers were trolling the countryside looking for companies to do high-yield deals. We wanted a $70 million deal in '94 but the bankers told us that $100 million was an easier number and sent us back to our shopping list. The promised $50 million follow-on equity offering, of course, never materialized.
    25 Dec 2011, 12:18 PM Reply Like
  • DRich
    , contributor
    Comments (4421) | Send Message
     
    >JP ... This is an agree to disagree situation. I've no doubt that supply/demand is a problem presently but I don't think Axion can get a chart that looks like WRT until a business event happens. This is a far tougher economy for finance than the 90's. Back then things were looking up because of Tech. Now we're looking into the abyss of depression. I fully expect it to recover back to 2005-07 levels and trade sideways albeit at better volumes. I hope I'm wrong
    25 Dec 2011, 12:29 PM Reply Like
  • John Petersen
    , contributor
    Comments (29438) | Send Message
     
    Author’s reply » Since 2005 to 2007 share price levels were a gradual slide down from the mid- $3s to the low-$2s you're talking about a 6 to 9 bagger from were we are today if it just returns to those levels. I'd like to see it run higher than $2 or $3 and think it will with some positive business developments, but that will take longer. For now something in the $2 to $3 range will suit me just fine – but that happens as a matter of supply and demand. My goal of a double digit price will take more execution.
    25 Dec 2011, 04:49 PM Reply Like
  • lsd_lsm
    , contributor
    Comments (134) | Send Message
     
    Merry X-mas morning!

     

    Great discussion. I like hearing about days in the trenches backed up with charts and numbers ... then again, I am kind of a dork.

     

    I think it will be a combination of both biz events and supply and demand issues ... For example, if the determined selling abates and the financing goes through, I think we will bounce back to the .60 area rather quickly without any other news.
    25 Dec 2011, 01:49 PM Reply Like
  • H. T. Love
    , contributor
    Comments (17247) | Send Message
     
    JP: Nice recounting of some (applicable) past experiences. I enjoyed it and thank you for the time and effort.

     

    I do have concern re the change in market characteristics these days.

     

    The market is ADD and headline-driven now.

     

    I *suspect* that even if we see some of the prices we're discussing and supply/demand is in balance, we might have a really tough slog as so *many* of the non-core group of investors and traders will be dumping their shares at the first whiff high double-digit percentage gains.

     

    I believe we would have to depend on institutional investors to come in to offset that pressure and allow to remain a fairly decent track up. And, of course, there are other conditions to meet before that can happen.

     

    Thoughts?

     

    HardToLove
    26 Dec 2011, 12:56 PM Reply Like
  • John Petersen
    , contributor
    Comments (29438) | Send Message
     
    Author’s reply » Given Axion's performance over the last 18 months I have a hard time believing that many shares are out there in the hands of non-core shareholders or traders. Heck, I thought the supply and demand inflection was going to happen back in February before Quercus and Special Sits joined the ranks of the willing sellers. Since then there has been absolutely nothing to draw the attention of the short attention span crowd. That may change after an inflection arrives, but my sense is that the bulk of the float is in the hands of people who think like the active Axionistas.
    26 Dec 2011, 01:09 PM Reply Like
  • H. T. Love
    , contributor
    Comments (17247) | Send Message
     
    That's what I was hoping to hear. But it's so hard to tell just from the mechanics of trading these days.

     

    The reporting of our collective holdings has been an interesting data-point for me and I hope that those who haven't reported will consider doing so.

     

    For me, to see these holdings continue to ramp up, as price does also, would be a welcome sign.

     

    HardToLove
    26 Dec 2011, 01:18 PM Reply Like
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