Pacific Rubiales (PRE.to): like Alange, but bigger (UPDATED)

Pacific Rubiales Corp., Colombia’s biggest private-sector oil company, earlier this month said it ended last year producing 183,000 193,000* barrels a day of oil, 19 percent lower than the 225,000 barrels a day the company had predicted in the “outlook” section of its securities filing Nov. 9. It also said that as of Dec. 31, its oil reserves had declined in 2010. Both of these are normal, life being life, even the most successful company can’t grow uninterrupted forever. The market didn’t much like the news – the stock fell hard on March 10, when the announcement came out. But now that I have escaped the wilds of Peru and I am reading through the last few weeks’ news, I don’t see anyone saying publicly the three things that were most completely screwed up about this situation.

1. The company giving 220,000 barrels a day as their figure for year-end oil output as late as February, even though they should have known a month earlier that the number was fiction.

2. Board members front-ran the bad news with millions of dollars in stock sales, during a period when they should have known about the bad news to come.

3. Executives are refusing to buck up and accept responsibility for missing on oil output and reserves replacement.

1. Ongoing misstatements

Pacific Rubiales affirmed its guidance in a Nov. 9 securities filing called a Management Discussion and Analysis.

The Company will continue working on increasing its production and transportation capacity. Expansion of current facilities will allow the Company to double its production with a target for the end of the year of 225,000 boe/d (gross)

Now, it’s legal for outlook to be wrong. Just annoying that they didn’t have the guts to retract the outlook when they were 7 weeks from the end of the year and should have known that they were going to miss. Whatever.

Where things get scammy is that the misstatements continued well into this year. Click and download the investor presentation posted on the company website Feb. 3 and turn to page 5:

It says year-end production was 220,000 barrels a day. This has been sorta kinda corrected in the new investor presentation, posted March 22. They added a little footnote to say that it referred to “production capacity.”

That’s the same bullshit Alange Energy (ALE.v) used to justify its miss earlier this year — but at least Alange figured out that it had screwed up within days after the close of the year, and promptly tried to fix the problem. Somehow, Pacific Rubiales, the biggest private-sector oil company in Colombia, has weaker internal controls than Alange, which became a laughingstock for its screwup. So we are presented with a few possibilities:

-The people who run PRE.to don’t know the difference between “production capacity” and “production.”
-The people who run PRE.to don’t get regular reports on how much oil they are producing.
-The people who run PRE.to don’t check their investor presentations before releasing them.
-The people who run PRE.to are lying liars who lie.

Are there other options? I’d love to hear the company’s side, but the company didn’t reply to an e-mail full of detailed questions that I sent to their investor relations officer last Wednesday.

By the way, there is also a nice error in the new investor presentation — it says that the company produced more than a quarter of Colombia’s oil last year. That would be 196,000 barrels a day. .

2. Insider sales

There are companies that mislead investors into buying shares, and then there are companies where board members sell into the deception. You can guess which group PRE.to falls into. I am ashamed to have ever told people that the company had a good reputation.

Now, I don’t know when a smart, informed board member would be able to figure out that the company wasn’t going to fulfill its guidance and was going to fail to replace reserves. But it had to be some time before the end of the year. Who sold after the Nov. 9 guidance and before the company came clean with its year-end financial statements?

Here’s my table of board member trades from SEDI, the Canadian regulatory website. Columns and rows highlighted in yellow are my calculations.

PRE insider sales

I had to do it as a PDF because it is so long. But here’s the summary:

Yes, a grand total of almost $9 million in market-price sales, the majority of it from co-chairman of the board Serafino Iacono. It also looks like German Efromovich sold $61 million worth of stock at a below-market price Feb. 11, and didn’t report that until more than a month later. I have no idea what that’s about, because the company declined to comment.

Looking only at trades after the Feb. 1 date of the inaccurate investor presentation, we see insider sales by both co-chairmen, Serafino Iacono and Miguel de la Campa:

Side note: Alange’s board spokesman, the one who defended insider sales ahead of ALE.v’s restatement, is also a board member of PRE.to. He netted $6 million by cashing out options and selling the stock last year, though he didn’t take advantage of the real bonanza share prices late in the year. He bought $42,000 worth of the stock last week, coincidentally the same day that I wrote to inquire about insider sales.

Just to be extra-fair, I’ll note that a regular correspondent of mine, who is long PRE.to, argues that it’s reasonable risk management to not hold huge amounts of stock in a company where one works. All I can say is that’s fine, but best to hold off on sales if there’s any chance you are in possession of material, non-public information. I can’t say these guys broke the law, as I don’t know what they knew or when they knew it. But if they didn’t know that output had missed, what are they doing as chairmen of the company?

3. Hand-waving

To err is human, to pusillanimously conceal errors is dickish. The company’s earnings press release doesn’t mention gross oil output, forcing those of us interested in such little items as “did you fulfill your guidance” to search through the full financial statements. However, the financials have an error in the December output figure — the number is the same as full-year production, which seems unlikely. The only way to get the real number is to listen to the conference call, which is only archived at the call-in center for two weeks. I finally scored a call transcript from a financial industry source. I can send it your way by e-mail if you need it.

The company’s annual information form is pretty straightforward — reserves declined.

But the company insists that its reserves are increasing:

as a result of the drilling of several successful wells that were commenced in 2010 but completed in early 2011, the Company has received an independent oil and gas reserve evaluation report as of February 28, 2011 (described in detail below), which indicates that the aggregate of the Company’s net proved and probable reserves (2P reserves) has grown to a total of 316.44 million barrels of oil equivalent (“MMboe”) as at February 28, 2011, signifying an increase of 12.8% when compared to December 31, 2009.

In other words, reserves fell year over year but please ignore that cause it’s all fixed now as long as you look at Feb 28 2011 and compare to Dec 31 2009.

Anyway, don’t worry. Jim Cramer says to invest in Colombia. And my goodness, these guys aren’t Hugo Chavez, so they must be fine.

NOTE: this post was updated March 27 to eliminate some garbled text at the beginning and to change the word “private” to “private-sector” in the paragraph that starts “That’s the same bullshit…” (incidentally a word that should appear more in financial journalism).

NOTE 2: I’ve never had any position in Pacific Rubiales, or any other oil company for that matter.

*Figure updated based on company comment, April 11 2011.