Alange Energy’s spectacular collapse over the past week, from being one of the great hopes among Colombian oil and gas exploration companies to being a case study in erroneous oil output reporting, surprised a lot of people whose names are not Hugo Chavez. That is, I think that (now ex-) CEO Luis Giusti’s fall has been a surprise because there was a widespread assumption that if Chavez hates the guy, he’s probably a-ok. The history is a bit different.
Giusti, who stepped down yesterday as CEO, was the last president of PDVSA before the Chavez era. Venezuela’s president campaigned, in part, against Giusti’s attempts to privatize state oil company PDVSA. Giusti resigned a day before Chavez took office. At that point their paths formally split — there was no professional relationship. But Giusti made a living in part because of people’s hatred for Chavez, while Chavez has continued to harp on Giusti’s supposed mismanagement of PDVSA.
Giusti did fine as a consultant. He is on the roster at the Center for Strategic and International Studies, a Washington think tank, and his bio there is the kind of honor roll that makes your correspondent feel like an extreme underachiever. Since at least 2007, he has spent most of his time in Colombia. At first, he was consulting with the government to write the country’s new hydrocarbon rules.
That work succeeded. Colombian oil and gas output had fallen from 687,000 barrels a day in 2000 to 525,000 five years later. Under the new rules, output in the next half-decade soared. The most recent figures, from November 2010, show output of 818,000 barrels a day. By comparison, Venezuela is supposedly producing on the order of 3 million barels a day of oil & gas — and Venezuela has a hundred times more oil reserves than Colombia. This new productivity is great news for Colombia in terms of tax and royalty revenue. It’s great news for state oil company Ecopetrol, which is benefitting from dozens of joint ventures with private companies that are coming in to explore Colombia. It’s great news for the junior oil and gas companies, most notably Pacific Rubiales (PRE.to), which has gone from zero to the biggest company on the Colombia stock exchange thanks to surging oil output.
I found Giusti thanks to my work as a Venezuela oil correspondent. Everyone pointed me to him as a smart, connected person to talk to about the oil industry. That said, there was a prescient warning that he wasn’t to be relied on for numbers. I met him on a warm night in Cartagena in 2008. His white hair and strong presence stood out among the swarm of oil-industry suits at an energy conference. He was warm and welcoming and introduced me magnanimously to his old friend and former PDVSA right-hand-man Ronald Pantin, founder and top dog at Pacific Rubiales.
Giusti then went on to start an oil company, Alange. But before it could go public, a pair of disasters struck. First, just when the company was supposed to get funded, the financial crisis dried up the money. Then, while the company (still private) got its affairs in order, Stanford Bank imploded. A Venezuelan financial analyst named Alex Dalmady published a now-famous article called “Duck Tales” analyzing the bank in the wake of the Bernard Madoff pyramid scheme. His article began: “One does not have to be a detective, or even a financial expert, to spot financial institutions that may prove insolvent, or worse, with the passage of time. As the saying goes, if it looks like a duck, if it waddles like a duck and if it quacks like a duck, it must be a duck.”
It soon turned out that Stanford “bank” was, in fact, a duck. A pyramid scheme. Venezuelans lost as much as $2 billion as the institution collapsed, making the Antigua-based company the biggest pyramid scheme in the history of Venezuela — a country with a long history of pyramids, now chronicled in real time at the blog Venepiramides. It then came out that Giusti was on an “advisory board” at Stanford. The board may never have had any power, but Stanford certainly benefitted from being associated with such an established character, while Giusti benefitted from networking opportunities. One friend of mine remembers Giusti’s wife pitching Stanford products. And when it collapsed, Giusti’s son was actually working at the bank.
But the story never got legs. There was — and is — no evidence that he had done anything except get suckered along with a lot of other people.
Alange finally went public in July 2009. For your typical stock trader, Alange’s story was compelling. You had the Venezuelan expat, out to redeem himself in the underdog country, Colombia, which makes up for limited oil reserves with some pro-corporate rules and a government willing to help out. Big bad commie Chavez tried to push him down, but capitalism will get the last laugh. That was the basic message of this article, published Jan. 11. Over time, oil discoveries seemed to bear out the story.
Meanwhile Pacific Rubiales was turning into one of those stocks that made market watchers say “why didn’t I buy that at $3” as it soared to $30 a share. Petrominerales (PMG.to), another Colombia oil stock, rose 6-fold from its early-2009 bottom. Gran Tierra Energy (GTE.to), which has had more than its share of problems getting oil out of the remote southern Colombia jungles, rose 3-fold. Speculators were looking for the next big thing. Why not Alange? By the end of October, the company’s stock was on its way to a double. In 2010, it had by far the most volume of 273 oil & gas stocks (Excel) on the Toronto Venture Exchange. In fact, in terms of number of shares traded, it beat all Canada-listed oil and gas stocks except Suncor Energy, the mammoth oil sands company that trades on the Toronto Stock Exchange.
In the course of all of this, the world forgot that it wasn’t Chavez who first accused Giusti of mismanagement back at PDVSA. There was a wide group of people in Venezuela, including at times the newspaper El Nacional (here’s a particularly harsh article) and some nationalists and leftists who questioned his management of the company: for using company jets as ministerial shuttles, for not disclosing his salary, but most of all for selling out to foreigners. (Before you send the hate mail: I know, the current PDVSA does all of this and more, and that makes 1990s-era critiques seem almost quaint. I know.) PDVSA was supposed to be a state company. The law was clear: the oil industry is for the pueblo. Giusti not only pushed the apertura, which gave attractive deals to private companies while PDVSA was in its worst possible bargaining position. He also promoted the partial privatization of the company. Now, as it turns out, that may have been good policy — it’s working well enough for Ecopetrol and Petrobras. But is it really the job of a state employee to agitate against the expressed will of the people and the country’s laws? After the oil strike in 2002-03, the “new PDVSA’s” big complaint about Giusti was that he contracted out the company’s computer systems to SAIC, the big U.S. defense contractor. That made it possible for angry managers to shut down and in allegedly wreck wells and pipelines, while loyal workers who stayed on the job were locked out of the system. Sort of a self-imposed Stuxnet.
Now, I have no idea if Giusti ever did any of this maliciously. He has always been decent to me and is a gentleman. But there are a couple lessons here for both Venezuela and for the rest of us. First of all, just because Hugo Chavez talks badly about someone does not indicate that the person deserves your money. I have a thousand problems with Chavez, but if there’s one thing he does well, it’s critique. (Of others.) Second is something I learned from Dalmady. You see one little scandal, like PDVSA jets being used to shuttle ministers to Fort Lauderdale, you say, “eh.” You see a bit of a cavalier attitude toward authority (or the hydrocarbons law), you say, “that’s leadership.” You see a guy get wrapped up in Stanford “bank,” and you say, “hey, we all make mistakes.” But then you hear this same guy telling a TV audience that his oil company is producing (not “has the potential to produce”) 4,100 barrels a day when he either knows or should know that’s not the case. The guy signs off on financial reports that say output is much higher than it really is, and it takes months to correct the figures. Then, when all this comes out and the stock price tumbles, no doubt costing some suckers a lot of money, the company and regulatory officials who should be punishing misbehavior just leave him on the board (along with Horacio Santos, who sold all of his shares “for tax reasons” three weeks before everything fell apart at Alange). And now, the company dilutes its shares by selling shares to suits in Toronto at an implied value of
24 28* cents apiece, it gets harder to shrug. As Colombian exchange Interbolsa wrote today in its morning report (cutting out some of the more technical points):
Alange: There is NO protection for current shareholders and no type of corporate rights for the people that have deposited their confidence in management! … WHY did Alange not offer this conditions to current shareholders? … Is the situation that BAD? … It’s a shame how a person that had the goodwill in the industry as Luis Giusti Sr destroys so many years of accomplishments and disheartens so many shareholders leaving by the back door. Forget of a dual listing in Colombia for sure as this story is finished from my
point of view, as confidence is totally lost.
Just to be clear here: This story in the end isn’t about Giusti, it’s about how we make decisions, how we judge credibility. Alange is still out there, with another 7 million shares changing hands today.
So let’s go back to Dalmady. At some point, when you see the waddle, hear the quack and notice a few feathers, you have to wonder if you’re looking at a duck. Do you entrust money to ducks?
*Note that there was an incorrect number in the first published version of this article. Note that even working here from my couch, with no boss looking over my shoulder, and even though this error is not likely to cause anyone to mis-invest their money, I am correcting the error within a few minutes of first publishing the post. I don’t understand how publicly traded companies go so long before correcting errors in their filings.