Back in the dark ages of 2011, I wrote about PetroMagdalena Energy (PMD.v), at the time known as Alange Energy. Short version: Management boosted shareholder expectations. When the disappointment came, the stock fell. I pointed out the company CEO touting on TV. The CEO quit. People got annoyed. Shareholders sued the company. The company threatened to sue me. A year later, what do we see in the 2011 results?
The company gives play to its increase in reserves and steadily rising production. Production is still way below where it should have been according to the BS spouted by the prior management team, but increased production is increased production. Good news. With these oil prices, that should make for a profitable company.
Instead, we see a $111 million annual net loss at a company with only $349 million in assets and $86 million in sales. Ouch. Where did the money go?
The loss is almost entirely the result of write-downs. According to the Management Discussion & Analysis for 2011, $46.6 million of the loss comes from costs for unsuccessful drilling in 2010 and 2011. Under accounting rules, the company needs to move costs over from “investment” to “expense” if a well doesn’t pan out, so there goes many millions of dollars off the income statement.
Another $46 million of the write-downs is the result of a new reserves report that found that two fields were being carried on the books at what the company has decided were overly optimistic values. In particular, the Carbonera La Silla field was written down by $15.7 million to $1.5 million, and Rio Magdalena was written down by $30.9 million. PMD also lost $3.1 million on the Cerrito gas property.
So the company and its shareholders obviously lost out on these fields. Who won? Let’s go in reverse order:
Cerrito was part of the original PMD holdings from before it went public. PMD tried to purchase it from Pacific Rubiales Corp. (PRE.to) for $7.5 million.* But that didn’t work. After waiting years for regulatory approval, regulators rejected that sale in 2011 and the property reverted to Pacific Rubiales, leaving PMD with nothing but a loss on the books for $3.1 million. However, you wouldn’t know any of this to read the PMD financial statements, as they simply say they disposed of the property in 2011. The Pacific Rubiales annual information form tells the story clearly: “In 2011, PetroMagdalena was not accepted by the applicable authorities as the operator of the block and as a result the Cerrito MOU was terminated and the Company retained its interest in the block.”** PetroMagdalena put this news half-way through their 51-101 reserves update (see page 9).
Rio Magdalena came to PMD via a couple transactions. PMD bought a 40% participation interest, along with part of another exploration contract, from Gran Tierra Energy for $3 million. PMD also got 51% as part of the assets of Delavaco Energy Inc. PMD bought Delavaco Energy from Delavaco Capital Inc. for $100 million in stock in Sept. 2009. The reduced reserves attributable to PMD are the result of state oil company Ecopetrol exercising its right to take an interest in the field, according to the PMD reserves update. I don’t understand why accounting rules let a company claim an asset that is subject to being taken at will by another company, but anyway, gone now.
Carbonera La Silla came from Alange’s purchase of Prospero Hydrocarbons for $45 million. Carbonera was just one of the fields that Alange got in the deal, so I’m not going to try to evaluate it on its own. According to this filing, two directors of Prospero were Horacio Santos and Gregg Vernon, who was chairman. The CEO of Prospero was, according to this bio, Luis Giusti.
Horacio Santos’s exceptionally lucky timing in selling his Alange shares earned him an award from this blog. Giusti quit as CEO of Alange during last year’s excitement. Gregg Vernon is now interim COO at PetroMagdalena.
As PMD says in its reserves update, “The current contract of Carbonera La Silla has not been extended beyond the development stage resulting in uneconomic development of the field and the probable reserve has been removed at this time.”
PS: speaking of Giusti, the US court-appointed receiver in the Stanford Bank Ponzi case, scraping for every last penny paid out by the bank, sued Giusti for $2.4 million that Giusti allegedly received from Stanford between 2003 and 2009, claiming that Giusti was an insider because he was on an “advisory panel.” Giusti long ago told me that the panel had no control at all over the bank and was just an occasional speaking gig, so this lawsuit may be a stretch. It hasn’t been reported anywhere before, as far as I can see.
PPS: (LEAVING THIS INTACT BUT PLEASE SEE UPDATE AT BOTTOM!) While poking around on Alange, I stumbled onto the name Luis Lugo. This is the son of Luis Giusti — Lugo’s full name is Luis Eduardo Giusti Lugo. He was head of investor relations at Alange Energy during its period of rapid share price appreciation in 2010. I had forgotten that when I recently wrote another post about someone named Luis Lugo — one of the people being sued by the court-appointed receiver in the PDVSA Pension Ponzi. The receiver says that Lugo (possibly not the same one) received ill-gotten gains from companies that were part of Francisco Illarramendi’s complex structures that were all, effectively, funded by a pyramid scheme whose victims included the pension fund of Venezuela’s state oil company and wealthy Venezuelan Oswaldo Cisneros. To quote the receiver’s lawsuit, “Lugo is a former partner in [Hispanic News Press, (HNP)]… An officer of HNP until October 2008… Lugo received transfers from HVP Partners and the MK Entities as part of a buyout of his interest in HNP.”
I don’t even know if this is the same Luis Lugo, but if so, it’s remarkable to have the same name would pop up in two otherwise unrelated situations that I’ve dug into on this site. (And yes, Lugo Giusti also worked at Stanford Bank, an institution which seems to pop up in connection with every big story here.)
I tried to reach the PetroMagdalena Lugo via Twitter, which was the only place I saw a way to reach him, but as yet haven’t received a reply. As usual, I am happy to post replies from anyone mentioned.
UPDATED JUNE 20: I just got a comment saying that they are different Luises. Thanks, commentor. And to each of you, sorry for indicating that you had anything to do with the other.
* Not to distract too much from the main line of the story here, but Pacific Rubiales’ relationship with PMD has always been very close. Two Pacific Rubiales board members were shareholders of PMD before the stock started trading publicly. Pacific Rubiales spent $1.4 million on “general and administrative expenses” on behalf of Alange before the shares started trading. When Santos & Giusti left the company last year, the co-chairmen of Pacific Rubiales, Serafino Iacono and Miguel de la Campa, stepped in as new board members, buying up heaps of low-priced shares.
** According to Pacific Rubiales, “On September 8, 2011, Ecopetrol notified [Pacific Rubiales] that the Topoyaco block could not be transferred to PetroMagdalena. As a result, the Company and PetroMagdalena entered into a settlement agreement on December 13, 2011 whereby certain debts between the companies were set off against the remaining U.S.$7.5 million owing to PetroMagdalena and the Company now maintains a 50% interest in the Topoyaco block.” What’s odd is that PetroMagdalena put out an exploration update Sept. 11 that mentioned Topoyaco but never mentioned this regulatory decision. In fact, I don’t see that decision anywhere in the PetroMagdalena website or annual statements. So either Pacific Rubiales is confused or the news wasn’t important enough to PetroMagdalena to bother telling to shareholders.
Disclosures: I have no interest, long or short, in PetroMagdalena, Pacific Rubiales, or any other oil company. No one is paying for this article. My interest, as ever, is in finding interesting stories and showing them to the public.
I don’t know any investors in this sector who use earnings to assess junior explorers and producers. Investors tend to use cash flow, particularly cash flow from operations.
Petromagdalena (PMD.v) has a capital expenditure budget of $50 to $60 million for 2012. The company states that capital will be funded by available cash and internally generated cash flow. PMD had $15 million of cash and equivalents on hand at the end of 2010.
If PMD does not have to go back to the capital or debt markets to finance expenditures in 2012, then that is in of itself an accomplishment.
Anyhow we will all want to continue following PMD because it and joint venture partners are drilling close to la luna formation in the Middle Magdalena basin.
Disclosure: I do not own PMD.v.
I do know Luis Giusti Lugo personally and can tell you that the other story you linking him to is incorrect. It is not the same person. In Venezuela people go by their father’s last name. In which case he is Luis Giusti Jr. not Luis Lugo. Luis is a very common name in Venezuela, so is Lugo.