Friday, December 01, 2006

Upstream Article Roils Waters; Some Investors Wary, But Deal Holds Promise

An article in UpstreamOnline that talks about a complex deal involving a company called Starcrest and ERHC Energy and the dilution of ERHE shares has left investors in an uproar - most of them angry at Upstream for what they say is an unfounded new attack on the company.

As we said in our last post, the company was due a $0.05 share price hike after good news on drilling rigs and schedules leaked from the Nigeria-Sao Tome and Principe and Joint Development Authority. The new revelation set off a small wave of selling this morning at the bell, though, with 28,000 shares trading before a buy was made and the price falling from the opening Bid of $0.385 and Offer of $0.39 to $0.365 and $0.375 at 10:08am EST, respectively. Trading is light. Note: We had mentioned a downside in our last column, too.

The article was written by Barry Morgan, who has written frequently about the company in the past. While he is often praised, yesterday's missive - or missile, more like it - detonated a growing stockpile of anger among shareholders who have seen their investment languish for endless months of low volume as the company awaits the next step by the SEC and the Justice Dept. in the Foreign Corrupt Practices Act probe of the company that began last April.

The problem, in short, is that the aticle says ERHC Energy CEO Sir Emeka Offor owns both companies, and by issuing new ERHE shares to acquire all of Starcrest he would then reap those shares, as well, increasing his stake in ERHE from 43 percent to 70 percent.

The deal as outlined is a stroke of genius that may leave his critics awed yet angrier than ever. The prospects of OPL 291 are the caveat in any criticism, though. If ERHC Energy ends up as owner of Starcrest and its rights in OPL 291, and the block as expected pays off in a big strike, the company's fortunes could again soar overnight. The dilution issue would evaporate in that case.

The positive side of the article is that Offor is not sitting on his thumbs while the majors mount their political attacks through the U.S. Justice Deopt. and SEC; instead, he is seeing opportunities and taking them, appearances be damned. That is how billionaires are made.

Here is the article:

Nigeria defiant over its awards Ministry says round followed 'routine practice' but potential future bidders stay wary

By Upstream staff

THE Nigerian Ministry of Petroleum has defended the way it awarded deep-water blocks outside of procedures dictated for last May's mini-round, suggesting "routine oil industry practice" was followed.

Majors bidding for the blocks remain unconvinced, clouding plans to hold another licensing exercise before the end of the year.

The acquisition by Addax Petroleum of Nigerian independent Starcrest's interest in OPL 291 was defended as "in line with the open and transparent bidding for acreage allocation in the 2005 round", according to ministry spokesman Peter Ogbonnaya. The same process will be adopted in future rounds, he said.

Minister of State for Petroleum Edmund Daukoru insisted Starcrest, in partnership with Taiwan's Chinese Petroleum Corporation, qualified to participate in the mini-round, winning OPLs 226 and 294 while Transcorp won OPLs 281 and 295.

India's Oil & Natural Gas Corporation/Mittal Energy tie-up won right of first refusal to OPL 291 but did not submit any bid, leaving the acreage stranded, Daukoru said.

This justified a request by both Transcorp and Starcrest/CPC to swap their own blocks for OPL 291, but Transcorp failed to pay the signature bonus, leaving the way clear for Starcrest/CPC to find $55 million and secure the block.

When CPC withdrew, Starcrest applied to replace its operating partner with Addax. Daukoru's explanation has left industry observers wondering why, if everything was above board, the director of the Department of Petroleum Resources (DPR) Tony Chukwueke was forced out of his job so abruptly two weeks ago.

Neither Transcorp nor Starcrest indicated interest in OPL 291 at the time, nor did they later apply on the floor of the conference to swap their own blocks for the acreage, said a senior executive present during proceedings.

Both companies are alleged to be associated with close business allies of the presidency and to have benefited from secret post-bidding manoeuvres, unwitnessed by other participants.

Faith in the ability of Abuja to conduct fair and open tendering before next April's elections has collapsed, as has morale at the DPR.

Junior assistant director of finance Chioma Njoku has been appointed acting director of the DPR, over the heads of more senior directors such as veteran upstream petrocrats Billy Agha and Olutoye Ibikunle who were deemed to be too close to Chukwueke.

Starcrest is owned by Ibo business magnate Emeka Offor and is under investigation by Abuja's Economic & Financial Crimes Commission.

Starcrest tried its luck with Sinopec after the deal with CPC fell through but the Beijing giant was unhappy with the tight time frame for concluding an agreement on OPL 294.

Addax persuaded Starcrest to instead pursue OPL 291 and in partnership with Starcrest managed to secure terms from the DPR exactly similar to the deal Addax had earlier signed with ERHC Energy in the Joint Development Zone.

At least 43% of ERHC equity is also owned by Offor, who has angled to acquire Starcrest by issuing additional ERHC shares - a move that at one fell swoop would land him about 70% of ERHC stock in the most prospective frontier oil province in west Africa. Minnow ERHC enjoys a key position with Addax in JDZ blocks 2, 3 and 4.

Offor also came under fire this week from Colorado-registered ERHC shareholders for appearing to commit a breach of fiduciary duty by diverting a commercial opportunity for his own benefit, preferring to press the interests of Starcrest rather than ERHC in Nigeria's Exclusive Economic Zone.

Burgeoning disquiet among ERHC shareholders may yet result in a class action derivative lawsuit under US federal jurisdiction designed to prompt Offor to revaluate his acquisition strategy in the Gulf of Guinea.

A spotlight thrown on the world of Nigerian licence allocations at this juncture could dissolve all confidence in the country's upstream policy until a new administration takes charge next May.
01 December 2006 00:01 GMT | last updated: 01 December 2006 00:01 GMT.

What is fascinaing is how incredibly agile Mr. Offor is when it comes to making deals. He had set his eye on two other non-JDZ blocks and won them, but was apparently persuaded by his JDZ partners at Addax to swap them for OPL 291 instead. The winning bid for OPL 291 was from India's ONGC, another crafty player, but ONGC couldn't pay the hefty $55 million licensing fee.
Starcrest's original partner in the bid for the two other blocks (collateral for the swap), Chinese Petroleum Corp., dropped out, and Offor tried to link with Sinopec, a government-owned Chinese company, but it couldn't make a quick decision and Offor replaced them with Addax. With Addax, he got the identical good deal he got from the Swiss driller in their JDZ partnership.

Once again, as other companies faltered, Offor seized the day and came out on top.

That has always been the pattern: In Blocks 2 and 3, he replaced Pioneer and Devon with Sinopec and Addax in a heartbeat, just as he'd earlier replaced Noble Energy with Addax in Block 4. The process, from the outside, looked seamless and brilliant; investors shocked by the Noble defection sold out, and the ERHE share price shot up almost instantly; the same occurred in Blocks 2 and 3, with sharp price drops followed by sharp rises when the malefactors were replaced.

But is that in the cards today and tomorrow?

We're dealing, if you'll permit me to abuse the paradigm of myth, with a many-footed Hydra, and there are thus more than two shoes that may fall. My suspicion is that an announcement on the SEC and Justice Dept. probes is near, perhaps within a business day or two. I expect it to be a positive announcement, but I am not urging investors to bet that I am right. To me, the place to be right now is on the sidelines, watching a fabulous football game in which all the players but one wear sunglasses. If the ball disappears in the sun, he's fried; if the skies cloud over, they are blind.

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