Is An ERHC Buyout In The Works?

Will ERHC sell its rights in the Nigeria-Sao Tome Joint Development Zone after blocks are awarded next week?

That's a question that has bedeviled investors and analysts alike, with this investor (I hold 123,000 shares) believing that yes, a buyout in the $6 range will occur in March. I base that on the pattern of accumulation investors have noticed in recent months, which suggest that someone other than short sellers has a motivation to keep the price low.

Friday's global release of a highly upbeat 1,500-word story by the Dow Jones Newswire, for instance, prompted almost 2.5 million shares of volume but only a $0.025 rise in share price.

I believe accumulators seeking a merger or buyout are doing so in groups, acquiring enough to keep them under the radar of the SEC filing requirements for those who have accumulated 5 percent of a company, or in groups somehow outside of SEC regulation. I understand, anecdotally, that ERHC was acquired that way from its founders the first time it ever changed hands.

Now, with First Atlantic Bank holding a block of 60 million shares - one it would presumably be willing to sell since it has been forced to merge with three other Nigerian banks to build up its reserves - and founder Sir Emeka Offor holding only about 36.48 percent (note that the 50.3 percent mentioned in the Dow Jones article is incorrect, having failed to account for the First Atlantic acquisition) - the potential for a change of ownership has increased dramatically.

We are not the first to suggest the possibility of a sale, and the company has a disclosed an arrangement to compensate one consultant in the event a sale is arranged by him. Their new lawyer, Frank Cascio, is also someone with oil company merger experience. Finally, the company took note in a recent filing that someone is gaming its shares outside of ERHC's control.

Meanwhile, the problem of short sellers was sharply reduced when ERHC appeared for nine days on the SEC's new Threshhold Securities List and then dropped off. MasterTrade, a company that used to make shares available to investors for short sales, now says "ERHC is no longer available to short."

So who and what is keeping the price down?

Again, I believe it is a company that is already associated with ERHC, or well known to it, that hopes to buy as much of ERHC as possible before completing its purchase with a buyout of some of founder Emeka Offor's shares. That would leave him in a comfortable back seat position, still able to profit but no longer so profoundly at risk. Many predicted he would never accept a lower profile - even as he did so, according to the Menas Associates energy consulting group, which said (after I did) that his lowered profile has already happened:

Some potential difficulties to a tie-up have been overcome. A veteran of the US oil industry has been appointed managing director of ERHC, in place of Chude Mba, and the decision of key shareholder ‘Sir’ Emeka Offor to take a lower profile in the company’s affairs has undoubtedly reduced the risk of partnership with ERHC for a potential US operator like Devon, given its concerns about compliance with US regulatory regimes.

According to Ken Silverstein's May 24, 2003, article in the Los Angeles Times:

About 4 billion barrels of crude are believed to lie beneath those waters. Without a drilling rig to its name, ERHC could reap hundreds of millions of dollars from its holdings. The company has not revealed its plans, but analysts predict it will sell its interest to one of the industry giants.

The theme was repeated in the Jan. 24, 2005, article by Dow Jones Newswires reporter Norval Scott:

Should ERHC's rights be validated through the block awards, the company's next move is unclear. Selling off its stakes to the highest bidder is one option, said Olly Owen, African analyst with U.S.-based economic consultancy Global Insight.

"Overall, the new crop of privately controlled domestic oil companies in Nigeria don't seem to be in the game for the long haul," Owen said.

"That's because slow-developing projects are seen as too high risk, due to the uncertain regional environment for investment. If making its outlay back appears too tortuous and tricky a process, ERHC will probably sell up," he added.

What should investors do? I believe that, first, they should not part with their shares under any circumstances until the blocks on offer by the JDZ are finally awarded - something that should occur next week.

Secondly, if they are interested in not just a quick profit but a long-term one, they should hold the security at least through the end of March. Then, if it is not bought out or merged, it will probably drop as the high cost of exploration and discovery loom ahead.

I plan to sell at a certain exit price, although I must say it keeps changing. I was initially set on selling at $1.20 and believed it would go as high as $1.28; I reined in my expectations due to the failure of good news to move the price earlier, dialing it all the way back to $0.78.

Now, depending on how widely the Dow Jones article gets circulated and how much of the JDZ we are awarded, I am hoping for something in the $1.78 range. What I have not decided is whether I should sell all my shares and buy something else, or just sell 23,000 and wait through March. I do believe that a buyout is in the works.

As is any decision involving a lot of my money and penny stocks, it is a perilous, risky decision, fraught with anxiety for me.