Barron's Sneaky Valentine To ERHC

An article on page 12 of the Feb. 14 Barron's weekly, in Bill Alpert's "Follow-Up" column, is an inverted Valentine to ERHC - i.e., the pointed side is up - and a carefully mounted attack on ERHC's former owners, oil investor Phil H. Nugent of New Orleans and Washington, D.C., lobbyist Noreen Wilson.

The article is ostensibly about Global Environmental Energy Corp. (GEEC), where Wilson is vice president for U.S. operations, and Nugent - according to Alpert - is a "current associate." On Jan. 21, GEEC signed a contract worth $9.75 billion with two Chinese firms to build up to 1,330 plants by 2010 to convert garbage to gas to generate 10 percent of China's electricity needs. Last Spring, it had also closed a deal with 20 percent-owner Diamond Ridge Advisors for a $250 million credit line that was later increased, Barron's indicates, to $2.08 billion.

The company, headed by former Irish Prime Minister Albert Reynolds, got a $51 million check from Diamond Ridge in September that was rejected by its bank, and as of the Barron's Feb. 7 was expecting a wire transfer to replace it. There is no indication from Barron's or GEEC that the wire transfer has materialized, and that is the basis for the story - along with the fact that the CEO, a fellow named Chris McCormack, didn't turn up for a hearing because he was busy making deals and sent Wilson in his place. The mention of Wilson precipitated a discussion of her former project, Environmental Remediation Holding Corp (ERHC), now named ERHC Energy.
Here's how the paragraph reads:

"[ERHC co-founder Noreen] Wilson has a long history of working with [GEEC attorney Wayne] Hartke - but as a public relations person who was paid in stock to promote companies like Environmental Remediation Holding. As a company, ERHC obtained the right to explore for oil in Sao Tome and Principe, a tiny two-island nation off of Nigeria. Hartke and his father, the late Sen. Vance Hartke, once represented the country - and ERHC - in the U.S. The oil-exploration-rights deal was cited as unfair by the World Bank and criticized by others as one of the worst ever secured by an oil-owning nation. Wilson had arranged the deal, working with yet another current associate of Global Environmental named Phil Nugent. Sao Tome politicians have acknowledged receiving financial favors from ERHC. The securities lawyer for ERHC and many other deals promoted by Wilson was Donald F. Mintmire - a Palm Beach, Fla., lawyer convicted Wednesday by a federal jury in Miami of obstructing an SEC investigation into a citrus exporter unrelated to ERHC or Global. Mintmire will appeal the verdict. [GEEC attorney Joseph A.] Artabane says the Mintmire allegations surprised Wilson."

Alpert has employed the "bomb in a suitcase" technique I invented more than 30 years ago when I fell into public affairs work for a California company after returning from a bomb-filled tour of duty in Northern Ireland as a war and foreign correspondent for the Village Voice. In Belfast, I made the not-very-astute observation that the best way for IRA bombers to get their munitions into the Europa Hotel across the street from me was in a suitcase, because while the barriers outside the hotel neutered some effects of car bombs, no one searched the guests' suitcases. They were an afterthought, and the hotel's Achilles heel. It was bombed 27 times.

A "bomb in a suitcase" is a paragraph or so of information in a longer article that seems tangential to most readers, but to the wise is nothing less than a bombshell; it was the only point of writing the 10-paragraph, 800-word story in the first place.

A bit of "deconstructive analysis," if you will, shows that the lengthy, complex paragraph on ERHC is 34 lines and 179 words long, or about 22 percent of the words, and is twice as long as all but one of the other paragraphs, 15 lines longer than the next-longest and takes up a full 25 percent of the two-column story.

The former name of ERHC Energy, Environmental Remediation Holding Corp. (Alpert dropped the "Corp."), is used in boldface, as is that of GEEC, the only other boldfaced name in the story. Barron's fact-checkers presumably missed the Feb. 4 name change reported by Dow Jones, its corporate sister. The paragraph is elongated to 34 lines because it is squeezed into the right-hand column where its bold-faced name appears immediately next to the lone small chart on the page that shows the price history for "Global Environ Energy," tying the boldfaced name just right of it to the chart's title.

This handsomely designed suitcase fits the hotel - the story - quite nicely. The narrative fuse sizzles along through its ties to the attorney son of a United States Senator, pausing to declare Wilson a stock promoter (the Los Angeles Times, in a front-page story on ERHC in 2003, called her a lobbyist) before it moves into a discussion of the overly generous terms of ERHC's deal with Sao Tome and Principe, which was once represented by Hartke's firm, glowing more brightly as it implies ERHC bribed Sao Tome officials, and finally ignites the dynamite: the link to Donald Mintmire, the lawyer convicted of obstruction who represented Wilson, Nugent, Bass et alii when they owned ERHC and in other deals. Finally, the smoke appears, as Alpert acknowledges that Mintmire's conviction has nothing to do with either GEEC or ERHC. All in all, it is a powerful piece of work, and whoever planted this bomb in Alpert's ear was a master of destruction. Just the same, his handiwork is a dud.

Bill Alpert's "reverse Valentine" may have had the pointy side up, but smart investors who also read Barron's will probably recognize the meaning of it. For ERHC investors, what was "unfair" to Sao Tome and Principe was, by fiat, greatly generous to ERHC Energy. The worst deal ever made by an oil-owning nation, of course, was also just about the best deal any oil company has ever gotten.

I wonder if these smarter investors will also note that in a publication geared not to foreign policy experts but to small investors, Alpert's emphasis is on how bad the deal was for the tiny islands of Sao Tome and Principe (population 140,000), not how good it was for ERHC. No one ever got rich overestimating the intelligence of penny stock investors, but like Woody Guthrie's Depression Era potato soup, this article's agenda is so clear "that even some of them thar politicians could see through it."

So the investors Barron's has jilted have to ask, like an abandoned lover does, "Why, oh why?"

Here are some obvious answers: First, the author and his sponsoring sources - more about them later - wanted to damage the reputations of Phil Nugent and Noreen Wilson that investors like the many-aliased stockhocker70 have worked so hard to revive. Why Nugent and Wilson?

With the late Sam L. Bass, Jr., these two founded the current incarnation of ERHC in 1997, and took away some 116 million shares then valued at around $2 million (and now worth $58 million) when - well after Wilson's 1998 resignation - ERHC was sold, first to Geoffrey Tirman in 1999 and then to Sir Emeka Offor of Nigeria in 2001. Note that the main paragraph of Barron's GEEC story concerns not GEEC but a company Wilson and Nugent left (with their hoard of stock) seven years ago.

Now, after Emeka Offor's loss of 60 million shares in a lawsuit settled last Nov. 10, they own a goodly chunk of the shares that would be necessary to mount a takeover of ERHC. As we pointed out last week, if the 116 million they own could buy First Atlantic Bank's 60 million shares away for about $30 million - or simply gain its proxy for free - they would need only add another $30 million worth from the open market to gain voting control of ERHC Energy. ERHC's rights amount to about 14 percent of the estimated 4 billion barrels of oil waiting in the deep, dark waters of the Gulf of Guinea's Nigeria-Sao Tome and Principe Joint Development Zone and Sao Tome's Exclusive Economic Zone. At current prices, that oil is worth $25.6 billion. The Nugent-Wilson group, or a rival mischief-maker among the multinationals, could get voting control of it all for $62 million or less, if no one stops them.

But "Why, oh why?"

Barron's is a Dow Jones publication and a sister of the Wall Street Journal, CBS Marketwatch and Dow Jones News Service. In the past month, complaints from ERHC investors about errors have forced the Dow Jones News Service and Dow Jones Newswire to run one glowing 1,500-word story on ERHC three times and a handsome story on its shareholder meeting twice. The first story, by Norval Scott, liberally quoted Nugent as he praised ERHC and its prospects, and also mentioned Wilson (both were also key sources for the 2,400-word Los Angeles Times front-pager). That's a lot of backpedaling to do, and you could, if you chose, look at Alpert's column as Dow Jones' way of getting even. To me, though, our clever master of destruction merely used that anger to spur the Alpert piece.

Deconstruction is a useful tool because once it has cleared the smoke and contextual debris away, it leaves only motives left standing. But a little more of the bulldozer first.

Alpert left key facts out of his piece:

• He never acknowledges that Wilson left ERHC in 1998, and that the trio sold ERHC to an interim owner, Geoffrey Tirman, in 1999, or that it was purchased in 2001 by Sir Emeka Offor, a friend of Tirman's.
  
  
• Alpert fails to mention that it was Tirman who accused Sao Tome politicians of demanding bribes, and that partly as a result of the fallout he was forced to sell the company. ERHC's contract required it to pay some educational expenses for Sao Tome children to study in the United States in order to build a cadre of economically-enlightened technocrats. Those gifts were used in part by the children of powerful Sao Tome politicians, and thus became the "favors" Alpert mentions.
  
  
• Alpert doesn't mention that ERHC's rights were challenged in Sao Tome's parliament this past year and that a bill to void them was rejected there.
  
  
• Alpert fails to mention that the Paris-based International Chamber of Commerce was the arbitrator of ERHC's contract terms with Sao Tome, and that it upheld them, or that ERHC voluntarily renegotiated the rights with Sao Tome and got itself an even better deal.
  
  
• Alpert fails to note that ExxonMobil and the South African-owned, London-based Equator Exploration Lltd. came by their preferential rights in the nine Joint Development Zone blocks and the Sao Tome Exclusive Economic Zone pretty much in the same way ERHC came by theirs. As political analyst Gerhard Seibert writes, "Indeed, Mobil was able to clinch an exclusive deal in STP (which apparently included the right to first refusal on all blocks) as other major companies such as Exxon and Shell were believed to have backed away from the offering because of unresolved issues concerning STP’s maritime boundaries with its neighbours."
  
  
• Alpert also failed to mention that the rights ERHC gained are incorporated by reference into the formal international treaty between Nigeria and Sao Tome, leaving them virtually invulnerable to legal attacks.
  
  
• Alpert could have told his readers that Mintmire hasn't been of counsel to ERHC for several years.

Obviously, Alpert was not working for his readers when he wrote this piece. So who planted his "bomb in a suitcase"? To answer that, the investigative journalist in me would say, "Follow the money." Let's see where that might lead:

• Short sellers, including some of the professed longs who have touted GEEC on the ERHC message board, will benefit from a drop in share price, at least of GEEC. Cashing out now, though, might give Nugent and Wilson et alii enough cash to buy control of ERHC. You can be sure they will not be the last to bail - or to short. In fact, with a few filings, they may be able to make a fortune in both directions. Short sellers of GEEC may get mightily smacked, though, if the wire transfer materialized after Barron's Feb. 7 deadline; nothing in Nugent's and Wilson's histories suggests they can't deliver when the chips are down. The stock fell 12 percent on Friday, or some $0.20 cents, after the fourth day of exposure to the Barron's attack.
  
  
• Savvy ERHC investors who understand the bulletproof nature of ERHC's deal may get a key buying opportunity shortly before awards are announced.
  
  
• Accumulators, whom we insist are planning to take over ERHC, can consolidate their current holdings at anywhere from a future $0.27 to $0.42, where the share price is likely to land if awards don't come soon. But that presumes there are a lot of naive investors left in ERHC, and we're not sure that's the case. What may happen instead is that accumulators will open the day with very low asks on a limited amount of stock, driving it sharply down in the thin market of recent weeks. Since they have slowly perfected this "dump and pump" technique, they ought to be able to get it down to $0.43, a very attractive level for such buyers (and for me) before they run out of idiots willing to sell. Recovery in advance of heat from leaks of pending awards announcements will be slow but steady, in this scenario.

That brings us to the final pieces of the Barron's puzzle. Let's recall that several publications have gone out of their way to characterize the relationship between oil majors and ERHC, who are bidding against each other in the Joint Development Zone, as like that between hard-working people and "freeloaders," the word used in an article by an anonymous writer in the high-ticket "Energy Compass" on Feb. 8. Menas Associates, an oil consulting firm, talked about ERHC and one of its partners' "concerns about compliance with US regulatory regimes." Barry Morgan of UpstreamOnline, in the more benign form of implication, suggested the oil majors were essentially jealous that ERHC was getting for free what they pay dearly for. Seibert, an academic whose last reports appear to have been sponsored by someone unfriendly to ERHC, has pursued other attacks on ERHC through Yahoo's Sao Tome message board.

I believe these kinds of attacks, which are at once more covert - i.e., better hidden from the general investing community - and more focused in their placement, all serve the same interest: the multinational p.r. player ExxonMobil, portraying it only as a benevolent donor concerned with the welfare of Sao Tome (while raking in $25 billion in last-quarter profits, about 250 times more than Sao Tome's annual budget). Ironically, as UpstreamOnline and other publications have reported, it is ExxonMobil that is holding up the process that would finally deliver hundreds of millions of dollars in signature bonus fees to Sao Tome, and tens of billions of dollars in oil royalties down the line.

By directing attention away from its own delay in choosing how and whether to exercise its preferential rights in the second bidding round, ExxonMobil undermines ERHC's memorandized partnerships with Noble Drilling, Pioneer Natural Resources and Devon Energy, justifies the continued pauperization of Sao Tome and Principe, and uses its delays as leverage against both Sao Tome's financial needs and Nigeria's independent licensing schedule - it has its own Exclusive Economic Zone auction on hold pending ExxonMobil's decisions - in a far more effective way.

Both nations are thus being inexorably pressured by ExxonMobil, we believe, to break its treaty terms and abandon ERHC. So doing will make the Devon Energy, Noble Drilling and Pioneer Natural Resources bids - all based on ERHC's preferential rights - instantly evaporate, and give ExxonMobil, with its two 25 percent preferential entitlements in Blocks 2 and 4, operatorship in at least two and possibly three of the most promising offshore deposits in the world. As the Menas Associates newsletter pointed out, "Without Devon there was a possibility that ExxonMobil could have won the operatorship through exercise of its opt-in rights, though it may need a partner among the bidders."

We believe it has more than one among the bidders, and probably one of those five or six that appeared so late in the process that their names went unreported when the second-round bids were opened on Dec. 15.

ExxonMobil is a substantial advertiser, not to mention one of the largest companies anywhere, and we think their hand is behind the dud bombshell. They accomplished little, but they did undercut their rivals and at the same time put a crimp in one of the world's most important technologies. Nugent and Wilson are turning garbage into energy, and GEEC is growing fast, especially in China, which should become a major market for ExxonMobil but may not because of GEEC's waste gasification plants. There's a lot more garbage than there is oil, remember, and it's an awful lot cheaper to find. And even if it helps Nugent and Wilson make a fortune playing GEEC up and down and they then go for ERHC, that will disrupt and distract ExxonMobil's upstart rival and might spoil the party for our mid-tier partners.

Unfortunately for ExxonMobil, I think, its pure savagery on the playing fields of business has not translated into a popular political presence in Nigeria, which tends to control the Gulf of Guinea bidding process.

While most of the violence of indigenous assaults against multinational facilities have targeted those of Royal Dutch/Shell and ChevronTexaco [Disclosure: my family holds about 3,600 shares of CVX], ExxonMobil has done little to endear itself. It is a very, very long way from having co-opted majority politicians in either Nigeria or Sao Tome, I think. And if it has skillfully exploited opposition figures in the Nigerian Senate and Sao Tome parliament, I believe those figures have found their efforts on behalf of ExxonMobil a bit embarrassing. By refusing to cooperate further, the politicians may have to brave some modest scandal-mongering proposed to the press by ExxonMobil, but they will survive it a little wiser for wear.

So will ERHC Energy's 2,250 core investors, I hope, used, abused and now somewhat less confused by the tactical skills of one of the most powerful marketing companies on the planet.

Disclosure: Joe Shea owns 123,040 shares of ERHC.