When we issued a caveat yesterday noting that "The unanticipated happens often in Africa," we did not anticipate today's big move. Here's what happened:
Sir Emeka Offor, K.C., chairman of ERHC Energy and of Chrome Energy Services, its sole lender, issued himself $38,743,509.86 worth of unregistered - meaning they cannot be sold for a year because they were not purchased in a public offering - ERHC Energy shares, surrendering whatever was still available on a $2.5-million credit line for company operations, and in so doing wiped out all of our $12.646-million debt to his Chrome Energy Services, a Bahamas-based company which is controlled solely by him, while diluting the value of our stock by about 11.5 percent, or $0.061 cents at the current price.
The short-term consequence, barring news tomorrow morning of a new Joint Ministerial Council meeting to make awards, will be - at a minimum - a $0.061 cent drop in share price to account for dilution.
Then, and only then, will investors start to ask themselves, "What does it mean that this company has rights to a minimum of about 560 million barrels of oil and is debt-free, while selling at only $0.469 cents?" My answer to that would be, "What kind of a rate can you give me for a third note on my house?"
Regardless of how the stock is priced tomorrow, the dilution downer will be instantly erased in the warm glow of block awards.
I did some interesting math last evening, and like all my math someone should double-check it. But I figure that the dilution is going to cost us about $0.50 of the new high we expect to reach upon awards.
I had originally said in early January that I had expected $1.28. Then I bumped that after some good news to $1.78. The irony is that Mr. Offor would have seen greater actual cash appreciation from his 225-odd million shares at $1.78 than he will from 306 million at $1.28, by about $24 million.
A year from now, no one will ask, as one poster on the frantic Raging Bull ERHE message board did Tuesday when 2 million shares were sold into the surge, "Where are all the shares coming from?" At the current average daily volume, if each day only these shares were sold, it would take 146 consecutive trading days to sell all the sharas Offor acquired on Jan. 28.
Several posters on Raging Bull noted that the move was signalled clearly in the Dec. 10-K; none of them, however, posted about it at the time.
The dilution means that in effect we gave back all the gains since last Saturday's notification to ExxonMobil by the Nigeria-Sao Tome and Principe Joint Development Authority, some $0.061 cents, to about $0.479. For the ERHC On The Move portfolio of 123,040 shares, those $0.061 cents mean a paper loss of $7,505.44, which is likely to be topped by another $7,200 actual loss in share price this morning. Mr. Offor essentially relieved me of $14,700 before supper. I will, of course, get it back.
The new shares, giving Offor a total of 306,091,433, or 42.97 percent, helps solidify Offor's voting control of the company but leaves him about 7.04 percent of majority control. We will talk more about that soon.
Update, 1:53am EST, 2/25/05: The market did take back five cents of the six I predicted, but slowly gave it back - slowly, that is, until our post at 3:12pm EST (see the story above this one on Thursday's trading) - when we said the market had turned in our favor and the price suddenly began to rise, finishing in extended hours with a $0.025 gain. That amounted to a take-away for ERHC On The Move of $6,152 - $1,230 less than anticipated - and a giveback of all that and another $3,076. It would lead one to the conclusion that Mr. Offor is wiser than I am in these matters. But I did get it back.
Here is the press release:
ERHE: Agrees to Cancel Conv Note -
Issues 73.1M Cmn Shrs [delayed]
Ridgeland, MS, Feb. 23, 2005
ERHC Energy Inc (OTCBB : ERHE) reported that as January 28, 2005, ERHC Energy Inc. agreed to cancel that certain Consolidated Convertible Note, dated as of December 15, 2004, in favor of Chrome Energy, LLC, an affiliated entity, with a principal balance of $10,134,084.42 and accrued interest as of January 28, 2005 of $146,597.17 and that certain Promissory Note, dated as of December 15, 2004, in favor of Chrome with an original principal amount of $2,500,000 and accrued interest as of January 28, 2005 of $11,986.30. As of February 14, 2005, ERHC has received the entire $2,500,000 principal balance of the Promissory note and is therefore, canceling the Consolidated Note and the Promissory Note by converting the total outstanding principal and accrued interest as of January 28, 2005.
On January 28, 2005, ERHC agreed, upon the funding of the entire $2,500,000 of the Promissory Note, to issue to Chrome 73,100,962 of unregistered shares of ERHC common stock in conversion of the entire outstanding principal and accrued interest of the Consolidated Note and the Promissory Note. The Consolidated Note was converted at $0.175 per share pursuant to the terms of such note and cancelled in its entirety. The Promissory Note was converted at $0.175 per share pursuant to the terms of such note and cancelled in its entirety.
Go to http://www.sec.gov/edgar to read the S-8 filing.
*Thanks to the late novelist Grace Paley for this headline.
6 comments:
So, is this a good thing for erhe?
Joe, Thanks for posting this and your other posts. Is this loan fair? First ERHE is receiving forgiveness of $9 million debt plus getting $2.5 million for current operations (so that adds up to $11.5 million in favor of ERHE).
Chrome must also pay .175 per share to convert debenture into ERHE common stock (so that means Chrome must pay approximately $12.8 million).
Total received by ERHE is approximately $24.3 million.
Issuance of 73.1 million shares is worth approximately $39.4 million at today's ERHE common share price of .54.
So the net difference in favor of Chrome is approximately $15.1 million at today's price.
It does not seem to be a fair deal negotiated at arm's length when loans of $11.5 million result in a gain of $15.1 million to Chrome.
That $15.1 million windfall for Chrome will grow much larger once awards are announced and production begins.
Joe, what is your take on this financial transaction announced so close to awards?
Is it a sign of confidence on the part of Chrome that ERHE will prevail in one Block or more?
Please re-read the post. I've tried to address some of your questions there.
I do feel that Mr. Offor put his own interests well ahead of his shareholders'. After awards, the debt could have been paid off with cash at a better share price if he had really wanted to reduce our debt. I feel there was a measure of desperation in this move, but it could well be a signal that a buyout is also imminent and that the pre-negotiated buyer wants a clean set of books. And to his credit, it also saves us those very, very hefty annual interest payments.
Thanks, Joe, for addressing some of our concerns. In Africa, it is half step forward and baby step backward, but we'll back into awards soon. Keep up the good reporting!
First, these were convertible notes. So, Offer would rather have equity then debt - I see this as positive. Offer now has additional 78M shares of interst to pump up the value of erhc. It also appears he is working toward majority ownership again. Bet he had it all figured out when he parted with his 60M shares to First Atlantic. Whatever that benefits Offer will also benefit the shareholders. If erhe goes to $1 Offer's holding will be worth that much more. With an aboslure clean balance sheet erhc is in a nice position to do well. They'll have a strong cash flow, no debt, very ripe for takeover or sell out. Either way works for me. ALso, HE CAN"T SELL FOR A YEAR SO NO IMMEDIATE DILUTION TO WORRY ABOUT. OFFER has the incentive to make sure the pps goes up and is sustained for at least a year. Be smart and do your dd.
Please kee in mind that over $10mm of the amount, plus accrued interest, has been outstanding for a long time and convertible at $0.20. He was offered, backed up by a fairness opinion written by a highly respected firm who does these things, the opportunity to have his conversion price reduced to $0.175 if he funded the company with an additional $2.5mm cash. This got the "going concern" clause removed, ultimately cancelled all debt and made the balance sheet as clean as a whistle (ripe for takeover). All that for the company issuing an additional 7.3 mm shares from the note and 14.3 mm shares from the line of credit. The conversion price of $0.175 on the line of credit is a bit harsh, but give the man his due. He has provided more value to the company that we dared to dream about and received nothing for it until now. Giving him what amounts to 21.6 mm shares (means he wins if we all win) for all his work is a bargain. Any of you have shoulders broad enough to have held this formerly sinking ship afloat for 4 years or $2.5mm cash to spare? I didn't think so.
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