Little Fantasies And Large Ones Spur Investors

It's strange what the lure of money does to some people. It distorts their logic, draws them into illusion, and leaves them grasping at straws when reality doesn't match their vision.

That's apparently what's happened to many investors in the past week, and they are typified by some on Raging Bull's ERHE message board who insist that Noble Energy, Devon Energy and Pioneer Natural Resources have so much money they don't mind loaning us the extra $25 million ERHC Energy needs to cover its share of the increased signature bonus fees.

President Fradique de Menezes forced us to pay this money by delaying his signature on the awards document, thereby earning an additional $21,600,000 for Sao Tome and Principe that the cash-strapped tiny nation would not have gotten had he signed right away. Good for him, I say!

But there has been a long-standing fantasy propagated on Raging Bull that whatever signature bonus fees had to be paid, our partners would pay them for us. No company press release or any other person in the know has ever said that; it is an invention based on wishful thinking and a single cryptic comment by our CEO, Ali Memon.

True, Memon mentioned the possibility of trading the original signature bonus fees we'd pay for part of our percentages in the five blocks. But beyond that one comment at the shareholder's meeting last February, there's been nothing. The reality is that it is money we have to pay, and it's part of the cost of doing business in the big leagues.

A recent post by Mabenn amply illustrates the lure of big cash. It's post number 52292 if you'd like to read the whole thing first; I have excerpted it and analyzed it below.

Mabenn, who usually seems like an honest person, starts his or her take on the bonus fees this way:

I have always believed that the partnership agreements were all about ERHE obtaining the required financing for participation in the blocks through carried interests. I still believe this. So I am starting with the assumption that any increase in signature bonuses will be born by our partners.

The world would be a lot better place if others did what we believe they might do. What Mabenn is saying with phrases like "I have always believed" and "I still believe" is that he or she lacks any information on this point. But the math is suspect, too:

In blk 2 ERHE is partnered with DVN and PXD. Our original bid was $50M. Suppose the consortium had hoped to win 90% of block 2. ERHE had 30% signature bonus free, so the partners would have had to pony up only $30M (60% of $50 M). We now understand that the signature bonus will be $71 M and the consortium won only 65%. So now they are faced with signature bonus payments of $24.5M (35% of $71 M). Actually a decrease of $5.5 M in what they may have planned on potentially spending. Even if you do the same comparison with only the 65% at the original bid and at the final bid price, the increase in signature bonus is only $7.3M.

I am not sure of the relevance of what anyone "hoped" to win. He is correct that ERHE had a 30 percent option that was bonus-free. But we were awarded 65 percent of the block with our partners; that's what the JDA and the Houston Chronicle say (the companies refused to comment). We have rights to one-third of that additional acreage.

That means that together, ERHC, Devon and Pioneer have to pay 35 percent of the signature bonus, which is .35 x $71 million, or $24,850,000. Our third of that is $8,283,333. Mabenn inexplicably mentions a factor called "what they may have planned on potentially spending," which when parsed with the strategic "may" and "potentially" mean absolutely nothing except that Mabenn doesn't know. And yet Mabenn discounts the overall bill by $5.5 million, based on that reasoning, and comes up with a figure of $7.3 million.

Then Mabenn goes through the same strange exercise on Block 4:

In block 4, NBL/ERHE bid $57.3 M vs. Anadarko’s bid of $90M. Suppose the consortium had hoped to win 90% of block 4 at their $57.3 M bid. ERHE had 25% signature bonus free, so the partners would have had to pony up $37.2 M (65% of $57.3 M). We now understand that the signature bonus will be $90 M and the consortium won only 60%. So now they are faced with signature bonus payments of $31.5 M (35% of $90 M). Actually a decrease of $5.7 M in what they may have planned on potentially spending. Even if you do the same comparison with only the 60% at the original bid and at the final bid price, the increase in signature bonus is only $11.5M.

Here, everything starts with "Suppose," and Mabenn doesn't mean ladies underwear. From "Suppose" it's on to "the consortium had hoped," and from this Mabenn posits the result, "it would have had to," resulting in "actually," as though it were real, followed by "a decrease in $5.7 M in what they may have planned on potentially spending," another phrase upon which wise men would not bet the farm. Then it is on to "Even if," and Mabenn declares at the end of this fantasy that "the increase in signature bonus is only $11.5 M."


Well, in the world Mabenn inhabits, the world of the possible and the subjunctive, perhaps that is so.

But in the oil industry, the Block 4 rights we had bonus-free were 25 percent, and that leaves 35 percent of the difference between $57 million and $90 million to divide three ways. One third of $33 million is $11 million. So now we owe a total of $11 million and $8,283,333, and to that we have to add our 15 percent of the $37 million winning bid in Block 5, where we do pay a bonus fee for our option, which is $5,550,000. These three numbers add up to $24,833,333 and change.

But that's not what Mabenn's analysis comes up with:

So in the very worst-case comparison DVN and PXD have to pay an additional $7.3M in blk 2 (DVN and PXD collectively generated $5.9 B in cash from operations last year), and NBL has to pay an additional $11.5 M in blk 4 (NBL generated $700M in cash from operations last year). In considering what they may have planned on spending, the total signature bonus payments may be as much as $11.2 M less than they planned.

What in heaven's name does this mean? Well, Mabenn says it means, "Given the size of the potential reserves, I’m certain no one has any problem paying an additional $18.8M in signature bonuses for blks 2 and 4."

I did not parse Mabenn's post to make fun, but to illustrate the way many Raging Bull posters lure investors into believing things that they may sincerely think are true but are "actually" pure fiction. Mabenn is reportedly a lawyer, and would seem likely to be a rational person, but when it comes to what Mabenn and others would like to believe about ERHC Energy's obligations, they just go off the deep end.

We have to come up with about $25 million. Our Chairman transferred all 306 million of his shares about two months ago to his company, Chrome Energy, on Grand Cayman Island, and thus Chrome may have no obligation to report as a U.S.-based firm would. He has probably been selling from the very first opportunity, knowing that this extra cash might have to be raised as a deal-closer.

The past week some 31 million shares traded. Some of them could be the 25,407,122 shares Offor purchased at market at around $0.40 each and that he reported he owned as of December 21, 2004. From the SEC filings he made in February about these purchases, I believe these are control but not restricted securities and can be sold freely at a $5 million profit at the current price, and $10 million at the recent high of $0.81.

Chrome's selling, of so, would only depress the price until $25 million is raised; then we will start to see the kind of share price we expected to see on awards day. Or so I believe; perhaps my own fantasies are just a little bit more realistic.

But take a look at the other, positive side of this signature bonus business. Of the total 500 percent of all the blocks, we had options on 105 percent - 30, 25, 20, 15 and 15 percent. Then we have one-third of the additional acreage in Blocks 2 and 4, amounting to another 11.6 percent in each, or 23.2 plus 105, or 128.2 percent. Converting this to a percentage (128.2 divided by 500) yields 25.64 percent of the total.

There are, according to no less a personage than Washington bureau reporter David Ivanovich of the Houston Chronicle, an estimated 11 billion barrels of oil in the blocks: "ERHC Energy has been awarded equity stakes in five different blocks in West Africa's oil-rich Gulf of Guinea, in waters believed to hold more than 11 billion barrels of crude," is what the article says.

Unfortunately, the 11 billion represents the entire JDZ, not just these five blocks, and with an additional (bonus-payable) 15 percent entitlement in Block 9, we only have 120 percent of 900 percent, or 12 percent of the JDZ's presumed wealth, which is only worth $79.2 billion at Friday's prices.

Now, it may be that we'll only get $3 or $6 or $8 per barrel after it's recovered from the deep blue sea, yet that's still a whole lot of money. If we got just $3 a barrel, we'd have $4.44 billion in the bank. A $25 million bonus fee won't look like much when the oil starts flowing.

That's why we need to end the fantasies, endure the selling, pay the fees, and start drilling for oil next year. That should be our dream.