BUENOS
AIRES, Jan. 23, 2015 /CNW/
- On January 23, 2015, LAIG Oil
Investments issued the following open letter to shareholders of
Crown Point Energy Inc.
January 23,
2015
Dear Crown Point Energy Inc. shareholders,
We write to you as a concerned shareholder of
Crown Point Energy Inc. ("Crown Point", "CWV" or the "Company").
Unless we collectively take immediate action, the value of our
investment in the Company will be seriously impaired.
We have been a significant long-term investor in
the Company since 2012 and tried to maintain a constructive
dialogue with Management when we realized the serious issues the
Company was facing due to Management's incompetence, evidenced by a
ridiculously high level of expenses, a declining operating
performance and, ultimately and inevitably, a plummeting stock
price. As a result, last November we wrote to the Board informing
it that we owned close to 7% of the total outstanding shares,
outlining our concerns and proposing a number of important changes
required to improve shareholder value. Our proposal and
recommendations were based on a thorough analysis of the Company's
finances and operations. The response we received was
disappointing. Management and the Board resorted to ad
hominem attacks instead of addressing the serious issues we
raised. Their response not only mischaracterized LAIG as a
"misleading and dissident" shareholder, but also continued to
mislead shareholders with a series of inaccurate statements.
In a separate letter we intend to send to
Management and the Board (see below) and make available to
shareholders via SEDAR, we explain why CWV's underperformance is
mainly due to their incompetence and negligence.
Recent events highlight the disregard that
Management and the Board have for their fiduciary duties:
- For some time, Management has been unable to meet its own
financial and operational targets.
- After denying publicly the Company faced any financial
pressures, it rushed, without a shareholder vote, the consummation
of a highly dilutive equity financing when the stock was at a
historical low.
- The financing includes some changes in corporate governance
that serve to entrench Management and current Board members, which
eliminates any hope of improvement in the Company's fortunes.
- Management has not disclosed any plans to reduce G&A
expenses or to de-risk its main assets, and has offered no
satisfactory explanations to several actions taken in the last two
years that have resulted in a significant loss of shareholder
value.
- Management, with the acquiescence of the Board, has failed to
explain the rationale behind certain decisions that had a
significant adverse effect on the Company's valuation.
- Management and the Board failed to provide full disclosure to
the shareholders.
We urge the participation of all of the Company's
shareholders in the upcoming vote on February 24th, which will define the
future of the Company and the value of our investment. We request
that you vote against the transaction proposed by Management and
approved by the Board. Also, we request your support for an
alternative and improved equity financing proposal and a credible
plan to turn the Company around.
Management has entered into a highly dilutive
equity financing that allows Management to entrench itself
As you may know, Management proceeded with the
first step of an equity financing proposal pursuant to the terms of
an investment agreement (the "Investment Agreement") entered into
with two new investors in the Company (the "New Investors"). As a
result, the New Investors now own 19.9% of the Company´s shares.
This highly dilutive and, according to Management, "strategic and
transformative" transaction was completed without calling a
shareholder vote. Moreover, the transaction was deliberately
structured in two steps to circumvent the requirement for
shareholder approval. Although the Company denies this, why else
would the deal have been structured in two steps other than to
avoid the shareholder vote for the entire transaction? Moreover,
for several months Management told us that their capital
expenditure plans were fully funded. This was clearly not the
case.
Management and the Board are asking the Company's
existing shareholders to pay for their incompetence. The equity
financing will result in significant dilution, as it requires
issuing an additional 60% of the outstanding shares at a time the
Company's shares trade at historical lows. Let's be clear - the
Company ran out of cash because of the incompetence of Management.
The same Management that now imposes a huge cost to shareholders
while offering no plans to improve shareholder value through a
clear plan to reduce the Company's exorbitant expenses. Management
hasn't even properly explained how it will deploy the new
capital.
The Investment Agreement confirms the composition
of the current Board and increases its size to 9 members to
accommodate two directors nominated by the New Investors. As part
of the agreement, the New Investors have committed to support any
directors nominated by the Board until December 2015 and to maintain the current board
composition for a certain period of time. This ensures the
entrenchment of current Management and Board members, who are
responsible for the disastrous situation in which the Company finds
itself. We, the public shareholders and collective owners of a
substantial majority interest in the Company, cannot allow this to
happen.
In what would appear to be a breach of its
fiduciary obligations, the Board agreed to amend the financing so
that it would be even more dilutive to you, the shareholders. It
justified this decision by the "recent sharp decline in global oil
prices and other related factors." This doesn't make any sense. The
Company primarily sells gas and, in Argentina, gas prices are not currently
affected by international market conditions. Also, the price of oil
in Argentina as of January 2014 was 40% higher than international
Brent price. Finally, the Investment Agreement does not provide an
"out" to the New Investors as a result of changes in oil
prices.
Management has indicated that it initiated
negotiations for raising capital in March
2014 (when the stock price was around $0.80), but closed a transaction when the stock
price reached its historical lows. This resulted in significantly
higher dilution for current shareholders. At the same time,
Management was not willing to find different providers for such
equity financing, which would normally be the aim of a responsible
management, since they clearly did not entertain a negotiation with
LAIG, who was willing to invest more money in the Company as long
as expenses were reduced and the strategy corrected. Clearly,
Management was not worried about the dilution the shareholders
would suffer and, instead, were only worried about keeping their
jobs and high salaries. Management rejected our financing proposal
out of hand, without any attempt to negotiate improved terms.
Management incompetence led to the liquidity
crunch
Last December, we learned that the Company had
been facing short-term liquidity pressures since the end of August,
and that the first tranche of the financing was needed to fund the
Company´s near term commitments to develop Tierra del Fuego
("TDF"). Management appears to have known that this was going to
happen as early as last March, since they claim that that is when
they started negotiations with the New Investors. Until the equity
financing was announced last December, Management had repeatedly
stated that the Company had all the cash flow needed to fund its
two key projects, Cerro los Leones ("CLL") and TDF. Clearly, the
disclosure regarding the Company's funding requirements was
deficient.
Despite the public assurances to the contrary, we
were concerned about the state of the Company's finances and its
strategic direction (or lack thereof). LAIG executives personally
met with Mr. Murray McCartney, the
Company's CEO, in June 2014 in
Buenos Aires. At that time, he
explained that the Company had total CAPEX needs of approximately
$22MM and about $25MM to fund them ($11MM in cash, close to $10MM
in cash flow from operations and a line of credit from HSBC for
$4.5MM). If this was the case, why
was he already negotiating with the New Investors at that
time? Subsequently, we learned that the Company ran out of
cash after drilling only one well in CLL. By then, the Company had
also lost any revenue from El Valle (sold for a fraction of its
true value without proper disclosure of the reason behind the
ridiculously low price obtained), and spent all the cash flow
generated by TDF to fund an unjustifiably high level of expenses.
On October 30, 2014, we met again
with Mr. McCartney and Mr. Madden, the CFO. During the meeting they
assured us that the Company's working capital amounted to
approximately $7 million. Evidently,
this was not true, as shown in the latest quarterly results. This
is further evidence of Management's incompetence or its willingness
to mislead one of its largest shareholders.
Inability to control costs and lack of a
coherent strategy
Management has not yet disclosed any plans to
reduce G&A expenses or to de-risk its main assets and has not
offered a satisfactory explanation of several decisions taken in
the last two years that have resulted in a significant loss of
shareholder value.
Given the large fall in the stock price in the
last year and Management's failure to meet its own production
targets, LAIG conducted a thorough analysis of the Company's
finances, operations and strategy. We found a number of serious
problems in the way the Company was managed. Our conclusion is that
Management is more interested in entrenching itself than in
creating value for shareholders. We have enough evidence that leads
us to question Management's judgment, motivation, and
competence.
The Company's shareholders can expect to see
further impairment in the value of their investment in the Company
unless there are immediate changes to Management and Board.
An improved financing proposal
We will formally submit to the Board a binding
proposal to provide the second tranche contemplated under the
Investment Agreement, improving the price per share offered for the
new equity by 10%. We are effectively offering to purchase
34,034,296 Crown Point Energy newly issued common shares at a value
of US$0.275 per share under
substantially the same terms of the Investment Agreement. Our
proposal is not subject to any conditions other than those in the
Investment Agreement and is therefore more attractive for the
Company's shareholders.
We are asking the Board to include in its
Management Information Circular the submission for approval of our
proposal. We ask you to vote in favor of our proposal.
Our plan to turn the Company around
We believe that a coherent and effective strategy
is as important as the funding itself. Otherwise, the dilution
shareholders suffer would simply delay the inevitable depletion of
the Company's resources. We have a seasoned management team to
execute such strategy.
We propose to appoint a new CEO, who can start
immediately. Our candidate would bring more than 25 years of
experience managing private and public energy companies in
Argentina and other countries in
Latin America. Also, the new CEO
we are proposing has a successful track record of turning around
companies, reducing costs and increasing production and revenues.
This is exactly the type of CEO the Company needs right now. We
propose a new compensation model for the Company's top executives
that would be based primarily on the attainment of objective
measures of success and would include a high component of stock
and/or stock options to better align their interests with those of
shareholders.
The key aspects of our turnaround plan for the
Company include:
- Proving up and de-risking CLL, either by self-funded capital
expenditures and/or joint ventures/partnerships, advancing the
stalled process of defining the asset, deciding whether to proceed
testing in the La Hoyada X1 well, and designing a program and
securing equipment for re entering and testing Vega del Sol X1 well (which Management said is
not abandoned and has no well bore or well conditions impediments
for a testing and re entering).
- Defining the status of Laguna de Piedra and Cañadón Ramirez,
and either developing their full potential or divesting the
Company´s interest in these assets.
- Continuing to prioritize TDF and, if it requires Company
resources, ensuring the Company is reimbursed for any costs
incurred.
- Exploring potential strategic partnerships and value-creating
transactions.
- Drastically reducing the current level of G&A expenses, by
curtailing travel expenses and office expenses, eliminating the
double layer of management and reducing the overall number of
employees.
- Optimizing cash positions and expenditures in foreign
currencies and utilizing legal instruments to obtain a better
exchange rate in the event funds have to be transferred to
Argentina.
- Pursuing legal analysis of potential claims in favor of the
Company and seeking payment of written off receivables.
We also believe that the Members of the Board
should not only have relevant experience in the oil and gas sector,
but also relevant knowledge about operating a business in
Argentina. Finally, we believe
that both Management and Members of the Board must have "skin in
the game" in order to assure a proper alignment of interest with
the Company's shareholders.
We urge all shareholders to read our letter to
CEO and Board in full to get a clear understanding of the gravity
of the current situation and the need to take immediate action. A
copy of the letter will be made available under Crown Point's
company profile on SEDAR at http://www.sedar.com.
As we have conveyed in our public
communications during the past two months, we think the Company
faces a very difficult situation, which is clearly reflected in the
stock price. Management reluctantly admitted the seriousness of the
situation by seeking a financing that imposes massive dilution on
its shareholders. They are asking shareholders to pay for
Management's own mistakes without making any effort to reduce
expenses. We have an opportunity to change the course of the
Company we own. This opportunity is on February 24th, where we will be able
to vote down the transaction proposed by Management and vote in
favor of changing the Board, as proposed by LAIG. Also, we
challenge Management and the Board to do the right thing and allow
shareholders to also vote on the improved terms for the equity
financing LAIG is offering. Our interests are fully aligned with
yours. LAIG and its principals have a proven track record in the
energy sector in Latin America,
particularly in Argentina. We ask
you to trust us and give our nominees the opportunity to turn the
Company around.
We are available to answer any questions you may
have on our plans.
Proxy Solicitation
LAIG is publicly soliciting proxies for the
meeting of shareholders in reliance upon the public broadcast
exemption to the solicitation requirements under section 9.2(4) of
National Instrument 51-102 – Continuous Disclosure
Obligations and applicable Canadian corporate laws. Information
applicable to public broadcast solicitations (including with
respect to LAIG's nominees) in accordance with corporate and
securities laws has previously been provided by LAIG in its press
release dated December 1, 2014 under
the section entitled "Proxy Solicitation", which press release is
available under Crown Point's company profile on SEDAR at
http://www.sedar.com.
SOURCE LAIG Oil Investments