The U.S. Securities and Exchange Commission has charged Miller Energy Resources Inc. and three people associated with the company with overvaluing its Alaska properties.
On the same day, several creditors filed an involuntary petition to force the Miller Energy subsidiary Cook Inlet Energy LLC into bankruptcy, which the company wants to avoid.
The Atlanta Regional Office of the SEC launched administrative proceedings against the Tennessee-based independent on Aug. 6. The 19-page order accused the company, its former Chief Financial Officer Paul W. Boyd, its recently resigned Chief Operating Officer David M. Hall and its former independent auditor Carlton W. Vogt III with inflating the value of the company’s oil and gas properties in Alaska by more than $400 million. “The allegedly inflated valuation had a significant impact, turning a penny-stock company into one that eventually listed on the New York Stock Exchange, where its stock reached a 2013 high of nearly $9 per share,” the SEC wrote in a statement.
The order requires the company to file a response within 20 days, requires a public hearing within the next 30 to 60 days and requires an initial decision within 300 days.
Although Miller Energy had yet to file its response by the time Petroleum News went to print, the company said in a statement, “While the Company believes the action is not warranted by the facts or the law, current management has taken the allegations seriously and is working with the company’s Board of Directors to effect appropriate actions.”
The company also said that it objected to SEC filing the case with an administrative law judge employed by the SEC and would prefer “the more neutral forum of the federal courts.”
Despite its decision to fight the charges, the company announced that Hall had chosen to resign, effective immediately, following the SEC announcement, “in light of the commission’s allegations and the interference they would cause in performing his duties.”
In the week leading up to the charges, Miller Energy had showed signs of strain.
As part of its quarterly earnings report on July 29, the company said it was considering a variety of options to improve its financial position, including asset sales. The company also said that SEC staff had recommended a civil claim. The next day, the company said it had been suspended from the New York Stock Exchange for failing to maintain an average market capitalization of at least $15 million over the preceding 30 trading days.
Properties acquired in 2009
Through the bankruptcy proceedings of a former operator, the Miller Energy subsidiary Cook Inlet Energy LLC acquired a package of west side Cook Inlet oil and gas properties in December 2009 for $2.25 million plus some $2 million in assumed liabilities.
The sale followed a year where the previous operator had failed to find a willing buyer, abandoned the properties and reclaimed them when renewed interest justified an auction.
In March 2010, in its first quarterly report following the acquisition, Miller Energy “reported a value of $480 million for the Alaska acquisition, which amount was comprised of $368 million for oil and gas properties and $110 million for fixed assets. Miller Energy also reported an after-tax $277 million ‘bargain purchase gain,’ which boosted net income for the quarter to $272 million - an enormous increase over the $556,097 loss reported for the same period the year before,” according to the SEC.
The increase, according to the SEC, allowed Miller Energy to greatly increase it stock value, which in turn allowed the company to secure considerable debt and equity.
The SEC accused the company and the three associates of failing to use “generally accepting accounting practices” when it valued those properties in the quarterly report.
The SEC accused the company of using a reserve report to determine the fair market value of its assets, which is improper under current regulatory guidelines. The reserve report was inadequate, according to the SEC, because it gave no consideration to income taxes, used an inappropriate “discount rate,” overstated cash flows, excluded retirement obligations and “intentionally overstated” projected operating and capital expenses.
Market chaos
The events in question occurred while the Cook Inlet market was in disarray.
The previous operator, Pacific Energy Resources Ltd., had acquired its Alaska holdings from Forest Oil Co. in 2007 for approximately $464 million - of which some $380 million was dedicated for repaying term loans, $68 million was cash and $16 million was stock. The sale included the properties Miller Energy would later acquire through the bankruptcy auction, as well as several undeveloped Cook Inlet properties that eventually became the Kitchen Lights unit currently operated by Furie Alaska Operating LLC.
By the time Pacific Energy filed for bankruptcy in March 2009, both oil and gas markets had been upended. Alaska oil prices had reached a spot price of $133.77 per barrel in June 2008 only to fall under the weight of the global financial crisis to $37.69 by December 2008 and rebound to $75.11 by December 2009, according to the Alaska Department of Revenue. Aging natural gas fields in Cook Inlet appeared unable to satisfy regional demand during extreme weather events, leading to serious discussions about importing liquefied natural gas or building a “bullet line” to transport supplies to the region from the Brooks Range foothills. Then, in March 2009, the Mount Redoubt volcano erupted, which shuttered crucial oil-processing facilities on the west side of Cook Inlet.
Bankruptcy looming?
On Aug. 6, the same day at the SEC charges, Baker Hughes Oilfield Operations Inc., MI-SWACO and Schlumberger Technology Corp. asked the U.S. bankruptcy court in Anchorage to force Cook Inlet Energy into Chapter 11 bankruptcy to repay its debts. The three companies each claimed sizable unpaid debts: nearly $1.4 million for Baker Hughes, more than $478,000 for MI-SWACO and more than $742,000 for Schlumberger.
Those come atop the debt-based financing Miller Energy owes to various creditors.
For weeks, Miller Energy has insisted that it can avoid filing for bankruptcy by restructuring its debt and selling certain assets, such as its stake in the Badami unit. CEO Carl Giesler recently told the Alaska Dispatch News that the company had a buyer lined up for the eastern North Slope unit, which is operated by subsidiary Savant Alaska LLC.
Considering oil and gas reserves as well as physical property such as rigs, Giesler said that the company’s assets are worth more than its debts, making bankruptcy unnecessary.
The company is hoping to convince the three service companies to revoke their petition and hoping the state will issue outstanding tax credits that could help pay down debt.
