Saturday, June 2, 2012

Gulfport Energy and Wexford Capital Part VII: The independence of reserve assessment

Having got into a spat with everyone and their dog (including more than one client) about the ethics and conflicts of interest in investment banking I thought I would go back to just old-fashioned hot-chair-job-swapping conflicts.

And my old flame - Gulfport Energy and the many conflict-ridden relationships they have entered.

This is a conflict as old as industry: who do you get to assess your reserves and are they truly independent?

Oil and gas companies are meant to have independent and competent parties assess their reserves. This is critical because what you as a shareholder are buying is future production and reserves are the basis for future production.

In this light I want to explore who is involved in assessing the reserves of Gulfport Energy.

To quote the 10K:

There are numerous uncertainties associated with estimating quantities of proved reserves and in projecting future rates of production and timing of expenditures. The reserve information herein represents estimates prepared by Netherland, Sewell & Associates, Inc., or NSAI, with respect to our WCBB, Hackberry and Niobrara fields at December 31, 2011, with respect to our WCBB and Niobrara fields at December 31, 2010, and with respect to our WCBB field at December 31, 2009; by Ryder Scott Company L.P., or Ryder Scott, at December 31, 2011, and by Pinnacle Energy Services, LLC, or Pinnacle, at December 31, 2010 and 2009, with respect to our assets in the Permian Basin in West Texas; and by our personnel with respect to our overriding royalty and non-operated interests at December 31, 2011 and with respect to our Hackberry fields, overriding royalty and non-operated interests at December 31, 2010 and 2009.

I have highlighted the critical bit. The reserves with respect to the Permian Basin are assessed by Pinnacle Energy Services LLC. This has been the case for many years - dating back at least to the 2008 annual report. Specifically the reserves were last assessed in 2010 and were assessed in 2009.

These reserves are over half the stated reserves of Gulfport in the last 10K.

In the first post I quoted the Gulfport's proxy stating that Windsor Energy (which is controlled by Wexford) is the operator all Gulfport's assets in the Permian basin.

Who are Windsor Energy?

Well apart from being controlled by Wexford we know very little about them. They have a website - but it is dead. More precisely the site is "under construction". Corporation Wiki gives a list of officers. But our best clue comes from archive.org - and the "way-back machine". On archive.org we can find how the WindsorEnergy.com website looked a few years ago. The site isn't "under construction" as described - it has been removed and replaced with an "under construction" page.

Anyway the old site contains some CVs and I have pulled one which you can find here (click the world "impatient" at the bottom right hand corner of the linked page).

Lance Galvin
Vice President and Chief Operating Officer 
Mr. Galvin was appointed Chief Operating Officer in July 2008. Prior to this appointment he served as Vice President, Operations and Engineering for Windsor Energy since February 2008. Mr. Galvin worked as a consulting petroleum engineer for Pinnacle Energy Services, LLC from 2003 to 2008. Mr. Galvin started his career in the oil and gas industry in 1980 with Marathon Oil Company serving in various locations and capacities. He served as Engineering Manager for Marathon Oil Company’s Oklahoma City business unit from 1996 to 2001. Prior to this 1996, Mr. Galvin served in various engineering and operations roles for Marathon in Houston, Wyoming and Alaska. Mr. Galvin graduated from Colorado School of Mines in 1980 with a bachelor's degree in Petroleum Engineering and is a Professional Engineer in the state of Oklahoma.
This CV was valid in 2009. I do not think the CV is currently valid because Lance Galvin no longer appears on their dial-by-name phone directory of Windsor. Thus I presume he no longer works there. He did work there during the period that Pinnacle assessed Windsor's reserves. Remember Windsor's reserves were assessed by Pinnacle in 2009.

And that is notable. According to the above CV, Lance Gavin, the former Chief Operating Officer and VP of Windsor Energy used to work as a "consulting engineer" for Pinnacle Energy Services LLC immediately prior to working Windsor Energy.

When accountants do that - going from audit firm to their clients - it raises eyebrows because it raises issues of independence. But it is not illegal. Its the sort of soft-conflict you get used to on Wall Street - surprising, but not very surprising.

I was however very surprised when I googled Mr Galvin's name. You see the first hit was his CV at Pinnacle Energy Services. I note that Lance Galvin is the second most senior listed employee at Pinnacle. The following was downloaded in May 2012 and is still on the web at the time of posting.
Lance J. Galvin began working part-time for Pinnacle Energy Services, LLC as a consulting petroleum engineer in 2003 and joined the company full-time in 2005. 
In 2001 Lance purchased a small manufacturing business in Oklahoma City and continues to be involved in that business. 
From 1996 to 2001, Lance was Engineering Manager for Marathon Oil Company’s Oklahoma City business unit. His duties included managing a multi-disciplined Business Development Team responsible for identifying, evaluating and completing acquisitions and divestitures, managing several multi-disciplined Asset Teams responsible for development and exploitation of the business unit’s reserve base. These responsibilities included properties located in Michigan, Wyoming, and Oklahoma. Lance was also responsible for engineering personnel development, reserve reporting and budget compilation. 
From 1992 to 1996, Lance held the position of Operations Engineering Manager reporting to the Vice President of onshore operations for Marathon Oil Company in Houston, Texas. He was responsible for overseeing all engineering functions in business units located in Midland, Texas; Oklahoma City, Oklahoma and Cody, Wyoming. Lance managed development of asset optimization strategies, implementing corporate change agendas, engineering personnel development, SEC reserve reporting, and corporate financial planning. 
From 1990 to 1992, Lance was Operations Manager for Marathon Oil International’s Damascus, Syria operation. His responsibilities included evaluating well performance, developing economics, preparing a Plan of Development, managing drilling and completion operations, government negotiations and facility design oversight.
From 1988 to 1990, Lance held the position of Reservoir Engineering Supervisor for Marathon Oil International in Houston, Texas. He was responsible for managing all reservoir engineering activities for properties in Ireland, Norway, The Netherlands, Tunisia, Egypt, Indonesia, and Australia. These duties included detailed technical well analysis, reservoir simulation, preparing drilling proposals, economic evaluations, preparing Development Plans, interfacing with government officials and reserve reporting.
From 1980 to 1988, Lance held various production and reservoir engineering assignments with Marathon Oil Company in Casper, Wyoming and Anchorage, Alaska. His responsibilities included field operations supervision, well completion and facility design for oil and gas fields in New Mexico, Utah, Colorado, and Wyoming. He prepared economic evaluations, reservoir simulations, field-wide reservoir studies and reserve reports for fields and reservoirs in Utah, Colorado, New Mexico, Nebraska, Wyoming and the Cook Inlet. 
Lance graduated from Colorado School of Mines in 1980 with a bachelor's degree in Petroleum Engineering.
There are several issues with this CV vis the CV on Windsor Energy's site. For a start Lance is described as a full time employee of Pinnacle since 2005 - somewhat more involvement than a "consulting engineer". The CV's don't match.

But again I suspect the CV is temporarily incorrect. I rang Pinnacle and despite the current web page stating that Lance is a full time employee his name does not appear in the Pinnacle phone directory. It is also possible to find other entities which Lance has been an employee of during this time - so the page stating he is a full time employee of Pinnacle may be old or not updated.

Still Gulfport Energy is laced with conflicts of interest: conflicts have been the point of this series. And conflicts of interest are not often illegal but the law generally requires disclosure. Moreover as my Facebook series shows reasonable people often argue about the ethics of conflicts.

Moreover, the disclosure at Gulfport is generally pretty good - but I had to work a little harder to find this conflict.

And I thought the process amusing.



John

2 comments:

Anonymous said...

what do you think about ATP? another one subject of much debate

Anonymous said...

Windsor is currently run by Steve West - a Wexford insider - who is also on the board of Grizzly.

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.