Last week, Texas oil producer Gale Force Petroleum (GFP) received its second letter this year from one of its top shareholders, New York based Iroquois Capital Opportunity Fund (ICO Fund). The letter was ICO Fund's second request for GFP to shake-up its Board of Directors who, according to ICO, have caused "severe mismanagement of Gale Force's otherwise valuable assets." GFP's share price, which closed at $0.14 on October 1, has been in a tail-spin since peaking at $0.38 in March 2012. The 63% price slide (see graph below) reflects decreased production due to poor well results and a lack of overall direction for the company.
Gale Force's average production declined to 160 BOEPD during the quarter ended June 30, 2013, 42% lower than the 277 BOEPD the company averaged during the same quarter in 2012. This decline in production shouldn't be attributed to the low decline asset base the company operates, but poor well results from its current drilling program and asset divestitures. Production from its recently acquired "Texas Reef" assets located in Henderson and Anderson Counties in East Texas has been disappointing due to completion mistakes causing two wells to have produced from a water zone.
Related article: This Mystery Points to Big Changes Afoot for Coal
Gale Force’s Stock Price (April 2011 – October 2013)
Source: Yahoo Finance / The Energy Harbinger.
If Iroquois' assertion that Gale Force's stock price slide has more to do with "lack of effective oversight by the board," than resource quality, the graph above shows that the market might agree. From April, 2011 to June, 2012, the oil weighted company's stock tracked WTI before decoupling in the latter half of 2012. When an oil company decouples from WTI to this degree, either the asset base has deteriorated or the company is experiencing financial/operational troubles.
It would be difficult to argue the former as GFP's asset base has certainly gotten oilier after the divestiture of the Gregg and Rusk County assets in Oklahoma. Production from these assets was approximately 40% natural gas and its sale raised $6.5MM which was used to pay down debt. Now the company is sitting on 2 million barrels of oil equivalent (MMBOE) (68% oil) in East Texas and the market is valuing the assets at $9.76 per barrel. This valuation is low when one considers the assets are in an established oil field and only 24% of the reserve basis is producing.
So where does that leave us?
Related article: Genel Energy Shares Up on Kurdistan Pipeline
With a company that has valuable assets but no financial plan to develop them. This is where a company with ICO Fund's track record can step in and restore confidence to GFP's shareholders. The company has several other micro-cap oil and gas companies in its portfolio, including AusTex (AOK) and PetroRiver (PTRC), proving that it has ample experience in the industry.
In addition, ICO Fund was instrumental in turning around Long Range Acoustic Device (LRAD) by replacing several board members and renegotiating options held by executives with very favorable strike prices. LRAD's stock price is now up 51% since May, a tribute to Iroquois' ability to put the correct people in place on the board and re-incentivize management. If Iroquois is able to reach a similar agreement with Gale Force, I believe it would restore confidence and value to a company that's in obvious need of direction.
If your plan is to buy low on GFP, you might want to expedite that plan as the record date for its general meeting is October 9. The actual meeting is on November 21, so if you want to support Iroquois, who hired Kingsdale as its proxy, act fast.
By. Braden Holt