There is not long to go before EGO's AGM and it is a very worrying time for me.
Consolidation.
The annual report again shows the board's indifference to the concerns of many shareholders that they will lose substantial percentage in the value of their shareholding in the company.
They don't care about the financial loss shareholders will incur, WHY? They don't care because when it is all said and done they will still retain their salaries at the same level prior to a consolidation.
According to the annual report (page 36) there is even a board member who has no shareholding in EGO at all as do several others of EGO's key management, yet all draw substantial salaries.
Only one board member has a substantial shareholding the others in my opinion only have a token interest at best.
Of course there is no obligation for a board member to hold shares in a company but EGO is inherently an oil & gas explorer with all the associated risks that are part and parcel of such an activity.
Shareholders who invested in EGO knew those risks when they put their hard earned into the company. THEY BELIEVED in this little company but do the board and key personnel have such a belief with their token holdings or are they just words on paper in the annual report?
There are quite few shareholders who have clutched onto their shareholding over many years through dilution after dilution believing that company WILL come through and return at least a small profit on their investment.
Consolidation will not give them that. The ASX is littered with examples of consolidations gone wrong for shareholders.
Should a consolidation proceed many will have their shareholdings relegated to unmarketable parcels and we know what happened recently to those shareholders who bought when the share price was much higher and who put their small holdings into a bottom drawer in the hope that one day they will come good.
The Chairman in his report states (page 6)
“The share consolidation will benefit all shareholders by reducing the bid-offer spread, reducing the volatility of the stock price, increasing appeal to a wider rang of long term investors and ultimately it will increase the Company's ability to raise funds in the future while minimising dilution for existing shareholders.”
What happened to the previous reason for consolidation, to attract a farm-in partner? If discussions are taking place (page 9) is it fait-accompli that a farm-in will only proceed if consolidation occurs?
If that is the case. Why, when the board cannot guarantee the share price will rise as a result. History is against such an occurrence.
The Chairman needs to be reminded the company already has many long term investors who will lose the value of their long term investments because of a consolidation.
I wonder who the Chairman is referring to when he is talking about long term investors? Perhaps it will be those new investors who will snap up EGO's shares cheaply when its share price falls post consolidation.
In my opinion for what it is worth EGO's share price will rise once consolidation is taken off the table as it is the “boat anchor” that is holding the company and it's share price down.
The 'bid-offer spread” volatility will also decrease with a rise in the share price.
The “smart money” knows about EGO and what it has and where it should go given the right incentive to move forward.
EGO's board has failed to provide that incentive I think.
Consolidation of shares will need to happen at some time, but not now, and not for the reasons given.
The Red Gully Plant.
The annual report (page 6) talks about a major production hub, and to
consider whether to extend or expand the Red Gully plant. Consider whether to? What about will extend?
The most recent presentation (2Sep15) it is shown on slide 14 the Red Gully plant is potentially going to be upgraded to 15Tj/d and only if the drill at RGN-1 can successfully produce the required volume of gas.
The Red Gully plant is presently rated at 10Tj/d yet they call this a major production hub, when it will only be processing 5Tj/d more.
What sort of message is this giving customers, the O&G industry and to potential investors?
It is embarrassing to read and to and to say the Red Gully Plant will be a major production hub.
EGO's CEO on page 8 talks about a vision of the company becoming a gas production operator of choice.
My question is how will this happen and over what time frame?
It has been nearly 2 years since EGO has been under a new and substantially different style management. Credit must be give to management to fix what needed to be fixed and do what need to be done with respect to the DMP and other legacy issues but to talk about being a gas operator of choice is not what EGO is or likely to be given Alcoa the state's largest gas consumer is already making their choices.
https://www.alcoa.com/australia/en/news/releases/2015_03_09_Santos_Agreement.asp
Potentially 13Tj/d from the “expanded/upgraded” Red Gully Plant is miniscule compared to what Santos will be supplying and what a customer like Alcoa wants.
Page 24 talks about a strategy for the “vision”. What is concerning about this, is that the board has not got a strategy in place for EGO going forward, but is planning one.
The board has had 2 years to see the problem and obviously had a short term strategy – to fix the plant and get steady production out of it. They did that, but surely they knew that Western Australian gas supply contracts were expiring over the next few years and they needed to set a strategy in concrete of how get some of those gas supply contracts that will be on offer.
Santos did.
EGO's previous management and I hate saying this, they made provision for the Red Gully plant to be doubled in size and with the tie-in pipeline from the plant to the DBNGP rated at a tranmission capacity to suit.
The report is inconsistent with some of the information, as previously mentioned the board is in discussions with potential farm-in partners yet on (page 24) the company's vision is to plan a strategy to amongst other things include another high value production production hub in various geographically separate exploration permits and attracting quality farm-in partners.
Raven prospect.
This was mentioned in the 2Sep15 presentation and is again mentioned in the annual report but what is not mentioned is what happened to the previous other two prospects in EP432, Yet in their place are Raven and Cygnet.
My question is. What happened to the Woolka and Cooljarloo prospects and the Black Arrow lead as shown in slide 20 of the Investor Presentation dated 25Nov14? They are not shown on page 15 of the annual report nor for that matter Charger.
Are the new prospects of Cygnet and Raven in addition to the previous and are more prospective or have they just been re-named?
Risk Management.
I am sure EGO's board is aware of the risks to the company and manages them very well but what I believe the board is not doing very well is as per the first dot point in the 2nd column on page 25.
“Board approval of company strategy which is designed to optmise shareholder returns with risks incurred.”
I understand this to mean it refers to current shareholders who have an interest in the company and not potentially future shareholders who do not have an interest.
Governance Framework – Role of the Board and Management. (page 39)
“The Board represents shareholders' interests in developing and then maintaining a successful business, which seeks to optimise medium to long-term financial gains for shareholders. By not focussing only on short-term gains for shareholders when making business decisions, the Board believes that this will ultimately result in the interests of all stakeholders being appropriately addressed.”
and
“The Board is responsible for ensuring that the Group (being Empire Oil & Gas NL and its subsidiaries), is managed in such a way to best achieve this desired result. The board currently undertakes an active, not passive role.”
The question needs to be asked. Is the Board if aware of and is doing the above?
Board of Directors – Director Independence (ASX Recommendations 2.2)
There are some interesting views the company's board has accepted (Page 40)
“The Company has adopted a definition of independence which is consistent with the ASX Principles and Recommedations. The Board recognises the recommendation that the Chariman should be an independent director. The Board accepts that Mr Iannello by virtue of his directorship with ERM Power Limited is not independent. However, given the transitioning of the Board and senior management along with the need for stable leadership in the evolving business environment, the Board is supportive of Mr Iannello continuing as Chairman of the Company. The Board has determined that Mr Iannello has the essential skills and attributes to continue as Chairman of the Company for the benefit of all shareholders.”
but
(Page 37) “Mr Iannello is a Director of ERM, and is therefore by virtue of Mr Iannello being a Non-Executive Director and chairman of Empire, ERM is a related party to the Group.”
No disrespect is intended to Mr Iannello, however it may be perceived that due to his holding of two related party senior postions there may be a conflict of interest in how EGO's business is conducted.
Does Mr Iannello as Chairman of the company comply with – (Page 40)
“Directors are also required to identify andy conflict of interest they may have in dealing with Empire's affairs an subsequently to refrain from partidipating in any discussion or voting on those matters. If a potential conflict of interest is likely to arise, the Director concerned does not receive copies of relevant Board papers and withdraws from the board meeting while those matters are considered. The director concerned therefore takes no part indiscussion and does not exercise any influence over other members of the Board if a potential conflict of interest exists.”
There will no doubt be circumstances when the Chairman will be required to abstain and then important decisions are made by the remaining two directors.
One event I envisage of conflicting interests to several directors – the recommendation of a consolidation of EGO's shares. Both Mr Iannello by virtue of his ERM connection and Mr Garratt with his large shareholding via his company Vison.
It has been nearly 2 years since the 249D action resulted in the exiting of EGO's previous board. The company has moved along since that time and much has been improved. However how long does the Board intend to call itself a board in "
transition"?
Is 2 years more than long enough for this “transitioning” phase to have been completed
Key management personell have been appointed. The CEO's position certainly has been filled for over 12 months.
I understand there is at least one board position up for re-election. It may be time for EGO's shareholders to vote in a truly independent board.
The company needs to move forward and quickly to be a gas supply first mover in the Perth Basin and as a shareholder I do not want to see our company scratching around picking up the crumbs left behind by other oilers who can and do move quickly.
