Old letter/email Keith to Lowman?? Two paragraphs near the end explains shares for leases...landowners choice or cash... Higher pps means shares more acceptable to landowners.....maybe some of those restricted shares now hitting market????
Low,
I have been reading IHUB. You do good objective disclosure. Also I am glad Matt (IHub admin) remembers me... I can remember back when he was 16? or 17? and wanting to start or starting IHUB, 1998? 1999? I knew he was a good guy, but wasn't sure he had the ability to pull this large undertaking off. He certainly proved me wrong and I hope he is enjoying every second of this success, he deserves it... Very cool!
The reason I am writing this is I also read your Money 101 link along with the Hemi thread. Very nice summaries! Please feel free to post this on the board if you like, because I am not going to get even close to posting "inside information", but rather give the folks a look at our corporate M.O. and rationale. I am not going to get in the habit of doing this very often though.
Let's start here: the reason we allowed public trading of our stock on the pink sheets, is because from 2001 through 2005 we had some larger industry partners backing us, invested in our projects/equity, and as time went by, they wanted liquidity for their investments. Pinksheets solved that liquidity problem. Hemi was profitable as a private company, and in hindsight, allowing our shares to trade on pinksheets was probably the worst decision we have ever made with Hemi. To date the negatives have certainly outweighed the positives from my point of view. Sorry, but that is just the way I see it.
We had revenue, assets, and production long before we had a ticker symbol, and we have had minimal fund raising...not enough to justify the pink sheet generic image. This company has not been, and will not be, built on "pinksheet" standards.
We are and will continue building on oil industry standards. The stock price in no way, shape, or form, affects our operations or revenue (the private company mentality is hard to shake).
I get calls all the time from "stock promoters" and "investment groups", all wanting to know if we need "funding". Of course, these guys all want stock discounted 50% or 75%. These chuckleheads make it too easy to say no.
Now this is not to say if a legit group comes along, we won't consider it, and there are some we are talking to (just talking...nothing more) at the moment. Anything considered has to be on fair terms which will serve both party's goals and purposes.
IMPORTANT! I do want to expand on your "dilution" observation on Money 101. We do issue shares from time to time...in fact, I am going to put everyone on notice after the first of the year: we WILL issue several million shares to insiders!
Why?
Because none of us around here are making more than $36k a year, and instead, opting to take restricted shares instead. They will be restricted as all our others are, and no insider has EVER sold to date. The underlying reasons are multiple and its not the typical pink sheet promoter double talk.
1. When we started back in 2001, as a group we decided our exit strategy would be a buy-out by an O&G industry company. This would, in no way, be done according to our stock price, but rather our oil and gas assets and reserves, potential future production and industry evaluations. The proverbial "big fish eating little fish" theory. The Hemi crew are older guys, Ed is 75, Craig is 60 or 61 and I am 45. So us hired help and insiders are going to make our money when we get bought out and I hope it's a truck load of money!!! Yup I am not ashamed to say that to any one that wants to hear it. Either it is a sale of the assets and a stock dispersal (big final dividend to shareholders) or a true M/A.
Anyhow, we waive our short term paychecks (as we could afford to pay ourselves more), but we know what we are doing and believe 100% in our projects. We have much more oil in the ground than money in the bank! A buyout will compensate us much nicer in the end, than to "cash-strap" the company right now, by taking excessive salaries.
Our buy out time horizon is between 2008 and 2010. Will it happen? I don't know...oil patch economics are virtually impossible to predict.
2. As for dilution, the real reason we are careful with dilution, because us insiders do not want to loose control of the company and expose ourselves to a potential hostile take over or some type of unforeseen corporate arm twisting, that could leave us with less than desirable results for the exit strategy. One thing for sure, we will not consider any type of stock swaps... it will be cash on the barrel (pun intended)
Which brings me to our anti debt strategy:
A. Look at the oil and gas history, if oil and gas turns down like it did in the 1960's, 1980's and 1990's the survivors were the ones that had minimal or manageable debt... true during the hard times they were not making a lot of money, but at least they were able keep the lights on and food on the table and lived to fight another day. The ones with big unmanageable debt now reside in the dust bin of history.
B. Any banker or lender will tell you, who ever controls your debt controls your destiny... for instance your observation about the market makers is spot on... Here is an evil idea, go buy the MM's personal mortgages or corporate paper and turn the screws whenever you see the need and watch how friendly they will get after a phone call. (I do hope you realize I am being fecitious.) BTW, Hemi will never have these problems for all these reasons.
4. We are very secretive, almost reclusive, and I know this drives the investors crazy, unfortunately, this is the way it has to be. If people are uncomfortable with any of this, then invest in something they are comfortable with. I SERIOUSLY MEAN THIS STATEMENT! We are in a high risk business. Every day there is little to no margin for error and if an investor is not comfortable with our strategy... then PLEASE re-consider buying our shares, because we are not going to change and the investor will sleep better at night.
On the positive side and no one knows this, until now, we have something no other company has... NO OTHER O&G COMPANY! This is where our true unseen strength lies...our research library. Back in the bad old days of $9 to $12 oil, before Hemi even existed, Craig and I were actively trolling oil and gas company bankruptcy auctions and buying as much of their in-house data as we could find, for 10th of a cent on the dollar or even free was stuff headed to the dumpster. Seismic, turn key projects, geological reports, project budgets, result expectations, well logs, you name it, we bought it... (Kansas came from this data. We have data that was been long forgotten by our competitors, so why should we tip our hand and generate our own Industry competition, especially if we stand to gain nothing from it?) For instance we bought a major bankrupt E&P companies records for all of Eastern OK from Oklahoma City to Arkansas, From the Kansas to the Texas line, in 2001? 2002? When I mean everything... everything is there, funny we have no short term interests in operating in OK... who knows one day we may throw open the doors and start charging other industry people to have a peek at it? Maybe not, who knows. Maybe we will consider OK for future programs based on this data? But we contributed this to Hemi long ago and it is now company property.
Back to us being secretive. We WILL NEVER jump up and down and yell "look at us, look at us" before we have completed a position at the level we want it. The oil patch has the same basic fundamentals as stocks or real estate...if the word gets out and suddenly a rush hits, the prices go up. In our case, lease acreage goes up in price, royalty owners have more options and negotiate from a position of power, service prices go up, equipment and personnel wages go up and availability goes down.... it cuts across the spectrum why we must be secretive. THIS IS ALSO WHY WE DO NOT TAKE ON PARTNERS OR JOINT VENTURES! They are a potential information liability, and yes, we would be exponentially much more wealthy if we did take on partners and jv's. But why risk it if we don't have to? Anyhow, we make the disclosures after the fact and when we feel it is in our best interests of both the company and the investors. The proverbial balancing act, which I have not mastered. There are no right or wrong answers. We are doing nothing different at .02 than we were at .40, but investor fear has ruled the market due to our silence, even though the PPS did not affect our operations in the least and the reason for last weeks PR... this PPS was starting to look like a bad joke and enough is enough, for the investors sake.
We will continue making disclosures. We will keep turning our cards over so the investors truly see what we/they have. I hope in the end, the readers take ALL THE PR's and read them like chapters in a book and have a complete picture of what they own.
For instance you made me nervous with just disclosing our drilling $50,000 turn key wells. Why? We are economic driven. We are not chasing "the elephant" or conducting rank wild catting in the oil patch. To put it into perspective a little: a $50k well that comes in 20 BoD @ $53 a Barrel (I am being extremely conservative) pays back in less than 60 days. If it came in 30, 40 or 100 BoD, that is a very realistic and sweet ROI! These types of wells are few and far between, so what competitor wouldn't want this kind of a program? We've had this for years and I know what can happen with the competition, because we have had "corner shots" and "claim jumpers" following us for years. Financial disclosures could reveal something operational that we would prefer to not have revealed before we are ready. Trust me? Nah...I am not asking that, its just the way it is going to have to be for a while longer.
Let me qualify what I am saying about our O&G secrecy and silence that has nothing to do with Hemi. Take a guess at the hottest area of the US Domestic oil patch right now. (no fair peeking because it isnt where you think)
STOP READ NO FURTHER UNTIL YOU TAKE A GUESS!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Its New York State! You know why you have never heard that? The majors have a serious lock down on information and the promotors have not discovered it yet, Google New York oil development/production/exploration or (something similar) and you will get bits and pieces of information from Oswego, Buffalo, Syracuse and other Western NY areas of activity. Enough to get a layman idea of what is going on up there. We aren't up there and have no intentions of ever being there. Simply trying to make a point.
This recently discovered region gets even more interesting! Back a few years ago a small private company similar to ours happened across a geological study and drill results by Standard of Ohio? New Jersey? Conducted in 1901? 1902? They drilled a well near Oswego NY that came in at 300 BoD. Standard determined the well was "un-economical" (by early 1900's standards) because of the lack of rail and other infrastructure to get the oil to market. Natural gas was a nasty waste product then and there was a large amount of NG in the oil. Anyhow, Standard decided to plug and abandon the well and focus a 100 miles south in Pennsylvania it was cheaper to operate. This Standard file lay dormant until 1990's, when the small company found the file, researched it, and proceeded to drill near the old Standard well with new technology and the well came in at 1,000 BoD. Yeah a 1,000 BoD! (too bad they talked it up and generated all the competition) So the silent New York O&G stampede is on. Only industry people have a clue as to what is going on in New York State. Could this be the same reason we are in Kansas? Who knows? But we aren't saying... for now. LOL
Finally back to stock "dilution" and operations, when we lease we have a very attractive lease program, for the land/mineral owners. We pay the land/mineral owners an initial "rental fee per acre" to lease the property over a set amount of time (1 year to 10 years), in order to develop the land. If we make a well the lease goes into in-perpetuity. On top of the rental fee, we also concede industry standard royalties to this owner... usually between 12.5 and 15%. The royalties and fees are determined by our negotiating skills, how savvy the mineral owner is and the desirability of the lease. We structure the royalties so that the oil purchaser (PAA) pays the royalties directly, so we never have issues with the mineral owner's money. They love this program. We also sweeten the bargaining process by offering to train the land owner or who ever they want (son, daughter, cousin and so forth) to work as a field pumper on the lease. For instance, farmer Les Purcell is a pumper on the Purcell lease. This is allowing the land owner to farm his land and our wells. This makes the theft of oil practically nil and is like having a pit bull chained to our pay tanks. If someone in a non-company vehicle goes on the land, they are stopped by the landowner/employee.
This program usually rapidly makes us one of the preferred operators in the area and is key to us being able to compete with the majors. How, you ask? Once we are established in an area, the locals usually know what is going on (small town gossip) and many times approach us with offers to lease their land. The smarter or more astute ones will "suggest" taking stock as part of the "leasing fee" to compliment the other benefits they get by dealing with us. Generally if we are interested in leasing a certain piece of land, we will tell them they have the option of cash or 2 year restricted stock (calculated on a 5 day moving average or something similar) or cash for the land... their choice. Of course we have not done this for a while, simply because stock prices this low is kind of embarrassing. So we have been paying cash lately.
I will tell you that all the above benefits forms a bullet proof leasing program, the land/mineral owners make mail box money (royalty checks) pay checks and if they work hard and if the production keeps increasing, in theory they get an additional benefit of an increasing stock price, just like any other investor. Is this dilution? I don't know, that is for you to decide. Also, I am not aware of a land owner/mineral owner that has sold a share, they are out making oil every day or at the local coffee shop gossiping and they know what is going on! Dilution or good will? I don't know. That is for you investors to decide, but it is something we do and it works very well.
Ok I am done with my long rambling Sunday Email, throw this out on IHUB and give your guys something to chew on. If an investor doesn't like what they see, well, there are a lot of other higher profile companies to invest in.
Keith A.
