Richfield Oil & Gas Co (fka ROIL)

[PlatypusRx]

We are seeing the fruits of a bad market strategy, not bad company fundamentals. The fundamentals, actually, would be pretty interesting were it not for the market mismanagement. Floyd Moulton, the dean of Central Utah geologists, once wrote that ROIL's Fountain Green property potentially holds a billion barrels. And that was before much was known about the vast Mancos shale deposits on the eastern edge of this acreage.

But a falling stock price, the result of tepid demand, has raised ROIL's cost of capital, effectively locking it out of the equity markets. The stock has fallen 90 percent from its original trading values of last March. This has created a "Catch 22", in which the funding the company must raise to realize the value in its Utah properties vastly exceeds its market cap. The cost of drilling a single well in Utah, where most of ROIL's upside lies, averages about $10 million. ROIL's market cap presently is just $12 million.

Richfield recklessly went public without an IPO -- meaning without a following among broker dealer networks. The daily trading volume for companies with Richfield's shares outstanding average about 130,000 shares a day. On the rare day when Richfield does see such buying, the stock price strengthens considerably. On most days, however, the volume is well below 20,000 shares. It is little wonder, then, that even modest selling pressure overwhelms buyers, thereby creating a self-fulfilling cycle of wariness. It has not helped, either, that ROIL has been doling out shares to pay debts and compensate board members and consultants. Even ROIL's board members have been selling into this weak market.

This raises the governance question of whether ROIL executives and board members ought to be compensating themselves so richly. According to Yahoo, ROIL's CEO, Doug Hewitt, who is also the company's largest shareholder, makes $760,000:

http://finance.yahoo.com/q/pr?s=ROIL

The company's main hope these days is to secure one or more joint venture partners who can demonstrate the enormous potential of Utah -- and then, possibly, to secure a non-dilutive loan that will enable it to participate in these ventures (which raises the question as to what ROIL might put up as collateral). Until there is a successful exploratory drill, ROIL is basically a real estate holding company with very modest operations in Kansas.

A final dynamic that has yet to be played out stems from the fact that the company was heavily promoted prior to going public. Many current shareholders invested in ROIL's predecessor companies, Hewitt Petroleum and Freedom Energy (which ROIL has since acquired), at prices ranging from $2.50-$10.00 per share. This "friends and family" shareholder base has a right to be angry at the results of ROIL's catastrophic market missteps. Shareholder democracy is supposed to hold boards and executives accountable for such failures. Let's hope that, at a minimum, Mr. Hewitt's rich compensation package comes up for debate at the next annual shareholder meeting.