Ann: Market Update , page-13

this is from the Oil and Gas weekly....please read below. Meet your directors


Subscribers might think we are a bit paranoid when it comes to the way
company’s describe their oil and gas reserves but bogus descriptions of
what a company may or may not have in the ground are one of the most
common ways junior oilers mislead the market. Just as bogus descriptions
of what hard rock companies may or may not have under their feet mislead
investors.
This week Kilgore Oil & Gas announced it had 4.5 Bcfe in “gross proven
reserves” which triggered the conversion of its Class C Converting
Performance Shares.
In other Directors, Adrian Ayers, Gordon Sklenka of Formaine Pty Ltd
and Anthony Short of Fay Holdings Pty Ltd get 1,000,000 free KOG
shares each and Alex Bajada of Spartan Resources also 1,000,000 shares.
We looked into Kilgore a bit more deeply and came away impressed with
the way Sklenka, Short, Ayers and Bajada appear to have set up the
company to maximise the benefits to themselves and their US partners
should the company enjoy any measure of success.
Nothing wrong with that we hear you say? Normal corporate practice you
claim? Certainly ASIC had no qualms about the way the company was
structured when it reviewed the IPO Prospectus. But we have a problem
with it, even if it is all perfectly above board in the strictest legal sense.
And our problem is with the way the promoters have put the company
together so that the contributors to the IPO and not the insiders, provided
the funds to buy the properties and pay for the exploration. Sure any
success the company had would flow back to the shareholders. But the
biggest beneficiaries of the risks others took in putting their money into the
company were always likely to be the insiders.
Because on listing, the majority of the Top Twenty shareholders were the
insiders who had paid diddly squat for their pre existing shares. And what’s
more got millions more free shares after listing as certain milestones were
passed. Read on!
Kilgore listed in July 2008 after an IPO which saw the company raise some
$10 million with the issue of 50,000,000 shares at 20 cents. There were
almost 40 million pre existing shares.
Prior to listing the company raised $1.493 million in seed capital and
secured varying interests (to be paid for via the IPO funds raised) in ten
exploration targets onshore and offshore Texas by the company’s US
industry partners.
What we found interesting about the corporate structure was the Converting
Performance Shares issued for free to the Directors and others associated
with the company. There were four classes, A, B, C, and D and each
converted to 500 ordinary shares after certain benchmarks had been met
(see pages 104-106 of the May 2008 Prospectus).
Each Director was issued 2,000 Converting Performance Shares in each
category. And more Converting Performance Shares were issued to others
associated with the IPO including 8,000 to Alex Bajada’s Spartan
Nominees for corporate advice. And 16,000 to an entity named Rulston. Bajada is an associate of Short’s and serves with him on the Board of
Advance Energy and Odin Energy (Gordon Sklenka is a co Director on
Advance Energy’s Board)
The first milestone which triggered the issue of 1,000,000 shares to the
holders of the CPS Class A shares was a successful IPO. Since then another
2,000,000 shares have been issued to each of the holders of the Class B and
C Converting Shares as the company claimed it had met certain reserves
milestones.
Now as we said above this past week the company announced it now had
gross proven reserves of 4.6 Bcfe, so it issued more free scrip to companies
associated with the Directors Sklenka, Short and Ayers and to their US
partners.
The reserves estimates were supposed to be done by an independent third
party according to the prospectus. But this week’s numbers were compiled
by a Kilgore Director Brian Ayers and joint venture partner Embry
Canterbury of US based Hibernia Resources. Both stood to directly benefit
from their decision as holders of Class C Converting Performance Shares.
How independent is that?
Now we can hear some subscribers say all this is immaterial. The company
has never found anything to justify market interest in its stock which since
listing has been in a death spiral from 21 cents to a recent low of 3.7 cents.
The shares closed Friday at 4.9 cents. So the insiders have not made any
money.
But that’s not the point. The poor buggars who subscribed for shares in the
company at 20 cents have done their dough if they have held on to their
stock. And they are the ones whose money paid for such assets as the
company now has. The insiders who didn’t put up much cash if any, now
control the company by virtue of their majority shareholdings.
Kilgore raised $10,000,000 in its July 2008 IPO. By the end of the
September quarter it had just $1,047,000 left. Nearly a $1,000,000 went on
the cost of the IPO, lawyers fees, corporate advisory fees, best endeavours
fees, printing etc. That’s almost 10%, rather expensive for a small IPO.
Another $6,000,000 went on exploration and evaluation and development
of the company’s US properties. $656,000 was spent on administration in
three months. And another $500,000 went on loans to other entities. We
can’t find the details of who those other entities were.
We will look at Kilgore’s latest cash flow statement next week with
interest. They were expecting production from their Alford well to start last
November and from their Stary and UpMach wells in December or
January.
After researching the Kilgore story we have to wonder about all the little
resource companies that popped like mushrooms after rain as commodity
prices rose. We wonder how many of them were little more than vehicles to
fleece retail investors of their hard earned to pay fees and commissions to
the promoters and brokers with never an intention in a million years of
actually developing a copper mine or a uranium mine or a gold mine in
Timbuktu. Perhaps we are just too naïve.