Empire strikes back against shareholders

What Empire Oil & Gas lacks in size, it surely makes up in attitude.

Here is a company that has made 79 share placements in its 15-year life. Its 80th capital raising, unveiled last month, promises to take the number of Empire shares on issue to 6.2 billion.

For perspective, BHP boasts just 3.2 billion bits of paper on issue and Andrew Forrest’s Fortescue Metals Group 3.1 billion.

The sheer volume of Empire shares helps explain why the stock price is 1.2¢ and has failed to surpass 4¢ since September 2001. The oil explorer debuted on the share market in 1998, floating at 20¢ a share. The stock value has dropped 94 per cent since it floated.

Unlike the preponderance of its rival drillers, however, Empire has actually discovered oil and gas and is now just a bee’s knee from becoming a producer.

This is the paradox of Empire and its share price: that it is finally graduating from explorer to producer but its share price has barely budged. It already has a forward gas contract with Alcoa worth $25 million and a contract to sell processed condensate oil to BP.

Its onshore wells some 80 kilometres north of Perth, its Red Gully project, are tipped to produce resources worth $75 million a year over a production life of 15 years, as reported in an Empire presentation.

Research from Perth broker Hartleys reckons the Red Gully gas plant – scheduled for commissioning this month – will bring revenue of $19.5 million in its first full year and a net profit after tax of $11.1 million in 2014.

Yet with its shares languishing at 1.2¢, the market value of Empire Oil & Gas stands at just $72 million. It is not just the sheer volume of stock on issue that is the problem – a lot of shares entail a lot of potential sellers – it is the attitude.

This is one scary little company, now well-known for suing its own shareholders. The most infamous case is that of Susanne Devereux, a 67-year old retired nurse from Queensland whom Empire is suing for defamation in the WA Supreme Court.

Devereux had lost $50,000 in Empire and had criticised the company on the internet stock forum HotCopper. Empire went after her, and threatened a slew of other shareholders and HotCopper critics. Its three directors, chief executive Craig Marshall, Bevan Warris and Neil Joyce, also threatened HotCopper itself – forcing it to release the identities of 53 of its members.

Further to the fight against the dissenters, those that is who were trying to dump the board last year, Empire’s lawyer Martin Bennett wrote to 377 shareholders who had committed their stock in support of the requisition to roll the board.

It even threatened the Australian Shareholders Association, whose then chief Vas Kolesnikoff had had the cheek to support the calls for change.

The imbroglio over Empire Oil & Gas goes to the heart of shareholder democracy in Australia, indeed freedom of speech. Here is a company which has shut down dissenting voices by using the legal system. It is by no means the only case – business media are constant targets of threats, mostly using shareholders’ money – though it is odds-on the most egregious case.

The back story

So what is all the fuss about? What is the back story behind the acrimony? Already, as is to be expected when covering an Empire Oil & Gas story, BusinessDay has received correspondence from Empire’s legal team. So we shall proceed with caution.

Although much of the shareholder criticism related to poor performance in the share price and delays in the company doing what it said it would do, there are two subjects of particular sensitivity.

One is the transfer in 2011 of some assets from Empire to another company, Key Petroleum, whose chief executive is Kane Marshall, the son of Empire chief executive Craig Marshall. No cash was paid by Key. Empire received Key shares.

The second area for shareholder consternation has been the dealings with some colourful Londoners from Wharf Resources PLC. Wharf had struck a deal to help fund Empire’s exploration but the two parties have had a nasty falling out. Allegations of foul play are flying.

Indeed, BusinessDay has been caught in the crossfire, receiving what turned out to be fake emails from the WA State Solicitor’s Office and from the address [email protected].

The bogus State Solicitor’s Office email warns against talking with Wharf, and the bogus Rinehart email says, “As a major shareholder I am confused about the facts being published by Empire it appears that Wharf has not defaulted”.

Here is the header on the first:

———- Forwarded message ———-

From: Intelligence Unit <[email protected]>

Date:2 May 2013 08:27

Subject: Journalist at the Sydney Morning Herald. Investigating Empire Oil & Gas NL and ERM

To:[email protected]

Attn: Sulin Tan

Please do not write to Wharf Resources Plc Or Yellow Energy Plc. They cannot say anything as they and their auditors have been threatened by lawyers that they will be sued for defamation. Please look at Yellow Energy Plc and Wharf Resources Plc, websites for info.

The State Solicitor’s Office confirmed that the email did not come from it.

The extraordinary barney between Wharf and Empire has ensured that controversy continues to swirl around the long-awaited Red Gully plant, which had been due for commissioning earlier this month.

Empire announced that it and ERM Power had ejected Wharf from the joint venture for failing to make its share of cash payments for the project last month.

But in communications with its shareholders, Wharf said it withheld payments because of suspected irregularities in costs incurred in the venture by the operator, Empire.

Wharf was a 10 per cent partner in the Gingin West/Red Gully Project – Empire and ERM Power hold the other shares.

In documents reviewed by BusinessDay, Wharf sent a team of specialist engineers to audit the project in March 2013 and claimed the project had a financial value of “some $20 million less than amount claimed by Empire”.

Empire rejects this.

“There are no irregularities. There are $29 million in costs [at Red Gully]. Alcoa’s $25 million is dedicated to this project. Alcoa has already given the money,” chief executive Craig Marshall said.

According to Wharf, its auditor had put together a schedule of costs that estimated the project had only cost $15 million, not the $36 million cited by Empire.

The documents suggest Wharf’s requests to Empire to provide evidence to support its costs claims were not met. Empire rejects this.

“Wharf jeopardised their interests by not paying their cash calls. When they asked for the audit, they were already in default. We cannot provide confidential documents to a defaulting party,” Marshall told BusinessDay.

Wharf’s engineers estimated the Red Gully project costs had blown out by 30 to 40 per cent. While the design and quality of the Red Gully plant was sound, Empire used more materials than necessary, which resulted in “cost drifting”, according to Wharf. There were also no quality manuals or formal procurement procedures.

“We have built a plant to process condensate. We need to satisfy safety of the democracies and all the codes and standards in Australia,” Marshall said.

“Wharf does not make an understanding of it. Just because the JV is not doing things their way doesn’t mean they can default. They have problems and they should be worried about their problems. They had ample opportunities to investigate the JV.”

Wharf’s audit also suggested there was a shortage of oil and gas project management expertise at Empire, a lack of accurate budgets, and that the project failed to meet standard quality controls.

Again Marshall rejects the Wharf claims.

“Wharf did not send a team of specialists,” said the Empire chief executive. “They sent a kid out of university, and two French engineers and spent just over three hours on the audit.

“Wharf directors have never been to Australia,” he said.

Marshall said the market was aware there had been a slight increase in Red Gully costs but this had been necessary to “build a plant to process gas which is full of condensate, and satisfy safety codes and standards in Australia”.

Wharf offered $2.5 million in cash payments in escrow as good faith when it requested an audit, but Empire initially denied the Londoners access, claims Wharf, which constituted a breach of the joint venture agreement.

“We did not refuse them an audit. We invited them to come despite their default,” Marshall said.

The total amount of cash calls owed by Wharf is $765,000. Wharf has paid a total of $12 million since it entered the joint venture in 2006.

On its website, Wharf tells its shareholders: “After our investment of millions of pounds, it is absurd to think we would relinquish our interest in EP 389.”

Wharf has been embroiled in controversy before. One of its directors, Francesco Fuscilla, has been accused on various online forums of colourful business activities.*

Wharf claims it has reported the irregularities to corporate regulators in the UK, and to ASIC and the ASX in Australia. There is no evidence, despite the fiery dispute, and despite Empire dragging its shareholders through the courts, that the regulators are investigating.

In the meantime, Wharf has engaged lawyers in Perth to investigate the default, and has received more threats from Empire – all defamation related.

BusinessDay was unable to get in touch with Wharf management. Empire responded to questions and sent a letter from its lawyer Martin Bennett. Empire and its lawyers have been unable to confirm, despite repeated requests, whether Empire shareholders are footing the bill for the extraordinary amount of legal work and litigation by Empire directors.

According to Bennett, each of the Empire directors is personally responsible for the costs of the litigation. Whether Empire is ultimately footing the bill for the high legal costs has not been revealed.

One thing is certain. Disputes in business are par for the course. Suing shareholders and media to shut down adverse comment, however, constitutes a serious threat to freedom of speech and shareholder democracy. Something ought to be done about it.

* Response: Letter by Francesco Fuscilla