Courtesy of Benzinga.
Activist investor Zachary Prensky of Little Bear Investments issued a letter to shareholders of FX Energy (NASDAQ: FXEN) Thursday morning, arguing that the board is effectively blocking shareholders from voicing concerns and is destroying value for shareholders.
Also, he noted that the only people getting rich in the company are the executives while shareholders continue to suffer.
Ad-Hoc Committee
Prensky represents the Ad-Hoc Committee of Shareholders which control about four percent of the shares in FX Energy and the group is extremely unimpressed with the recent actions of the board. Thus, the ad-hoc committee is taking a stand and Prensky argues that it is time that shareholders fight back against the board.
“We are extremely dismayed at the current lack of focus on improving shareholder value. Over the medium term, and especially in the past 12 months, [FX Energy] has appeared to have been run as a privately held company. With the exception of a few chosen individuals, most shareholders are given little to no technical information about the company’s prospects, producing assets, capital expenditure plans, and other such information necessary to make an informed investment decision with regards to the company’s publically [sic] traded stock.”
Prensky argues that the lack of public information about the company is keeping the stock price artificially low and that better clarity on operations from a new board could see the stock rise. “The lack of useful, actionable information coming out of the company has created a dearth of legitimate research which severely limits the pool of available investors willing to join us in owning a stake in FXEN. With a lack of knowledgeable buyers, shareholder value has been destroyed to the point that the current stock price is a fraction of fair value.”
Excessive Compensation
Prensky also argued that the only people benefiting from the current board are the board itself. He argued that the compensation committee in particular is over-paying the board and the executives and the compensation committee be wiped out in order to preserve value and return more to shareholders.
“Despite an abysmal total return for long term shareholders, the Board – led by the Compensation Committee – continues to reward management with large stock option grants. These stock and option grants get set at low strike prices due to the ongoing destruction of shareholder value.” In this light, they believe that the board and the executives are simply accumulating stock and options at low prices in order to eventually lead a sale of the company for fire-sale prices which only benefits the same executives and board.
Prensky takes a direct shot at President and CEO David Pierce in the letter, noting specific remarks made on a recent earnings call are insulting to shareholders. “On the May 5th conference call, David Pierce started his introductory remarks by stating, ‘It just keeps getting better’. [sic] For FXEN shareholders that couldn’t be further from the truth – although given the fact Mr. Pierce received over $2.9 million in total compensation from 2010-2012 I guess he could be forgiven for his enthusiasm.”
Fair Value
Prensky argues that the board is not doing enough to realize the full value of assets of the company. With the stock trading at a mere $3.42, he sees individual assets of the company being able to fetch as much as $13 per share, meaning that the Board is almost trying to keep the price low.
“Based upon a range of possibilities as to the ultimate recovery from the gas field discovered in the Tuchola 3k, it is possible that the Edge concession alone could be worth $8 to $13 per share” and he sees the a separate oil and gas field worth over $10 per share. In sum, these values represent a not-so-modest six times the current stock price.
Recommendations
Prensky has four recommendations for the company going forward to unlock value for shareholders.
- First, he recommends that the board provide more technical information on key assets of the company. “Additional technical information gleamed from the production test must be publicly released in order for [investors to make informed decisions” and releases “should include management’s range of estimates for how far the field extends and what the ultimate reserve possibilities could look like.
- Second, Prensky demands that Arnold Grumvig, the Chairman of the compensation committee, step down immediately along with two other board members, Dennis Goldstein and H. Allen Turner. “The Board should immediately start a search for capable and qualified individuals to take their place. We have a number of suggestions and would be happy to share our thoughts with you on this topic.”
- Third, and rightfully so, Prensky demands that the board release more timely information on the state of operations to better inform the market of the true value of the company’s various energy assets. “Basic details as to the timing of major events have been kept from shareholders consistently throughout the past few years, contributing to a sense of unease and dismay from long term shareholders.”
- Lastly, Prensky argues that the board, in the worst case scenario, should “commit to evaluating all avenues of increasing shareholder value – including a sale of the company – should the above actions not contribute significantly to an immediate improvement in the price of FXEN’s common stock.”
Stock Underperformance
FX Energy’s shares have seemingly declined at a steady pace for the last two years. Shares closed Wednesday at $3.42 down three percent and are down 61 percent from the 52-week high of $8.77 from September.
