Open Letter to the Chairman of FX Energy
The following letter was delivered to the Chairman of the Board of Directors of FX Energy on Thursday, June 27th, 2013. If you wish to join the mailing list of the Ad-Hoc Committee of FX Energy Shareholders and participate in our ongoing discussions as to how best to effectuate positive growth in shareholder value, please email email@example.com
FX Energy Ad-Hoc Cmte Letter Public 6.27.13
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Thomas B. Lovejoy, Chairman
FX Energy Inc.
3006 Highland Drive, #206
Salt Lake City, Utah84106
Dear Mr. Lovejoy,
I am writing to you on behalf of the Ad-Hoc Committee of FX Energy Shareholders (“ACFX”), an informal group comprised of shareholders of FX Energy, Inc. (“FXEN”) Upon information shared with me over the past two weeks, members of the ACFX control an ownership stake in FXEN approximating 4% of the common stock outstanding. None of the members of ACFX have currently given me any ability to vote, tender, dispose or otherwise exercise control over their respective ownership stakes in FXEN. Nevertheless we as a group have exchanged ideas and opinions over the current positioning of FXEN and our interests in seeing the company grow shareholder value and it is those ideas that I, on behalf of ACFX, are sharing with you today.
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, FXEN 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 traded stock.
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 as defined by the 2012 NPV10 proved + probable report (as drafted by the company’s outside consultants) along with the newly discovered 2013 finds (namely the Tuchola-3k and, possibly, the Plawce).
On the earnings conference call dated May 5th, 2013, during the Q&A section an investor inferred that the Tuchola-3k was ‘down dip’ of the assumed reservoir of gas. This fact was never disclosed publically by management but somehow known by an informed investor. In the case of Plawce, various message board posters seemed to have firsthand knowledge of the delays in testing the well, including the curious fact that key equipment was held up at the German-Polish border.
These are but two examples of selective disclosure that hurts the vast majority of shareholders and creates a two-tiered non-level playing field. Ultimately such behavior on the part of management leads directly to a yawning valuation gap between the company’s true asset value and the price of common stock as large swaths of potential investors assume that the deck is stacked against them.
We believe that the Board of Directors at FXEN has allowed management’s interests to diverge significantly from that of the true owners of the business – namely the 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. It leads us to believe that the long term goal of management is to accumulate large grants of stock and options struck at low prices before putting the company for sale down the road.
In 2012 alone, you, the Chief Executive Officer and the Vice Presidents of Operations & Exploration as a combined group received over $940,000 worth of restricted stock and options – during a time in which both stated reserves and shareholder value declined precipitously. Of course this was on top of large, six figure cash bonuses. These payouts were all given to long term executives who have already been significantly incentivized with company equity. From our standpoint the culture of rewarding management regardless of outcome needs to end immediately.
On the May 5th conference call, David Pierce started his introductory remarks by stating, “It just keeps getting better”. 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.
The sad fact is that an analysis of the long term exploration results for the company under Mr. Pierce’s management conclusively show that the vast majority of drilling success has been in the Fences concession – where the Polish Oil & Gas Company (PGNiC) has been the operator and 51% majority owner. With the exception of the recent Tuchola-3k, management has had a terrible track record creating lasting value drilling outside the Fences. Within the Fences PGNiC has done the ‘heavy lifting’. This leads one to ask – exactly what independent accomplishments long term shareholders have been ‘rewarding’ management for?
All of the above actions have contributed to the largest gap between perceived & actual value we have seen amongst small-cap E&P businesses in a long time. 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 upwards of $500 – 750 million dollars (or approx. $8 to $13 per share – assuming 55m+ shares fully diluted and a valuation of approx. $5m per BCF). Plawce likewise could add upwards of $10 per share in value. Furthermore, if Plawce is a commercial success there are numerous other ‘tight gas’ plays with the same structural similarities within FXEN-controlled concessions that would suddenly be worth significant sums of money.
It is very likely that material success at both the Tuchola & Plawce wells would yield a ‘takeout’ premium of anywhere from $15 – $25 a share. The fact that the price of the company’s common stock is so far from taking those possible scenarios seriously goes to the heart of our argument – namely that FXEN’s management has 0% credibility from professional E&P investors and financial institutions.
We feel very strongly that the Board of Directors needs to immediately take the following steps in order to begin the process of gaining institutional credibility and repairing the significant damage done to shareholders:
- Release additional technical information gleamed in testing the Tuchola-3K. In a press release dated May 21, 2013, shareholders were informed that “Tuchola-3K well inPolandsaw gas flow at rates between 3.8 million and 5.5 million cubic feet per day, with no water”. This is the full extent of the dataset you have released on this important prospect. There is simply not enough information to allow investors to make an informed decision as to the potential range of values that the Tuchola-3k may add to future reserves. Additional technical information gleamed from the production test must be publically released in order for this to occur. This should include management’s range of estimates for how far the field extends and what the ultimate reserve possibilities could look like.
- ArnoldGrundvig, Jr. is the current Chairman of the Compensation Committee. His stewardship of this position has been poor, to say the least. Mr. Grundvig should immediately step down from the Board of Directors along with Mr. Turner and Goldstein, and 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.
- Commit to releasing on an ongoing basis full and complete updates on the various capital expenditure projects. To date shareholders have been left in the dark as to the exact status of the Plawce and the planned 3d seismic program covering the Edge concession. 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.
- 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.
The company recently concluded its’ Annual Meeting without committing to any of the aforementioned operational and strategic changes. We are ready and prepared to open a constructive dialogue with the Board on how best to go about improving the message and flow of public information about the Company’s prospects. If you wish to do so we are available to schedule a meeting in the near future inNew York Citybetween a delegation from the Board and a subset of Ad-Hoc committee members.
If the Board will not commit to implementing the above steps then we have no choice but to oppose the existing Board in whatever efficient means we have at our disposal, including but not limited to running a slate of ACFX-recommended directors and/or calling a special meeting to change the current composition of the Board. Given the long term damage suffered by shareholders, we feel that absent an immediate and sustained attempt by the Board to rebuild trust, we would push for a newly-constituted Board to pursue a sale of the Company and extract whatever percentage of the implied value we can from the large portfolio of producing assets and high probability prospects.
It is our fervent wish to work in partnership with the Board to regain the trust of the marketplace. I sincerely hope that to be the case and am available to discuss the issues raised in this letter at the contact information below.
Ad-Hoc Committee of FX Energy Shareholders