Wednesday, May 16, 2012

Wexford Capital and Gulfport Energy

Gulfport Energy is a reputable Oklahoma based oil and gas company with widespread interests including in Canadian oil sands (via Grizzly Oil Sands) and in the Utica shale. It trades on the NASDAQ and has a market cap of a little over 1.2 billion dollars. The ticker is GPOR.


Wexford Capital is a reputable hedge fund and investment group based in Greenwich Connecticut with (according to the website) $5.6 billion in assets under management. That is more than 100 times what we manage.


The principal of Wexford is Charles E Davidson. He has a fine CV which I have cribbed from the website:


Charles E. Davidson, 59, co-founded Wexford in 1994 and serves as its Chairman and Chief Investment Officer.  Mr. Davidson has primary responsibility for the overall strategic direction of Wexford’s investment activities and serves as the senior portfolio manager for the Wexford Spectrum Funds and the Wexford Catalyst Funds.  From 1984-94, Mr. Davidson was a General Partner of Steinhardt Partners, L.P. where he was responsible for all fixed income arbitrage, risk arbitrage, private equity, distressed/bankruptcy and special situation investments of the multi-billion dollar hedge fund.  From 1977-84, Mr. Davidson was employed by Goldman Sachs & Co. where he was the head of domestic corporate bond trading and proprietary trading.  Mr. Davidson holds an MBA and a BA in economics from the University of California – Los Angeles.
Last week I read the proxy for Gulfport Energy which goes through the relationship with Wexford. There, properly disclosed, are many related party transactions.


The hedge fund I run is (apart from the management contract) involved in no related party statements so I find complex related party transactions surprising. However, as I said, they are properly disclosed. Here are a list of related party transactions from the last proxy:



... Based solely on Form 4 filed with the SEC on March 13, 2012 by Charles E. Davidson. Represents 5,336,526 shares of common stock held by CD Holding Company, LLC. Mr. Davidson is the manager and a member of CD Holding Company, LLC and the Chairman and Chief Investment Officer of Wexford Capital LP...
... We are a party to administrative service agreements with Stampede Farms LLC, which we refer to as Stampede Farms, Everest Operations Management LLC, which we refer to as Everest, and Tatex Thailand III, LLC, which we refer to as Tatex III. Under these agreements, our services include professional and technical support and the fees for such services can be amended by mutual agreement of the parties. Each of these administrative service agreements may be cancelled (1) by us with at least 60 days prior written notice and, (2) by the counterparty at any time with at least 30 days prior written notice to us and (3) by either party if the other party is in material breach and such breach has not been cured within 30 days of receipt of written notice of such breach. We did not provide services under any of these agreements in 2011 and received no reimbursements thereunder. Each of Stampede Farms, Everest and Tatex III is controlled by Wexford Capital LP, or Wexford...

... We contract with Athena Construction, L.L.C., which we refer to as Athena, to provide barge services in our West Cote Blanche Bay, or WCBB, and Hackberry fields located along the Louisiana Gulf Coast. For the year ended December 31, 2011, we paid Athena $3,389,000 and owed an additional $676,000 for such services at that date. Athena is controlled by Wexford...
... Effective March 1, 2008, Everest provides tax planning, preparation of supporting tax schedules and consultation services to us based on an agreed fee structure. The scope of such services can be modified with the mutual agreement of the parties. Everest is controlled by Wexford. We paid Everest $5,000 for these services in 2011. 
Caliber Development Company, LLC, or Caliber, provides building maintenance services for our headquarters in Oklahoma City, Oklahoma. For the year ended December 31, 2011, we paid Caliber $20,000 and owed an additional $2,000 at that date. Caliber is an entity controlled by Wexford
Great White Directional Services LLC, which we refer to as Directional, performs directional drilling services for us at our WCBB and Hackberry fields. Directional was an entity controlled by Wexford until August 24, 2011 when it was sold to an unrelated third party. Directional is no longer a related party. While still a related party, we paid Directional approximately $2,625,000 and owed an additional $1,133,000 for such services at that date. 
Great White Pressure Control, which we refer as Pressure Control, performs services for us at our WCBB field. Pressure Control was an entity controlled by Wexford until August 24, 2011 when it was sold to an unrelated third party. Pressure Control is no longer a related party. While still a related party, we paid Pressure Control approximately $80,000. No amounts were owed to Pressure Control as of August 24, 2011. 
Black Fin P&A, LLC, which we refer to as Black Fin, performs plugging and abandonment services for us at our WCBB field. For the year ended December 31, 2011, we did not pay any amounts to Black Fin and owed $436,000 to for such services at that date. Black Fin is an entity controlled by Wexford.

... We have a 23.5% ownership interest in Tatex Thailand II, LLC, or Tatex II. The remaining interests in Tatex II are owned by other entities controlled by Wexford. Tatex II holds 85,122 of the 1,000,000 outstanding shares of APICO, LLC, or APICO, an international oil and gas exploration company. APICO has a reserve base located in Southeast Asia through its ownership of concessions covering two million acres which includes the Phu Horm Field. During 2011, we received $870,000 in distributions from Tatex II. 
We have a 17.9% ownership interest in Tatex III. Tatex III owns a concession covering approximately one million acres in Thailand. Approximately 68.7% of the remaining interests in Tatex III are owned by other entities and individuals affiliated with Wexford. During the year ended December 31, 2011, we paid $3,794,000 in cash calls to Tatex III. 
We own a 24.9999% interest in Grizzly, a Canadian unlimited liability company, through our wholly owned subsidiary Grizzly Holdings, Inc. The remaining interests in Grizzly are owned by other entities controlled by Wexford. As of December 31, 2011, Grizzly had approximately 754,000 acres under lease in the Athabasca region located in the Alberta Province near Fort McMurray. Grizzly Holdings Inc. entered into a loan agreement with Grizzly effective January 1, 2008, under which Grizzly borrowed funds from us. Borrowed funds initially bore interest at LIBOR plus 4% and had an original maturity date of December 31, 2012. Effective April 1, 2010, the loan agreement was amended to modify the interest rate to 0.69% and change the maturity date to December 31, 2011. Effective October 15, 2010, the loan agreement was further amended to change the maturity date to December 31, 2012. Interest was paid on a paid-in-kind basis by increasing the outstanding balance of the loan. During the year ended December 31, 2011, we loaned Grizzly approximately $3,182,000 and recognized interest income of approximately $147,000. Effective December 7, 2011, Grizzly Holdings Inc. entered into a debt settlement agreement with Grizzly under which Grizzly agreed to satisfy the entire outstanding debt and accrued interest of $22,325,000 by issuing additional common shares of Grizzly with no effect to the ownership structure of Grizzly. 
During the third quarter of 2011, we purchased a 25% ownership interest in Bison Drilling and Field Services LLC, or Bison, at a cost of $6,009,000, subject to adjustment. In April 2012, we increased our ownership interest in Bison to 40% for an additional payment of $6,152,000. The remaining interests in Bison are owned by entities controlled by Wexford, including Windsor Permian LLC, or Windsor. Bison owns and operates drilling rigs. 
During the fourth quarter of 2011, we purchased a 25% ownership interest in Muskie Holdings LLC, or Muskie, at a cost of $2,142,000, subject to adjustment. The remaining interests in Muskie are owned by entities controlled by Wexford, including Windsor. Muskie holds certain assets, real estate and rights in a lease covering land in Wisconsin that is prospective for mining oil and natural gas fracture grade sand...
... Effective as of November 1, 2007, we and Windsor entered into an area of mutual interest agreement to jointly acquire oil and gas leases in the Permian Basin. The agreement provides that each party must offer the other party the right to participate in 50% of each such acquisition. The parties also agreed, subject to certain exceptions, to share third-party costs and expenses in proportion to their respective participating interests and pay certain other fees as provided in the agreement. During 2011, we acquired approximately 604 net acres from Windsor under the terms of this agreement for an aggregate of $1,102,000. Windsor is controlled by Wexford
Windsor is the operator of all of our acreage in the Permian Basin. As operator of these properties, Windsor is responsible for the daily operations, monthly operation billings and monthly revenue disbursements for the properties in which we hold an interest. For the year ended December 31, 2011, Windsor billed us approximately $56,103,000 and at December 31, 2011, we owed $5,593,000 for these services. 
Effective April 1, 2010, we entered into an area of mutual interest agreement with Windsor Niobrara LLC, which we refer to as Windsor Niobrara, to jointly acquire oil and gas leases on certain lands located in Northwest Colorado for the purpose of exploring, exploiting and producing oil and gas from the Niobrara Formation. The agreement provides that each party must offer the other party the right to participate in such acquisitions on a 50/50 basis. The parties also agreed, subject to certain exceptions, to share third-party costs and expenses in proportion to their respective participating interests and pay certain other fees as provided in the agreement. We are the operator of this acreage in the Niobrara Formation. As operator, we are responsible for daily operations, monthly operation billings and monthly revenue disbursements for these properties. For the year ended December 31, 2011, we billed Windsor Niobrara $6,642,000 and, at December 31, 2011, Windsor Niobrara owed us $3,557,000 for these services. Windsor Niobrara is controlled by Wexford
In February 2011, we entered into an agreement with an unrelated third party to acquire certain leasehold interests in acreage located in the Utica Shale in Ohio. The agreement also granted us an exclusive right of first refusal for a period of six months on certain additional tracts leased by the seller. As of December 31, 2011, we had acquired leasehold interests in approximately 98,000 gross (49,000 net) acres in the Utica Shale in Eastern Ohio under these and other agreements for approximately $118,421,000. As of February 20, 2012, we had closed on additional acquisitions bringing our leasehold interests to approximately 107,000 gross (53,500 net) acres. We have commitments with various future closing dates that could increase our acreage position in the Utica Shale to an aggregate of approximately 125,000 gross (62,500 net) leasehold acres. Entities affiliated with Wexford, primarily Windsor Ohio LLC, or Windsor Ohio, participated with us on a 50/50 basis in the acquisition of the leases described above and, at December 31, 2011, held leasehold interests in approximately 49,000 net acres for which they paid approximately $118,413,000, excluding fees and expenses of $1,184,000 billed under the acquisition team agreement described below. We are the operator on this acreage in the Utica Shale. 
Effective July 1, 2008, we entered into an acquisition team agreement with Everest to identify and evaluate potential oil and gas properties in which we and Everest or its affiliates may wish to invest. Pursuant to this agreement, Gulfport and Everest each agreed to form an acquisition team. Upon a successful closing of an acquisition or divestiture, the party whose acquisition team identified the acquisition or divestiture is entitled to receive a fee from the other party and its affiliates, if applicable, participating in such closing. The fee is equal to 1% of the party’s proportionate share of the acquisition or divestiture consideration. The agreement has a one-year term unless earlier terminated by either party upon 30 days notice. 
From time to time, certain of our petroleum engineers provide services relating to evaluation of potential investments to Wexford and geological evaluations, seismic review and similar services to Tatex II and Tatex III. Wexford, Tatex II and Tatex III, respectively, have agreed to reimburse us based on the amount, scope and nature of services provided by our petroleum engineers to such entities. We did not provide any services under these arrangements in 2011.

As you can see there are considerable (properly disclosed) related party transactions with Wexford. Helpfully they include a summary:

Our Relationships with Wexford and its Affiliates 
Charles E. Davidson is the Chairman and Chief Investment Officer of Wexford and he beneficially owned approximately 16.8% of our outstanding common stock as of December 31, 2011. Wexford is the manager of the Wexford-controlled entities described above. As manager, Wexford has the exclusive authority to, among other things, purchase, hold and dispose of the assets of each such entity. Mr. Liddell, our Chairman of the Board, is the operating member and, in some cases, an officer, of certain of these entities. All distributions made by these entities are first paid to the Wexford members in accordance with their respective ownership interests until they have received amounts equal to their respective capital contributions. Thereafter, distributions are to be made 90% to the Wexford members in accordance with their respective ownership interests and 10% to Mr. Liddell. Mr. Liddell is not currently entitled to, and has not received, distributions from any of these entities. All transactions between us and these entities are reviewed and approved by our independent directors.

All for thought and consideration of my readers.



John

Disclosure: We are short Gulfport Energy and have been for some time. We recently increased the position.

10 comments:

Anonymous said...

In principle that could just mean that Wexford is a big (controlling?) shareholder in Gulfport and Davidson has a lot of his own money in Wexford as an LP. (It may not mean that ... but it is a possibility).

SB

Anonymous said...

The zerohedge dude (danny boy ivanijiski) worked for wexford capital

Anonymous said...

@SB

Gulfport only has 55mm shares floated, so 5% would be ~2mm shares.

According to their most recent SC 13G/A, the only entity to own more than 2mm shares is The Bank of New York Mellon Corporation.

I wouldn't be surprised if Davidson has his own money in Wexford as an LP but you'd think that would merit disclosure.

- MDd

Anonymous said...

So, it smells a little by rewarding a large shareholder with multiple contracts. What is the total annual value of these contracts? Is it enough to singk the stock?

Is that why you are short, just because it smells?

the buckaroo said...

hey john...off topic. Good call on LightSquared! What of Digital Domain & recent 1st quarter statement & release?...or are you already short on that pup?

Anonymous said...

Certainly the potential for self-dealing is huge.

Kris Tuttle said...

Wow. I've never seen so many related party transactions in one place with a single related party.

It's unusual. Reminds me of private equity where they invest a ton of LP money in a company, then pay themselves a bevy of fees and finally get a nice carried interest if the investment actually works out.

I wonder if Gulfport employees all have to buy their cars at a particular dealership controlled by Wexford?

Does this come up on their quarterly earnings calls?

Anonymous said...

So Gulfport lends money to Grizzly. Grizzly pays PIK interest since it is not generating any cash flow and then they do a debt-for-equity swap. How come the ownership structure does not change? Do you think Wexfort also had a loan that was pro rata to their ownership?

B

longshorttrader said...

Some of these comments, not to mention the reality that situations like GPOR have existed in the past, currently exist, and will continue to exist in the future ... lead me to the belief that people either don't read the fucking (excuse my french) SEC filings, and/or if they do, they're no better than sheep that go 'Baaaaah!'

Maybe it's me, maybe I'm missing something...but I really would using the 'other' F-bomb. I may in the future.

Anonymous said...

Regarding the complexity of Wexford's relationship with Gulfport in Ohio.

Rhino Resources touted by Wexford -
http://beta.fool.com/insidermonkey/2012/...

files regarding to agreement with Gulfport and Windsor a Wexford affiliate pertaining to Gulfport lease activity in Ohio.

http://biz.yahoo.com/e/110512/rno8-k.htm...

All in all Wexford appears to have a very complex relationship with its clients

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The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.