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Arakis Energy: The rest of the story

2006-06-14 13:52 ET - Street Wire

By Stockwatch Business Reporter
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Throughout the hearing at the B.C. Securities Commission into whether Terry Alexander was acting as a de facto director of Pinewood Resources Ltd., the subject of his securities ban has come up often, without much explanation as to its origin. Similarly, there is scarcely any mention of the Sudanese oil project that Mr. Alexander was promoting in the 1990s through Arakis Energy Corp. Although he hit a wall, Mr. Alexander was onto something big.

On the edge of the Red Sea, the Sudan is now producing 401,300 barrels of oil a day. The African nation exports nearly three-quarters of this resource. While the Nile flows south into Egypt, much of the Sudanese oil wealth flows east. Prolific oil fields in Sudan are now prized assets of Chinese, Malaysian and Indian national oil companies. In the mid-1990s, however, five of these fields were the pride of Howe Street promoter, Terry Alexander.

In 1991, a younger Mr. Alexander was readying his shot at the big time. He had been on the board of Arakis's predecessor companies since 1988, and was now president and chief executive officer. Anne Eilers, a co-defendant in the current hearing, was serving as corporate secretary. In June, 1992, Mr. Alexander arranged for Arakis, listed on the Vancouver Stock Exchange, to acquire State Petroleum Corp. for five million shares. The private oil company was buying concessions in the Sudan. Arakis interlisted on the Nasdaq Stock Market in 1993. With prodding from Mr. Alexander, investors bought the stock as an attractive speculative play. Yet money for the Sudanese project was always a problem.

In January, 1994, Mr. Alexander brought in Anthem International Inc., a company incorporated in the British Virgin Islands, as an investor. Anthem obtained one million Arakis shares. Later that year, in September, the chief executive officer landed another financing with Hatfield Investments Ltd. The investor agreed to buy 500,000 Arakis shares at $5.10 each for $2.55-million. Mr. Alexander became chairman of Arakis on Nov. 1, 1994, and soon after cut a deal with Verwaltungs-und-Privat Bank Aktiengesellschaft. The German bank agreed to buy one million shares for $6.37-million. The VSE would later voice its suspicion that Hatfield and Verwaltungs were late in paying, or did not pay at all, but there was insufficient evidence to be certain. In any case, Arakis was in need of enormous sums to finance its oil wells and a 1,500-kilometre, 28-inch pipeline to Port Sudan on the Red Sea coast.

On July 6, 1995, Arakis told the public that Arab Group International for Investment and Acquisition Co. Ltd. (AGI) was willing to provide $750-million (U.S.) in financing. Immediately, Arakis shares, which had already levitated from $5.10 where Hatfield got in, moved from $23.25 to $26 on the VSE. War-torn Sudan is a perilous place to do business, but with financial backing in place, it looked as though Arakis shareholders might soon collect vast risk premiums. On Nasdaq, the company was trading huge volume, often more than Microsoft, which was in the middle of its Windows 95 hoopla.

In fact, summer would have been a good time to sell. Investors got jarring news on Aug. 22, 1995. In a news release, Arakis told the world what a few already suspected -- that AGI would not be forthcoming with its $750-million (U.S.) investment. On the VSE, the stock cratered to $15.50 on heavy volume. On Aug. 24, 1995, Arakis voluntarily delisted. The stock resurfaced only a month later on Nasdaq at $6.25 (U.S.). Mr. Alexander resigned from all his positions at Arakis on Dec. 1, 1995.

The aftermath of the Arakis share calamity filled business columns in newspapers for years, but the stock market angle received most of the coverage. Few paid attention to the company's role in the Sudanese project.

In October, 1998, Talisman Energy Inc. was able to snatch up Arakis and its State Petroleum subsidiary on the cheap. Talisman issued one of its roughly $33 shares for every 10 Arakis shares. In total, this meant 8.92 million Talisman shares in a transaction worth $295-million. Lundin Oil AB held about 9.6 million Arakis shares, or 10.8 per cent of the total outstanding, and agreed to vote in favour of the Talisman bid. Adolf Lundin and his family first started buying Arakis through Sands Petroleum in the early 1990s.

Dr. James Buckee, president and chief executive officer of Talisman, said, "This is a rare opportunity with spectacular potential."

While Talisman was congratulating itself over its acquisition, Mr. Alexander was in trouble. In early 1999, the BCSC sent investigators to the island of Jersey in the English Channel. Michael Watson, then executive director of the BCSC, said "investigators spent several weeks working with the Jersey Financial Services Commission obtaining evidence and interviewing people." The result of the joint investigation was a litany of allegations against Mr. Alexander. It appeared the Vancouver promoter was trading in Arakis shares at various times through Princely Ltd., Hatfield Investments, Chatel International Ltd. and Anthem International Inc. The BCSC claimed that Mr. Alexander did not file insider trading reports or direct Arakis to disseminate material information while he was buying and selling. Further, the BCSC alleged that he violated the Company Act by, among other things, having Arakis issue shares before the company received payment.

On Feb. 24, 1999, Mr. Alexander signed a detailed statement of facts, admitting to the trading and disclosure violations. He agreed to an administrative penalty of $700,000 and also paid $500,000 toward the cost of the investigation. In addition, the BCSC saddled him with a 20-year ban on acting as a director or promoter, the ban it now alleges he defied. In 1999, Mr. Alexander said: "Contrary to the claims of the project's detractors, who claimed the project was a sham and that it was impossible to build an oil pipeline in war-torn Sudan, initial production from the oil fields is expected before the end of this year. [...] Am I proud of its success? Absolutely."

While Mr. Alexander was accepting his punishment, Talisman was telling shareholders about its splendid Sudanese investment. In a March, 1999, news release, the company said it had already added 33 million barrels of oil through additional drilling and evaluation. On June 23, 1999, first oil flowed into the 1,500-kilometre pipeline from central Sudan to the coastal port.

The play, while reportedly very profitable, eventually became a public relations burden for Talisman. After four years of enduring rebellions in Africa and human rights protests back home, Talisman sold out. In October, 2002, Dr. Buckee commented, "Shareholders have told me they were tired of continually having to monitor and analyze events relating to Sudan." No doubt he was also tired of accusations that Talisman was fomenting genocide in Africa. Talisman sold all its Sudanese oil assets to ONGC Videsh Ltd., the national oil company of India, for $758-million (U.S.), or roughly $1.2-billion.

Unlike most VSE projects of the time, Arakis Energy held a huge asset. Had the financing materialized, Mr. Alexander would have been known as a company builder. There would have been no Arakis hearing, no fine, no 20-year ban, and no current hearing.



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