What is the Up With Alange Energy ? – Strange revision of Earlier Production Numbers Accompanied By Massive Selling By Insider

Author's Avatar
Jan 14, 2011
In my quest to load my portfolio with undervalued oil reserves so that I profit from our new world of higher oil prices rather than suffer from it I try and learn about a new company every week. This morning in scouring the usual places for some companies to look into further I came across one that reinforces the importance of investing alongside a good management team.

The company is called Alange Energy and last night they told investors that at the end of November they had mistakenly provide production details based on production capacity rather than actual production. Here is the press release:

TORONTO, Jan. 13 /CNW/ - Alange Energy Corp (TSXV: ALE) revised today production numbers it earlier provided in its Management's Discussion and Analysis for the quarter ended September 30, 2010 (the "Third Quarter 2010") and announced on November 29, 2010. Average production for the Third Quarter 2010 was 2,561 barrels of oil equivalent per day (boe/d) rather than the reported 3,179 boe/d. Exit rate production for the Third Quarter 2010 (defined as the average daily production for September 2010) was 2,622 boe/d rather than the reported 3,330 boe/d and the daily production rate as at November 29, 2010 was 2,609 boe/d rather than the reported 4,300 boe/d.

The production numbers that were reported on November 29, 2010 related to production capacity rather than production as of the referenced dates. Production capacity is based on management's estimate of the capability that the Company has to produce oil and/or gas, which at any moment may be partially limited by diverse factors. The difference between capacity and production, called deferred production, is generally readily available when the extraordinary factors that cause it are removed. These factors can include a normal structural time delay when production is expanding by drilling new wells, or transportation restrictions and seasonal weather difficulties. The latter has been especially severe during the past three months, as Colombia experienced unusually high rainfall resulting in landslides and floods.

During the Third Quarter 2010, the Company instituted a new internal production reporting system for better operational control, which allowed it to better pinpoint each field's production capacity and improve optimization. These capacity numbers were reported on November 29, 2010 rather than the production numbers, which had been used appropriately for all previous quarters. This revision has no impact on the unaudited consolidated financial statements for the three and nine month periods ended September 30, 2010 previously filed on SEDAR since they were based on production rather than capacity. The revised Third Quarter 2010 production numbers do not include any results from Topoyaco.

The Company also reported that its exit rate production for the fourth quarter of 2010 was 2,374 boe/d. The Company's share of daily production averaged 2,515 boe/d for the fourth quarter, bringing the daily average for 2010 to 2,413 boe/d. The Company's production statistics for the third and fourth quarters of 2010 are summarized below:

Daily average production (boe/d)


Previously Disclosed

Q3 2010 Exit Rate(1)



Three months ended September 30, 2010



Nine months ended September 30, 2010



November 29, 2010



Q4 2010 Exit Rate(1)



Three months ended December 31, 2010



Twelve months ended December 31, 2010



(1) Measured as the average of the daily production rates for the last month of the fiscal quarter.

As at December 31, 2010, Alange Energy had a cash balance of approximately US$6 million and total debt (current and long-term) of approximately US$47 million. At current production levels, the Company estimates that its operating cash flow is sufficient to cover its day to day operations and monthly debt service requirements. However, all previous guidance provided by the Company, including capital expenditure budgets, is currently under review by the board of directors.

The board of directors of the Company has formed a committee of its independent directors which, in conjunction with its Audit Committee, has reviewed and approved the revised production numbers. The committee of independent directors has also instituted a review of the Company's internal controls and procedures, management systems and corporate governance practices to ensure that production is consistently reported and has engaged professional and financial advisors, including GMP Securities Inc., to assist it in this review. The committee will report the results of this review to the market on a timely basis and has taken all steps necessary to ensure that the market is fully informed. Moreover, the committee has also mandated various steps towards improving the Company's disclosure checks and controls.

In conjunction with the procedures the Company has put in place, it has appointed Gregg Vernon as Interim Chief Operating Officer, reporting directly to the board of directors and the Chief Executive Officer. Mr. Vernon will be responsible for the review of controls and systems mentioned above, as well as implementing management and systemic adjustments that the review requires. Mr. Vernon has been acting as a consultant to Alange Energy since September 2009 and was the Chairman of Prospero Hydrocarbons from August 2007 until it was acquired by the Company in September 2009. Mr. Vernon is an engineer by training with over 30 years' experience in the oil and gas business in various executive positions.

Luis Giusti, Chief Executive Officer of Alange Energy stated "Our production was affected by a number of factors in the third and fourth quarters of 2010, but as a result of our successful drilling efforts, our potential production capacity has increased and continues to do so, and we expect actual production to start catching up to capacity in due course. The board has made some important recommendations based on the disclosure issues that are now apparent, and we will do everything necessary to meet their internal review process requirements. I particularly welcome Gregg Vernon's increased role in the Company to ensure the implementation is handled in a proper and timely manner."

Production capacity rather than production was reported in a press release dated November 29, 2010 and the Third Quarter 2010 Management's Discussion and Analysis filed on SEDAR on the same day. The Company has re-filed its Management's Discussion and Analysis on SEDAR; it is also available on the Company's website (www.alangeenergy.com). The Third Quarter 2010 financial statements were not affected by this correction to the production numbers and have not been re-filed.

So that would make you pretty unhappy if you were a shareholder. How would you then feel if you saw an insider go from owning 8,776,944 shares at the time of the overstated announcement to 470,000 shares by the time this revision was released ? Here is the link to the transaction details:


I'd be more than a little upset.

I hope that the selling and the timing of the revision were just coincidental. One thing seeing something like this does is reinforce the importance of getting to know the management of the companies you are invested in if you run a fairly concentrated portfolio.