Chariot Limited (CHAR)

Chaparral Resources Buyout Highlights Lukoil's Questionable Tactics
Monday September 18, 11:27 am ET


Thomas Kirchner submits: Russian oil giant Lukoil's attempt to buy out the minority shareholders of Chaparral Resources, Inc. raises serious concerns about shareholder rights and the treatment of outside investors by the first Russian company to list on the London Stock Exchange -- one that claims to be a model for openness and transparency.
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Over the last few years, Lukoil, described by many observers as an extended arm of the Kremlin, has tried repeatedly to expand its operations in Kazakhstan, which it views as strategically important for its vast oil reserves. Last year, it lost the $4.2 billion takeover battle of Canadian PetroKazakhstan to the Chinese National Petroleum Company. In the heat of that fight, it bought another player in Kazakhstan's oil industry, Nelson Resources, and thereby acquired a stake in CHAR, which it eventually raised to a 60% majority. Following its defeat in the PetroKazakhstan saga, Lukoil has taken on an easier target: the minority shareholders of CHAR.

While it is not surprising that Lukoil seeks to consolidate its presence in Kazakhstan, it is the tactics it employs that raise eyebrows among U.S. investors. Minority shareholders have a tough stance anywhere in the world, but when U.S. minority shareholders and a Russian company are involved, two extremes come together. Shareholders would not even know the whole story, had it not come to light through a class action lawsuit against the buyout. Lukoil's managers seem to have been unaware of the remarkable powers enjoyed by plaintiffs in the U.S. to compel the release of internal documents during discovery, as they left an extensive paper trail. Frank Quattrone's infamous e-mail instructing employees to 'clean up' their files sounds harmless and innocent compared to the unambiguous and direct language in documents released through Chaparral's proxy materials.

During the preparation of the 10-K in early 2006, a Lukoil executive instructed Chaparral in internal e-mails to “add something a little negative to the report” and complained that it conveyed a “positive impression” and used “positive words.” To make sure that investors got a negative impression, he also suggested the deletion from a press release of production data that showed growth. In fact, production had been a major drag on CHAR's stock price for a few months, because drilling of new wells had been suspended at the end of 2005 when the lease on the CHAR's only drilling rig on the Karakuduk oil field expired. The field is operated jointly by Lukoil and CHAR. However, the expiration of that lease was caused deliberately by Lukoil, which refused to renew the lease contract, even though the rig's owner kept urging a renewal. The suspension of drilling had the desired effect: CHAR's stock price dropped by more than 23%. Investors were told neither that two new rigs had already been lined up, nor that drilling and production would be accelerated later in the year.

With the stock price depressed artificially, Lukoil made a lowball offer for the shares of CHAR's minority shareholders. Lukoil's initial bid of $5.50 per share was soon raised to the final price of $5.80 when it became clear that this was a level at which one institutional holder was willing to sell. While CHAR and Lukoil were debating whether $5.50 or 5.80 was the right price, CHAR's financial adviser indicated that the value of the firm in the $8-$11 range.

Even though it exploited the Karakuduk field jointly with CHAR, Lukoil executives regarded it
as theirs. In an email, the CFO of CHAR talks of Lukoil's regional director for Kazakhstan, Boris Zilbermints, making “noises” about payments from the oil field to CHAR, which “is letting the minority shareholders receive funds.” Presumably, this is an example of what a CHAR director describes in another email as “the Russian way of doing business.” So are some of the other scare tactics used by Lukoil. It threatened to shut-in the Karakuduk field if no deal were reached, or to cease development or fire the board of directors.

This is not to say that firing the board of directors would have been a bad outcome. A committee of two independent directors had been created to lead the negotiations with Lukoil, as is standard practice in mergers, with a mandate to represent shareholder interests. At least one of the two directors on the committee, however, appears to have had more concern for Lukoil’s interests than for those of shareholders. He leaked the valuation range that CHAR's financial adviser had calculated to Lukoil, so that CHAR was negotiating with a buyer who knew the price range of the seller. The two directors appear to have been well aware of the problematic nature of the buyout, as they negotiated a highly unusual clause in their indemnification agreement: if there is a lawsuit in connection with the merger, they will be paid $300 per hour for time spent defending themselves. In other words, the less they represent shareholders, the longer the lawsuits will be, and the more they get paid.

The big question is: why does Lukoil bother going to such great lengths to strongarm minority shareholders? Chaparral is a $200 million company of which Lukoil owns 60%, so that the buyout is costing a mere $80 million. This is small change for the world's second largest oil company by reserves, which posted net
profits of approximately $1.7 billion in the first quarter alone. Clearly, it could afford to pay fair value if it wanted, without the need to squeeze outside shareholders to the bone.

Lukoil's actions can only be explained by culture. As in many other emerging markets, Russian companies have an appalling record of treating minority shareholders, and Lukoil is exporting this standard to the U.S. market. Add to this a few ambitious regional and divisional managers seeking to impress their superiors with clever financial maneuvering. In a 2003 presentation posted on Lukoil's website, Lukoil's regional management for Kazakhstan boasts of its skill at buying assets low and selling high - they are sure to get top grades in that subject due to their Chaparral dealings.

For any large corporation, it is easy for top executives to tout their firm as a modern, shareholder-friendly company with good governance. But it is much harder to get B and C-level executives to act in that spirit. In Lukoil's case, middle management actively torpedoes the tone set at the top, and sooner or later it will lose any credibility with investors. And it is a mystery how exactly Lukoil intends to build a brand name for its gas stations in the Mid-Atlantic while establishing a reputation of abusing shareholders. What money they save on the CHAR purchase today will not be enough to fix their reputation in the future.

With Lukoil guaranteed to vote its 60% stake at the September 29th shareholder meeting in favor of selling CHAR to itself, the fate of Chaparral's minority shareholders is now in the hands of the Delaware courts. Class action lawsuits are often vilified, but if you are a holder of Chaparral, it is your only shot at getting a fair price for your shares.

==>Our attorney is co-lead Plaintiff and I'm confident that we'll end up getting in excesss of $10.00/share: OIL is going up all the time and CHAR's fair share price will be determined at the conclusion of the legal proceedings, when OIL could well be close to $100.00 a barrel...

Does anyone have any idea what is going on with Chaparral and their drilling situation? The silence is deafening!

CHAR: The Next Class-Action King
Tara Weiss 06.07.06, 1:00 PM ET

Related Quotes
CHAR 5.76 + 0.01
There’s nothing like a federal bribery and fraud indictment to scare away a law firm’s clients. That’s especially true at Milberg, Weiss, Bershad & Schulman, the class-action giant known for snagging the lucrative lead counsel position in numerous securities lawsuits.

The firm and two name partners are accused of paying kickbacks to plaintiffs in as many as 150 lawsuits. And since its May 18 indictment, Milberg has been losing both partners and clients. Among the defections: institutional clients like the Ohio Tuition Trust Authority and the New York State Common Retirement Fund. Adding to Milberg’s worries is the announcement on June 6 that Delaware’s Office of Disciplinary Counsel is investigating the firm's work in the state.

So which firms are likely to benefit from Milberg’s misfortune? Three years ago, Milberg Weiss was the leader in investor lawsuits, according to Institutional Shareholders Services, a Maryland-based company that tracks all securities class-action litigation for shareholders. Their most recent survey put Milberg Weiss in fourth place behind Bernstein, Litowitz, Berger & Grossman; Barrack, Rodos & Bacine; and Lerach, Coughlin, Stoia, Geller, Rudman & Robbins. Forbes.com called each of Milberg’s top four competitors, but they refused to comment on how they might be wooing Milberg’s former clients.

Each firm stands to gain. But of the three, it’s a toss-up between the industry’s two largest players. Bernstein, Litowitz, Berger & Grossman settled nine cases totaling $3.7 billion. Close. Barack, Rodos & Bacine also had settlements totaling $3.7 billion in five cases. While third-place Lerach, Coughlin, Stoia, Geller, Rudman & Robbins settled 47 cases, it totaled just $1.8 billion. By comparison, Milberg settled 34 cases totaling $600 million.

The indictment may have brought Milberg to its knees, but the company says it’s not yet crippled. “We will vigorously defend ourselves and our partners against these charges, and we will be vindicated,” Melvyn Weiss, one of the firm’s co-founders, said in a statement on the company’s Web site.

Despite how overly optimistic that may sound, even the firm’s competitors aren’t counting Milberg out. “They’re like cockroaches; they’re highly adaptable,” says John D. Lovi, a securities defense attorney and managing partner at Steptoe and Johnson's New York office, who frequently sparred with Milberg Weiss’ attorneys. “Unless this firm is destroyed by this investigation and this case, I think they will continue to be a dominant player in the field.”

It’s a field that’s notoriously cutthroat, despite attempts to temper the competition. The most recent effort was 1995’s Private Securities Litigation Reform Act. Prior to its passage, plaintiffs raced to the courthouse to be the first to file a lawsuit against a company if its stock dropped. Backroom jockeying determined who the lead plaintiff would be, a significant role since that attorney divvied up the winnings.

The Reform Act changed that. Now, the plaintiff who owns the most stock takes the lead role. But firms such as Milberg have allegedly found a way around that. State controllers decide where institutional investors put their money and which law firms represent them. Those are the same firms that make campaign contributions to state comptrollers, raising the question: Do comptrollers recommend firms to represent their states based on how much money was donated to their campaign?

That may be debatable, but New York State Comptroller Alan Hevesi received $100,000 from Milberg Weiss for his 2002 campaign and $13,500 from Melvyn Weiss and senior partner William Lerach. (Lerach left Milberg in 2004 and formed his own firm in California.)

“These types of contributions aren’t illegal; it’s a practice that’s under fire,” says Bruce Carton, vice president of shareholder services at Institutional Shareholder Services. “In a perfect world, that decision making would not be affected by political donations.”

Others that stand to gain from Milberg’s predicament are firms that represent members of the classes that didn’t initially hold lead status. That’s because the indictment leaves room for attorneys in class-action cases to lobby the court to unseat them as lead plaintiff. Those attorneys are likely to argue that Milberg was made lead counsel based on its reputation and because it follows the rules of the court. Now, all of that is in question.

The indictment is already affecting Milberg’s notorious ability to gain lead status. Last month, a Delaware judge denied the firm the lead counsel role in a case that involves Russia's largest oil producer, OAO Lukoil Holdings (other-otc: LUKOY - news - people ), and its proposed takeover of Chaparral Resources (otcbb: CHAR.OB - news - people ), a Kazakhstan subsidiary.

And last week Ohio Attorney General Jim Petro appointed Cincinnati firm Waite, Schneider, Bayless & Chesley to represent the Ohio Tuition Trust Authority in its case against the Putnam American Government Income fund. New York’s Hevesi is going to appoint a replacement in the New York State Common Retirement Fund class action against Bayer AG (nyse: BAY - news - people ).

Much has been made about the similarities between Milberg Weiss and the fall of accounting behemoth Arthur Anderson. But we’re not likely to see the demise of securities class-action suits. There’s simply too much competition out there. Plus, there’s already speculation that several attorneys from Milberg will form their own firm.

“If they were to disappear tomorrow, I doubt very little would change,” says Joseph Grundfest, a professor at Stanford University Law School and former Securities and Exchange commissioner. “The same companies would be sued, the same causes of action would be pursued.”

==>CHAR is worth in excess of $10.31/share...

http://www.thelion.com/bin/forum.cgi?msg=923300&tf=wall_street_pit&cmd=read

==>This offer is less than that paid to Nelson for the corresponding share of the same asset and will be bitterly contested...

Lukoil to acquire Chaparral Resources
Mon Mar 13, 2006 8:18 AM ET
NEW YORK, March 13 (Reuters) - Chaparral Resources Inc. (CHAR.OB: Quote, Profile, Research) on Monday said it has struck a deal to be acquired by Lukoil for $5.80 per share in cash, leading to a payment to minority holders of more than $88 million.

Chaparral operates in Kazakhstan.

==>CHAR hit a low today of $3.85 from a recent high of $7.45 on concerns about Lukoil acquisition of a 66% position in its partner and majority shareholder Nelson Resources, even though this would only give Lukoil a 40% stake in CHAR...

1st Q was .10, second Q was .17 and at this rate of organic growth, I'd expect .25 for the 3rd Q, to be released around 10 of November. Earnings for the whole of 2005 will be in the .85 range, giving a share price of $8.50 at a PE of 10...

The current state of mild panic about the Lukoil deal and shorting of oil/gas stocks is an opportunity to take a position in the $4.00 range, if you missed my original call to buy at $1.94...

Target: at leat the previous high of $7.45 that also happen to be the lowest estimate on the value of CHAR's shares, based on the Lukoil offer to Nelson...

==>CHAR's valuation is $10.96 under current offer by Lukoil to buy Nelson...

http://www.thelion.com/bin/forum.cgi?tf=wall_street_pit&msg=842316&cmd=read

Btw, next Q is some 6 weeks away, not 2 weeks...

What happened with CHAR any opinions?

From what I've read about the Karakuduk field in the Kazakhstan, this has the potential to be pretty big.

The government is relatively stable and they seem to be really happy with the arrangement of KazakhOil and Chaparral together developing the resources.

If you study the Subsidiary/JV Structure on Chaparral's web site, you can see that if the wheels start coming off for some reason, it'll be a nighmare to unravel who gets what.

OilVoice http://www.oilvoice.com/m/viewLink.asp?id=112 didn't really have much to say about the company other than some boilerplate from the website.

Considering the pop this thing has done the past 4 days I'm prone to wait a bit. Of course, if I do sit it out, it'll go to the damn moon!

The company's comments in the recent 10-Q about improvements in rail shipping pending in the next year is consistent with a recent article from the Russian Railroad and their goal of increasing their ability to transport a larger quantity of crude to China in the next year...LJ

Char.ob is doing a very nice job of consistently adding to production and increasing cashflow and profits. They are working on increasing access to world pricing for their oil and aiming for a big increase to 13,000bpd by year end.

Contrary to several other juniors drilling in the Former Soviet Republics, they are having good success at extracting oil in decent quantities. CNR and TMY have struggled mightily to increase production even though both boast always about their huge reservoirs of oil. Neither has consistently produced or increased output. TMY seems closest but was below 1000bpd early this year and still shooting for 4-5000 by yearend. This is the same goal they declared was possible last year. So compared to it's rivals, CHAR.ob is doing very well.

Recent stock action has been positive and I expect that to continue into 2006. The field has many drilling sites left and Char is improving the efficiency of existing wells and hitting new ones on a steady pace. Bobwins

Will the week ahead be positive here?...LJ

Char posted q2 at .17. Production up and headed higher. Shooting for 12,000bpd by 12/05. Setting up rail transport of oil to increase price some more. Prospects look good. Bobwins

==>CHAR ALL TIME HIGH: @$3.06 from $1.94. TARGET $10.00... Chart is a thing of beauty: 1st support at $2.83, secondary very strong support at $2.55, previous all time high of $2.99 taken out yesterday...

http://stockcharts.com/def/servlet/SC.web?c=char,uu[h,a]dacayyay[pb50!b200!d20,2!f][vc60][iUc15!Ua12....

The Chinese are looking at buying Petro companies in Kazakhstan, such as PKZ and presumably NLG.TO, CHAR's big brother/joint partner and they're paying top price, as evidenced by their offer for Unocal...

Next Q for release in August should show about .14 after .10 in Q1 and will seal the fate of CHAR's share price: estimated EPS for 2005 is .54 compared to .30 in 2004, reflecting increased output from 8,500 barrels/day to 12,500 barrel/day in December 2005 and higher prices. On the basis of a conservative PE of 20, we obtain at the end of 2005 a projected price of:

.54 x 20 = $10.80

Of course, this is just the beginning, as further development will bring total output to over 15,000 barrels/day in 2006 and the life of the field is at least 10 years without further discoveries...

OT Napolion

I noticed you mentioned methane digesters. Have you looked at IESV.ob. Not profitable but I think has a better approach than your pick. IESV.ob has a working production situation with a dairy in Idaho. Several hundred head with a much bigger installation just starting. The IESV folks have figured out that methane digesters aren't economic if they just use the methane to turn a generator to produce electricity. Poor use of the gas. They are looking for higher value uses and have contracted with several endusers. They are going to pipe it into the regional natural gas lines for home heating, they are hoping to setup a plant to convert it to propane, which is a much higher value added product and they have purchased a local distributor of CNG, which supplies local fleets of trucks.

It is a penny stock and likely won't be as good an investment short term as yours but IESV claims to have a higher btu content end product than others. Also generating electricity from methane is especially not competitive in the West where hydropower is so cheap. Bobwins

CHAR: @$2.29... Mkt Cap 88 mil, EPS .30, LQ .10, cashflow $49.6 mil, 15 mil shares trading at most, main asset: between $1.7 and $2.4 Billion worth of RECOVERABLE light sweet crude in the ground, TARGET: $10.00...

http://www.investorshub.com/boards/read_msg.asp?message_id=6649896

This stock is an OK energy stock to hold as the production is projected to increase modestly over the next few quarters however, it isn't without problems Kazakhstan now doesn't allow gas flaring which has acted as a major production curtailment on some of its competitiors. (ie PetroKazakhstan)

Another undervalued stock in the oil group is IMO is the Russian oil Tatneft NYSE: TNT

LOOK and check this oil company 3.83 milion $ net profit at Q1 10 cent a shar for q1 CHAR is very deep under value with 9000 barrels per day is shuld trade at 10 $ a share