In 2009, Miller Energy Resources, a Tennessee company, announced what looked like one of the best Alaska purchases since William H. Seward's time. It paid $2.3 million for oil and gas reserves in Cook Inlet that the company said were worth $325 million.
Now the company is facing a challenge on three fronts -- the Securities and Exchange Commission told the company that it is challenging that 2009 valuation; the New York Stock Exchange warned that the company's stock price has dropped so low it may be delisted; and the Alaska Oil and Gas Conservation Commission has levied a $446,000 fine for alleged violations on oil and gas facilities in Cook Inlet.
The company says that no SEC action is warranted, it plans to get its stock price back up within the next six months and it is seeking to settle its differences with the commission and operate safely.
Six years ago, Miller entered the Alaska scene with Chief Executive Scott Boruff describing the purchase of $325 million in reserves for $2.3 million as an "extremely attractive value."
Not attractive enough, according to some critics. The comments proved controversial, prompting court challenges alleging Miller had overstated the value of what it bought, claims the company rejected. "Over time, Miller Energy announced the increased value of these assets to over $400 million in March 2010, over $800 million in May 2010 and over $1.2 billion in August 2010," Thomas Varlan, a federal district judge in Tennessee, wrote in a 2012 decision rejecting a suit against the company. "The announced valuation of the Alaskan assets was positively reflected in the company's financial reports and increased stock price."
It was also reflected in Boruff's compensation. But the stock price fell in 2011 when published reports said the Alaska assets purchased through a bankruptcy proceeding were worth only $25 million to $30 million, but even that was more than offset by $40 million in liabilities. Boruff responded by saying the company had become the "target of a short selling blog that hoped to profit from discrediting our company."
Boruff, who bought a 37,000-square-foot house in Tennessee in 2011 for $8.5 million, served as CEO until last year. He was replaced by Carl Giesler, but remains executive chairman.
Court complaints by disgruntled investors over Boruff's compensation failed. "Indeed, there are no allegations of any specific act or omission of any kind by defendant Boruff, only that his compensation was overstated in light of the company's 'real' financial performance," Harlan wrote in rejecting one case.
But the question of the proper value of the Cook Inlet reserves caught the attention of the SEC. Miller released a statement April 29 that said the "staff of the commission had made a preliminary determination to recommend that the commission pursue a civil action against the company related to its 2009 Alaska asset acquisition."
It concerns the "reported valuation of certain Alaskan assets acquired by the company from Pacific Energy in 2009 and later reported by the company in its 2010 and subsequent filings."
Miller said it has yet to respond to the SEC, but that an enforcement action is not justified. "Were the commission to bring such an action, the company cannot determine the amount of any potential monetary penalties or any other impact as a result of the proposed enforcement action," Miller said in an SEC filing April 29.
In the years since the purchase, Miller has moved aggressively to increase its operations and boost production in Alaska. It has benefited from the heavy use of Alaska tax credits, with the state funding from 35 percent to 65 percent of its drilling and completion costs per well regardless of success, the company said. The company told investors it could collect about $89 million in payments from the state in 2015.
The company produced at least 2,400 barrels of oil a day in Cook Inlet last year, where there are no oil production taxes.
In 2014, the company purchased Savant for $9 million, acquiring a two-thirds stake in the Badami Unit on the North Slope to go with its Cook Inlet holdings.
Speaking to stock analysts last fall, Boruff said, "We're probably the second-largest producer in the Cook Inlet now and so I think we are there to stay." He added, "It should be an exciting year with our rigs and our financing and our acquisition strategy."
But it has not gone according to plan. On Nov. 28, Boruff was "notified that, due to the fall in the price of our common stock, he was subject to a margin call on a securities account held by him that contained shares of company-issued stock and that the brokerage firm holding that account intended to begin effecting sales of the securities in that account unless the related margin loan was otherwise immediately paid in full," the company informed the SEC.
The price of Miller stock has dropped from about $6.40 last July to 59 cents this week. And the company announced Wednesday it would defer the payment of the quarterly cash dividend on its preferred stock. It hired a company to raise "credit-enhancing capital" and said it would "help ensure sufficient liquidity and maximize asset value."
With the drop in the stock price, the New York Stock Exchange gave notice April 23 that Miller could be removed from the exchange because its price has been below the $1-a-share threshold for more than a month. Miller, which has been on the NYSE since 2011, said it plans to "cure the deficiency" within the allotted six month-deadline.
In a conference call with analysts in March, Geisler said the company wants to be straightforward with investors. He said the company is working on improving internal controls with the goal of having an audit comment about a "material weakness" removed by the end of the year.
"Finally, please know that we remain eyes wide open to our situation," he said, adding that the company has been "paying for decisions" made by prior management. He said that the company has agreed to sell its plane. "There's no need to talk about it anymore," he said.
"The remainder of calendar 2015 will be all about repair. One, repair of our operating performance. Two, repair of our balance sheet. And three, perhaps most importantly, repair of our credibility. We're aware that calendar 2014's operation performance was poor," he said.
In Alaska, the company and the Alaska Oil and Gas Conservation Commission are debating repair issues as well. Last Friday, the Alaska Oil and Gas Conservation Commission issued an order fining Cook Inlet Energy, a Miller subsidiary, $446,000 for numerous violations related to production from a well that lacked a working safety valve system required to prevent an oil spill or a gas release.
Such systems are critical because a spark during a spill or blowout could lead to injury or environmental and property damage, said Cathy Foerster, chair of AOGCC. The safety valve systems are designed to shut off the well if there's an unexpected change in pressure.
Cook Inlet Energy CEO David Hall said the company is prepared to comply with regulatory requirements and that past issues with the commission have been resolved without any penalties. "I'm a longtime Alaskan, I like living here and we certainly strive to take care of our workers and the environment," Hall said.
Foerster said the commission has found that some operators new to Alaska are having difficulty meeting the agency's regulations.
"We are seeing small operators that don't have the same level of emphasis on regulatory compliance as the big operators and the ones who have been here a long time," she said. "We're going to do whatever it takes to make it a high enough priority for them that they do it right."
"If that means fining them, we'll do that," she said.
That goes for longtime Alaska operators, too, she said.
Foerster signed the order, along with Commissioner Dan Seamount. The third seat on the commission, to be filled by a public member, is currently open.
The order said Cook Inlet Energy has a pattern of noncompliance dating back to 2011 and listed several of those missteps. Despite a protest from Cook Inlet Energy, Foerster and Seamount said they were proceeding with an enforcement action for this latest event because of the company's past errors. But the commission has so far agreed to lower the civil penalty from $806,000 because the company has taken steps to improve its regulatory compliance program.
Foerster also said the company has a chance to seek a public hearing that could lead to a new finding depending on what evidence is presented, such as a lower penalty or even a decision that no wrongdoing occurred. The company has until the end of the month to decide whether it will take that step, she said.
Cook Inlet Energy says its safety record operating Sword No. 1 and similar wells has been done without the release of hydrocarbons or health, safety or environmental issues. But just because there hasn't been an accident in the past, doesn't mean there won't be one in the future, Foerster said on Wednesday.
"It's like saying, 'I've never been killed in car wreck, so I don't have to wear a seat belt,'" she said.
"CIE's documented history of regulatory noncompliance, acknowledged violations, and need to deter similar behavior warrant proceeding with this enforcement," the order said.
Hall said he appreciates the commission's efforts. He added that Cook Inlet Energy is weighing its options about whether it will ask for a public hearing to seek reconsideration.
Correction: This story has been revised to correct the estimated state tax credit payments to Miller Energy in 2015. The company told investors in April it expected $89 million in 2015.