Cook Inlet Energy parent loses some shine

FORTUNE TURNS: Miller's shares drop and it faces 2 federal lawsuits.

August 6, 2011 

Cook Inlet Energy LLC and its Tennessee-based parent, Miller Energy Resources Inc., have enjoyed considerable success since becoming an Alaska oil and gas producer in late 2009.

They grabbed a package of west Cook Inlet assets out of bankruptcy, restored a number of shut-in wells to production and brought the offshore Osprey platform back to life.

Along the way, Miller's stock price went from a few pennies to a few dollars.

In recent days, however, the good fortune has seemed to turn a bit for Miller and Cook Inlet Energy.

Miller has reported that some of its recent financial filings with the U.S. Securities and Exchange Commission "should not be relied upon," and must be corrected.

The company's shares, traded on the New York Stock Exchange, have taken a beating, in part due to a negative online article about Miller. The stock closed Aug. 3 at $3.46 a share. Through most of July the stock traded well above $7.

Aside from these troubles, Miller and Cook Inlet Energy have been hit with two federal lawsuits, one involving Cook Inlet Energy's former chief financial officer, who was fired.

All these issues stand in contrast to what previously had been a stream of positive news from Miller and Cook Inlet Energy as they advanced their Alaska operations.

FULL STEAM AHEAD

David Hall, Cook Inlet Energy chief executive, told Petroleum News on Wednesday that the recent run of difficulties hasn't hindered the company's operations in the field.

Assembly continues in Houston on a $17.9 million rig for use on the Osprey platform, Hall said. It's expected to be in Alaska and working this winter.

"We've got our heads down and nothing has changed," he said. "We're moving full steam ahead. Production is still flowing."

Cook Inlet Energy operates the West McArthur River oil field as well as Osprey, which sits in the Redoubt unit. The company, with Miller's backing, acquired the assets in December 2009. The previous owner was California-based Pacific Energy Resources Ltd., which had filed for bankruptcy.

At the time, Miller said it paid about $4.5 million for Alaska reserves valued at more than $325 million.

Since the purchase, Hall and Cook Inlet Energy have set about reviving shut-in wells and making plans for further drilling.

In an "open letter to shareholders" issued Aug. 1, Miller Energy indicated it has four Alaska wells producing about 1,450 barrels of oil equivalent per day.

These include the West McArthur 5 and 6 wells, which averaged a collective 847 barrels per day in June, and the recently activated RU-1 and RU-7 wells on the Osprey platform, which averaged 371 and 239 barrels respectively during their first 30 days of production.

CEO REFUTES 'ATTACK BLOG'

Scott M. Boruff, Miller Energy's chief executive, wrote the open letter to explain some recent SEC filings and to respond to what he called a disturbing "attack blog" seeking to discredit the company for the benefit of short sellers. Short selling is a technique that can profit an investor who bets correctly that a stock's price will fall.

On Monday, Miller Energy filed a Form 8-K "current report" with the SEC explaining that some previously filed financial statements, including its Form 10-K annual report filed July 29, contained errors and would be revised as soon as possible. The company added it didn't expect any "material changes" to its overall financial situation.

Boruff's open letter also sought to defend Miller's valuation of its Alaska assets.

On July 28, a website called The Street Sweeper posted a long article highly critical of Miller Energy, questioning the "hefty valuation" the company placed on the assets and its involvement in a number of lawsuits.

The article had a disclosure at the end saying The Street Sweeper, "through its members," in late June began establishing a short position in Miller Energy and that it "expects to profit on future declines in the stock."

In his open letter, Boruff wrote that "Miller became the target of a short-selling blog that hoped to profit from discrediting our company."

He said his company takes "a conservative approach" to its valuation and production data.

"In order to provide an accurate valuation of our Alaskan subsidiary, we have consulted extensively with independent third parties in order to fairly and reliably value those assets," Boruff wrote.

In conjunction with a recent financing deal, he said, an "independent reserve engineer approved by our lenders" conducted a review and the valuation was "consistent with" the company's current reserve report.

Boruff added that "not a single member of our board of directors or senior management has sold a single share of Miller stock since the Alaskan acquisition."

Two East Coast law firms known for bringing class actions put out press releases on Aug. 1 and 2 announcing they were "investigating" Miller Energy for possible securities violations.

TWO LAWSUITS

As for the implication that Miller Energy is "riddled with lawsuits," Boruff wrote that "any company our size will be subject to lawsuits in the ordinary course of its business."

He continued: "Miller is currently being sued by two parties and believes that both lawsuits are without merit."

In one suit, filed May 6 in federal court for the Eastern District of Tennessee, Troy D. Stafford is suing Miller claiming he was wrongly fired and was denied pay, severance and rights to company stock. All told, he is seeking damages totaling at least $3.47 million.

When the Alaska assets were acquired in 2009, Stafford was part of the deal as Cook Inlet Energy's chief financial officer.

Miller Energy, in its recently filed annual report, vowed to defend the lawsuit vigorously, saying: "We believe that we had appropriate cause to fire Mr. Stafford."

A second suit was brought against Miller Energy and Cook Inlet Energy on June 15 in the federal court for the Eastern District of Pennsylvania. The plaintiff, VAI Inc., says it is a Wayne, Pa., financial adviser and consultant that "devoted nearly all of its efforts, time and resources over a six-month period in 2009" to connect Cook Inlet Energy with Miller and help them acquire "those extraordinarily valuable oil and gas assets in the Cook Inlet region of Alaska." Despite this help, VAI contends, the defendants breached a contract by failing to pay it "warrants for 1,750,000 shares of Miller stock exercisable over a four-year period at $.01 per share."

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