Published September 24, 2013
Gulfport Energy Corp , a publicly-traded oil and gas company based in Oklahoma City, allowed its former chairman to receive millions of dollars in equity interests at no cost in more than a dozen firms that have done business with Gulfport.
The equity stakes awarded to Mike Liddell, who stepped down as Gulfport chairman in June, were granted by Wexford Capital LP as part of an uncommon arrangement. While working for Gulfport, Liddell also served as an advisor for energy investments by Wexford, a $4.3 billion Connecticut investment firm.
In response to questions from Reuters about Liddell's dual roles, Gulfport said all "material terms" of Liddell's equity stakes had been disclosed to the U.S. Securities and Exchange Commission.
Gulfport appears to be in compliance with SEC disclosure requirements, said three corporate-governance specialists who reviewed Gulfport's SEC filings and its responses to Reuters.
The stakes awarded to Liddell in companies that do business with Gulfport could nonetheless create the risk of a conflict of interest, the governance specialists said, because the deals could benefit Liddell at the expense of Gulfport shareholders. They said the company could have provided a fuller understanding of the relationship between Liddell and the Connecticut investment firm.
Gulfport said it "regularly solicits bids" from independent providers of oil-field services and other vendors, in addition to bids from firms in which Liddell owns a stake. "Because of the competitive bidding process ��� and the oversight of our audit committee, Gulfport believes its decisions are always in the best interest of its stockholders," the company said in a statement.
In written responses, Charles Davidson, Wexford's co-founder and chief investment officer, said Liddell's equity interests were "compensation for services rendered." Gulfport's business deals with Wexford companies in which Liddell owns an interest are "normal arms-length transactions," he said.
The SEC's rules on so-called related-party transactions address only deals between officers, directors and the company that employs them. The regulations don't compel disclosure of transactions with outside entities. They do require companies to provide "other information" that is "material to investors." Companies have discretion to determine what's considered material.
An SEC spokesperson declined to comment.
Gulfport first disclosed in a 2012 proxy filing that Liddell held a 10 percent equity interest in an unspecified number of companies in which Wexford is the controlling or a principal shareholder. But Gulfport hasn't told investors Liddell received the stakes at no cost, according to a review of Gulfport filings with the SEC. In its 2013 proxy, Gulfport identified 13 companies with which it has done business and in which Liddell has a stake.
The company said SEC rules only require disclosure of compensation earned by Liddell for work on behalf of Gulfport. The amounts and estimated value of the equity interests awarded to him by Wexford, it said, "were not and will not be for services rendered by Mr. Liddell to Gulfport" and therefore aren't covered by SEC rules.
The corporate governance experts who reviewed Gulfport's SEC filings agreed with that view. But they said Gulfport may have left out information important to shareholders, such as why Liddell was awarded the equity interest by Wexford.
"This creates a huge question about whose interests the (former) chairman is serving. And that is why the withheld information is important to investors and likely rises to the level of a material omission on the part of Gulfport," said James Cox, a law professor at Duke University who specializes in securities law.
Gulfport disputed Cox's assessment. "The Company strongly believes it has complied with its disclosure obligations under the securities laws," Gulfport said in a statement. "Despite Mr. Cox's generalized assertion, the Company has not 'withheld' information about these transactions from investors and there is certainly nothing that rises to the level of a material omission."
The company said its board was informed of Liddell's equity interests "prior to the time Gulfport engaged in transactions with or invested in the (Wexford) entities."
Gulfport has won praise from Wall Street analysts and investors. The company is seen as having acquired lucrative oil holdings in Ohio's Utica shale formation, one of the hottest U.S. drilling zones. On September 23, Gulfport stock closed at $61.52. That was near an all-time high of $64.73 per share, putting Gulfport's market capitalization at $4.8 billion.
Liddell continues to work for Gulfport as a consultant earning $65,000 per month. He owns about 1 percent of Gulfport's stock, filings show. Gulfport declined to make Liddell available for an interview.
Gulfport and Wexford have had close ties since 1997. That year, Wexford brought the predecessor company of Gulfport, WRT Energy Corp, out of bankruptcy. In March 2012, Davidson and Wexford entities controlled by him owned nearly 12 percent of Gulfport's shares. By the end of last year, Davidson had sold down his stake; it is now less than 1 percent, according to SEC filings.
"Because of his knowledge and expertise, Wexford occasionally requests that Mr. Liddell advise on or provide strategic oversight of certain investments," Gulfport said in a statement.
Gulfport's SEC filings show that Liddell received interests in, or served as an officer or operating member in, at least 19 different companies in which Wexford is the controlling shareholder or a principal one. Over the past seven years, Gulfport has invested about $439 million alongside Wexford in 13 of those firms, according to Gulfport's latest quarterly SEC filing.
One example: Since 2006, Gulfport has invested $176 million in a Wexford oil-sands project under construction in Alberta, Canada. Gulfport owns 25 percent of the project, called Grizzly Oil Sands. Investment funds owned by Wexford hold the remainder. Liddell has an interest in the project entitling him to a 10 percent share of any future profits, according to regulatory filings.
Some of the equity stakes awarded to Liddell in Wexford-controlled entities have paid off handsomely.
In December 2012 and February 2013, Gulfport paid a total of $590.4 million to purchase about 59,000 acres in Ohio's Utica shale formation from a Wexford-controlled firm called Windsor Ohio LLC. Gulfport issued about 11 million new shares to help pay for the transaction, according to SEC filings.
Liddell, still chairman of Gulfport at the time of the sale, owned a 10 percent stake in Windsor Ohio. According to SEC filings, he will earn as much as $31 million from the deal.
Gulfport said it bought the acreage from Windsor Ohio, its joint-venture partner, "in a fully negotiated transaction." Liddell "recused himself from participation" in arranging the deals, which were managed by a special committee of directors, Gulfport said.
Investors and analysts have applauded the Utica deal for adding valuable acreage to the company's top energy prospect. The transaction helped drive Gulfport's stock price up 64 percent this year.
Of the 21 investment analysts who follow Gulfport, 10 rate the stock a "strong buy," while 11 rate the stock a "buy," according to data from Thomson One Analytics.
Gulfport shareholders aren't hurt by the fact that Liddell took stakes in firms such as Windsor Ohio, the company said. "If a contingent equity interest is offered (to Liddell) that contingent interest comes solely from Wexford's portion" of an entity, Gulfport said in a written statement.
In such arrangements, Liddell typically got a 10 percent interest in the entity and Wexford investors received the other 90 percent, which is only paid out once Wexford recouped its initial investment, the company said. Liddell has no say over when these entities are sold or traded, Gulfport said.
On September 10, Gulfport warned investors its acreage in the Utica would produce less than expected in the third quarter. The news sent the stock down as much as 5 percent before it recovered to end slightly lower.
(Reporting by Brian Grow in Atlanta and Anna Driver in Houston. Edited by Michael Williams)