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Toreador: The Story behind the Stock's Wild Bull Run
by Melissa Davis - 3/11/2010 8:00:09 AM
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Shortly before New York Times reporter Zachery Kouwe resigned for plagiarizing the work of others, he wrote a speculative column about Toreador Resources (Nasdaq: TRGL) that – in an ironic twist -- spawned copycat reports by competing journalists. Those stories, suggesting an imminent buyout of Toreador that failed to materialize, raised some eyebrows even before Kouwe’s public fall from grace.
At the time that Kouwe penned his Jan. 20 “DealBook” column, Toreador desperately needed to raise money for looming debt obligations that could trigger massive payments later on this year. As a small resource company with ambitious plans, Toreador also needed cash to finance an expensive drilling program in Paris – home to its controversial new vice chairman – in order to reinvent itself as a major energy player on the international stage.
Toreador counts its acreage in the Paris Basin, a mature oil play with slowly declining production, as the company’s primary asset. While those Paris Basin wells currently generate fewer than 1,000 barrels of oil per day – and that number has been sliding – Toreador hopes to significantly boost its output through modern drilling techniques already considered by much larger players. Last fall, in fact, a tout sheet (resembling those normally reserved for overhyped penny stocks) claimed that the company had hatched a grand scheme to drill for oil beneath the Eiffel Tower and “legally ‘steal’ 40 billion barrels” of black gold from the French.
To be fair, Toreador told The Street Sweeper that it supplied no information – or funding – to the newsletter and roundly dismissed the report’s spectacular claims. The publication itself failed to return a phone call from The Street Sweeper seeking comments for this story.
One fact remains clear, however. Before Toreador could launch any massive projects on its Paris acreage, the company needed to avert a possible liquidity crisis first. With just $10.6 million in the bank – and upcoming debt payments totaling up to five times that amount – Toreador spent the latter part of 2009 arranging to sell stock so that it could bolster its financial resources. Less than two weeks after regulators finally authorized that stock offering, however, Kouwe suddenly reported that Toreador had changed its plans.
Specifically, Kouwe claimed, Toreador had entered into serious negotiations with three giant oil companies – Royal Dutch Shell (NYSE: RDS-A), BP (NYSE: BP) and Statoil (NYSE: STO) – about a partnership or outright merger deal instead. That story, citing mysterious unnamed sources, sparked a flurry of media coverage that fueled a well-timed rally in Toreador’s shares.
Within days, Toreador’s stock – already boosted from $5 to $8 on the earlier newsletter tout -- had rocketed 40% on massive volume to $13.69 a share. That lift helped cushion the blow when the company reported disappointing results from an important drilling project in Paris before ultimately moving forward with its stock sale.
On Feb. 9, three weeks after Kouwe reported that Toreador had shelved its stock offering in favor of a likely merger, the company announced an overnight financing deal. With assistance from its underwriter RBC Capital Markets – which had also publicized the Kouwe buyout story – Toreador managed to raise $23.5 million by selling 3 million shares of stock priced at $8.50 a share. While Toreador sold that stock at a 16% discount to its previous closing price, critics argue, the company still pocketed far more than it would have without Kouwe’s heavily regurgitated DealBook column.
Toreador’s stock, which barely fetched $2 a year ago, now trades for $9.50 a share. Based on typical metrics such as production and reserves, however, some believe that Toreador was more fairly valued around last year’s lows instead. They feel convinced that Kouwe, while now gone from the Times, had a lasting impact on Toreador’s stock price.
Notably, since Kouwe’s departure, even the Times itself has identified possible risks associated with its popular DealBook section.
“Much of the copy gets read only once by an editor,” the newspaper’s public editor admitted in a story over the weekend. So “it may need added oversight.”
Kouwe officially resigned from the Times the week after Toreador’s successful stock offering, never identifying the source (or sources) who supplied the tip for his buyout story before he left. A spokesman for Toreador, who declined to answer other questions for this story, told The Street Sweeper that he had no idea who had provided that information. To some, however, Toreador’s own Vice Chairman Julien Balkany – the subject of a fawning profile by Kouwe last fall – looks like a possible suspect.
Behind the Curtain
A native of Paris, home to Toreador’s new headquarters, Balkany first scored headlines here in the U.S. when he attempted a doomed takeover of another Texas energy company a couple of years ago.
His brand-new investment firm, Nanes Delorme Partners, surprised Houston-based VAALCO Energy (NYSE: EGY) when it suddenly became the company’s largest shareholder and demanded aggressive actions – including boardroom changes and a possible sale of the company – in March of 2008. Balkany himself personally signed the demand letter, claiming that his firm had lost its “initial confidence” in VAALCO’s management team and become “extremely frustrated” with the company’s stock price.
Balkany’s firm actually had little time to lose that confidence or deal with that frustration, however, since it had just started purchasing VAALCO’s stock after opening for business earlier that year. In essence, VAALCO would soon argue in a lawsuit, Nanes Delorme was asserting that it had paid too little for the stock it had only recently acquired.
That particular concern looked almost mild, however, compared to other allegations in the lawsuit. Notably, VAALCO claimed that Nanes Delorme had secretly conspired with Loik Le Floch-Prigent -- a fellow Frenchman convicted in a notorious corruption case five years earlier – when assembling its big stake in the company. In its coverage of that case, which featured Le Floch-Prigent in a starring role, The Guardian newspaper referred to the scam as “probably the biggest political and corporate sleaze scandal to hit a western democracy since the second world war.”
The former chairman of French oil giant Elf Aquantine (Paris: AQ.PA), VAALCO noted, Le Floch-Prigent served a year in prison before winning early release in 2004 to seek medical treatment. Two years later, VAALCO claimed, Le Floch-Prigent helped launch Pilates Energy – which soon wound up with a big stake in VAALCO – and secretly ran the company from behind the scenes.
Between November of 2007 and January of 2008, VAALCO’s lawsuit stated, Pilates quietly acquired 4.6% of VAALCO’s stock. With its ownership stake fast approaching the 5% threshold that would trigger disclosure requirements, the lawsuit said, Pilatus then joined forces with Nanes Delorme – a firm established less than one month earlier – by transferring its VAALCO stock into the new firm’s name.
“Pilatus Energy would not have contributed over $12.5 million worth of VAALCO stock to a newly formed limited partnership being managed by a 27-year-old French citizen,” the lawsuit argued, “without some agreement as to how those shares were to be utilized.”
Within a month of that Valentine’s Day transaction, the complaint noted, Nanes Delorme presented itself as VAALCO’s largest shareholder (without identifying its partner) and began taking the first steps toward a full-blown proxy fight. A judge stepped in to intervene as the battle heated up in May of 2008, Dow Jones reported, paving the way for a court-ordered deposition of Balkany ahead of the official proxy vote. Nanes Delorme suddenly abandoned its fight later that month, just days before Balkany was scheduled to be deposed.
By the end of that year, however, Balkany had already hatched a similar plan. This time, his firm simply shifted its focus a little farther north – from Houston to Dallas – and began targeting sleepy Toreador instead.
The Second Act
Balkany’s renamed firm, Nanes Balkany Partners, began purchasing Toreador’s stock in October of 2008 for a little more than $7 a share. The firm continued to build its stake – buying the stock at cheaper and cheaper prices – over the course of the next two months. By the time Nanes Balkany had accumulated 5% of the company’s stock in December of 2008, Toreador had tumbled below $4 a share.
At that point, Balkany issued a letter to Toreador’s board – eerily similar to the one fielded by VAALCO nine months earlier – demanding aggressive actions that would supposedly unlock the true value of the company’s stock. Taking a familiar stand, Balkany complained about Toreador’s stock performance during a period that largely preceded his firm’s purchase of the company’s shares.
Balkany’s firm fared much better this time around, however. Less than two months after hearing Balkany’s “concerns,” Toreador had agreed to major changes – including a leadership overhaul and a major asset sale – that left Balkany himself serving as vice chairman of the company’s board.
Toreador’s stock nevertheless continued to dive for a while, ultimately bottoming out in March of 2009 at barely $2 a share. As Toreador’s new leaders rose to power, however, the stock quickly reversed course – more than tripling in price – during a three-month span.
When the stock later slid from $7 back toward $5 last summer, an obscure newsletter suddenly “discovered” Toreador and came to the rescue. Without actually identifying Toreador by name, The Money Map Report dropped enough telling hints about its favorite stock pick for investors to recognize the company. It claimed that the company (which it nicknamed the “Tiny Texan”) was tapping a “$2.8 trillion oil reserve under the Eiffel Tower” that could produce enough oil to supply the entire United States for years.
Urging readers to subscribe quickly – so they could learn the actual name of the stock – the newsletter went on to proclaim that the company would begin “bringing this mother lode to market just days from now” and see its share price skyrocket when the “mainstream American financial press” discovered its big plans. Toreador’s stock quickly surged, jumping from $5 to $8 a share, as investors piled in early for projected gains of 1,800% or more.
The week after that report, however, the “Stock Gumshoe” weighed in with a blunt warning about the apparent tout-fueled rally in Toreador’s shares.
“I was hoping that, if I waited a few days to write to you about it, the initial enthusiasm over these shares would die down a bit,” the Stock Gumshoe stated on Sept. 17. “But they’re still holding pretty firm at just under $8 a share, a good 50% jump from the $5 or so that the shares traded at before this ad began running last week.
“The price seems very likely to come down a bit,” he cautioned. “Big spikes like that from newsletter attention don’t usually last that long. I could be wrong, of course, but I’d be surprised if we didn’t see the shares tail off a bit in the coming weeks if the marketing push slows down.”
The Unfolding Drama
With Toreador itself releasing a string of news, however, the company’s stock continued to march higher instead.
Just one day before the Stock Gumshoe’s warning, for example, Toreador announced the appointment of Marc Senges – the former CFO of Maurel & Prom – as its new finance chief. When releasing that news, Toreador described Maurel & Prom as the second-largest publicly traded oil and gas company in France without mentioning its recent sanctions by government authorities or its past ties to Balkany.
Last year, Africa Energy Intelligence noted, French regulators fined Maurel & Prom for overstating its reserves in 2005 – when Senges reportedly served as CFO – and then revising the figures after insiders had sold stock in the company at inflated prices. Notably, Internet records show, Balkany himself acted as an advisor to Maurel & Prom when it acquired the reserves that wound up being overstated.
When Kouwe profiled Balkany in his DealBook column the month after that CFO change, he never mentioned the young fund manager’s checkered past at all. Rather, he portrayed Balkany as a “young hotshot” whose recent gains rivaled those posted by far more experienced market players. He specifically pointed to Toreador – with its 210% gain for the year – as Balkany’s big “home run.”
The next (and only) time Kouwe covered Toreador again, he was predicting an imminent buyout of the company based on tips from unnamed sources.
Meanwhile, the month after that favorable profile appeared, Toreador began a flurry of activity. In mid-November, less than a week after posting unimpressive third-quarter results, Toreador filed a registration statement in preparation for a planned stock offering. The next day, Toreador followed up by announcing that it had officially hired RBC Capital Markets to pursue strategic alternatives – including possible securities offerings and/or “various corporate transactions” – for the company. A few days later, the company finished up with news of a fresh drilling project in the Paris Basin.
Although Toreador expected to finish testing that well within 20 days, the company failed to deliver any concrete results for months. When Toreador finally issued a vague update on the project in mid-January, the company simply announced an unexpected delay – which it blamed on an outside drilling rig – and set a new completion date near the end of the month. Meanwhile, one day after that news release, Kouwe published the speculative buyout column that sent the company’s stock soaring to new highs.
That bounce came in handy when Toreador released some bad news a couple of weeks later. Near the end of a Feb. 1 press release otherwise focused on its estimated reserves, Toreador discreetly revealed that it had generated only “limited quantities” of oil from its latest Paris Basin well. While the company’s stock fell 7% to $11.70 a share on that buried announcement, it still fetched about $2 more than it did before Kouwe’s buyout report.
Toreador’s shares remained in double-digit territory until the company executed its overnight stock sale – after reportedly shelving those plans – one month ago. Although Toreador plunged 16% the following day, the stock has since recovered most of that lost ground.
With a market capitalization of $205 million, Toreador currently trades at roughly 6.5 times its actual book value – more than double the multiple sported by giant ExxonMobil (NYSE: XOM) – despite its falling revenues and operational losses. Two of the biggest past drivers of Toreador’s stock, the DealBook column and the newsletter tout, still seem baked into the company’s share price. Just as some investors counted on a buyout that failed to materialize, others continue to wait on a Paris oil boom – and its ability to launch Toreador’s stock toward $100 a share – that looks no closer now then it did before the stock’s big rally first began.
Meanwhile, the unrealized promises that helped trigger that surge still linger to this day.
“You could turn a small speculation of $5,000 into $100,000 starting just a few weeks from today,” The Money Map Report pledged six months ago. “But you must act right now … We’re talking about a $100 million oil company, trading around $6, that’s about to ‘pop the cork’ on more than 40 billion barrels of crude oil worth as much as $2.8 trillion.
“This situation,” the tout sheet proclaimed with confidence, “is unprecedented.”
* To contact Melissa Davis, the author of this story, please send an email to editor@thestreetsweeper.org.
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