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Articles Posted in Oil & Gas Investments

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Investors in Energy 11, L.P. (“Energy 11”) may be able to recover investment losses through FINRA arbitration. if their investment was recommended by a financial advisor who lacked a reasonable basis for the recommendation, or if the nature of the investment was misrepresented by the stockbroker or advisor.

Oil Drilling Rigs
On March 19, 2020, Energy 11 announced that it would suspend distributions to limited partners until further notice, citing “recent volatility in the market and oil prices in particular” that “has caused uncertainty to our cash flow for the remainder of 2020.”  Energy 11’s letter announcing the suspension is accessible here. ex_178082

Energy 11 has published an estimated per common unit value of its common units of $13.82 as of December 31, 2019.  However, this value may be premised in part on oil prices of over $50 a barrel that prevailed in 2019.  Oil prices have since plummeted to less than $30 a barrel as of this writing in March 2020.

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Oil Drilling RigsInvestors in certain oil and gas limited partnerships offered and underwritten by David Lerner Associates, Inc. (“David Lerner”) — including Energy 11, L.P. (“Energy 11”) and Energy Resources 12, L.P. (“ER12”) — may be able to recover investment losses through FINRA arbitration, in the event that the investor’s broker lacked a reasonable basis for the recommendation, or if the nature of the investment including its many risk components was misrepresented by the financial advisor.  Energy 11 is a Delaware limited partnership formed in 2013 “to acquire producing and non-producing oil and natural gas properties onshore in the United States and to develop those properties.”  Specifically, as of March 31, 2017, Energy 11 had made key acquisitions in certain Sanish Field Assets (for approx. $340.5 million) located in North Dakota in proximity to the Bakken Shale.

ER12 was formed in 2016 as a Delaware limited partnership, with essentially the same objective as Energy 11, namely to “acquire producing and non-producing oil and gas properties with development potential by third-party operators on-shore in the United States.”  On February 1, 2018, ER12 closed on the purchase of certain Bakken Assets, including a minority working interest in approximately 204 existing producing wells and approximately 547 future development locations, primarily in McKenzie, Dunn, McLean and Mountrail counties in North Dakota.

Structured as limited partnerships, both Energy 11 and ER12 carry significant risks that may not be adequately explained to retail investors in marketing pitches by financial advisors who may recommend these complex financial products.  To begin, both Energy 11 and ER12 were only recently formed (2013 and 2016, respectively) and have very little operating history.  Moreover, each limited partnership is helmed by a CEO and CFO, Glade Knight and David McKenney, whose primary experience is in the real estate industry, not the oil and gas arena.  Oil and gas investments by their very nature are extremely volatile as they are subject to the boom and bust cycles which characterize the oil market.

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Oil Drilling RigsIf your financial advisor recommended an investment in All American Oil & Gas (“AAOG”) stock, limited partnership units, or high yield (“junk”) bonds, you may be able to recover losses sustained through FINRA arbitration, in the event your broker lacked a reasonable basis for the recommendation, or if your financial advisor failed to disclose the many risks associated with an investment in AAOG.  Headquartered in San Antonio, TX, AAOG is a privately held oil and gas producer that is the parent company of subsidiaries Western Power & Steam, Inc. (“WPS”) and Kern River Holding Inc. (“KRH”), an upstream exploration and production outfit with approximately 124 producing wells in the Kern River Oil Field.  Together, AAOG, WPS and KRH are referred to as the Company.

On November 12, 2018, the Company filed for Chapter 11 bankruptcy in U.S. District Court in the Western District of Texas, citing “an ongoing dispute with its lenders.”  As of the date of filing its petition, the Company has a total of $141,942,197 in debt obligations.  According to the bankruptcy petition, in a number of instances KRH is the borrower on the Company’s loan facilities, as it requires regular ongoing cash flows to maintain its exploration and production activities.

With U.S. crude oil now trading below $50 per barrel (in 2014 oil was trading around $100, and as recently as September 2018 was hovering around $80 per barrel), many oil and gas companies may now be encountering financial distress after leveraging their balance sheets in order to fund costly exploration, drilling and related operations.  Predictably, this overleveraging has placed some oil and gas companies in a precarious financial position, particularly those operating in the capital-intensive and risky upstream sector of the oil and gas market.

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Oil Drilling RigsHard Rock Exploration, Inc. (“Hard Rock”) of Charleston, West Virginia and certain of its affiliate entities, including Blue Jacket Gathering LLC, Blue Jacket Partnership, Caraline Energy Company, and Brothers Realty, LLC (“Hard Rock Affiliates”), are independent oil and gas development companies.

On September 5, 2017, Hard Rock and Hard Rock Affiliates filed for bankruptcy protection in the Southern District of West Virginia Bankruptcy Court (2:17-bk-20459).  Shortly after filing for Chapter 11 bankruptcy, Hard Rock reported a monthly cash flow shortage of $325,000.  According to Hard Rock’s lender, Huntington National Bank, “rehabilitation of the Debtors’ business is impossible” due to their ongoing hemorrhaging of cash.

Hard Rock and Hard Rock Affiliates operate approximately 390 well sites in the Appalachian Basin.  In addition, Caraline Energy Co. owns and maintains approximately 365 miles of pipeline developed to support natural gas collection.

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Oil Drilling RigsInvestors in various oil drilling programs offered by Vista Resources, Inc. (“Vista”), may be able to recover losses sustained on their investment through arbitration before FINRA, in the event that the investment was recommended by a financial advisor who lacked a reasonable basis for the recommendation, or if the nature of the investment — including its risk components — was misrepresented by the advisor and his or her brokerage firm.  Founded in 1987, Vista is headquartered in Pittsburgh, PA.  Over the course of the past several decades, Vista has managed roughly 60 drilling programs, typically structured as industry joint ventures or limited partnerships.

Included among Vista’s recent programs are: Vista Drilling Program 2011-1, Vista Drilling Program 2012, and Vista Drilling Program 2013-2 (collectively, “Vista Programs”).  These Vista Programs are extremely complex and risky investment vehicles, for a number of reasons.  To begin, these private oil and gas investments charge very high fees to investors.  For example, Vista charges investors an approximate 10% up-front commission.  In addition, Vista charges an approximate 12% markup fee on the costs associated with drilling for productive oil reserves.  Such high up-front commissions and fees act as an immediate “drag” on the initial investment, and present significant risk to the uninformed retail investor.

Further, these Vista Programs are allowed to use up to 20% of investor capital to drill speculative exploratory wells.  A broker recommending such an investment has a duty to inform the investor of such risks, and of the capital-intensive and speculative nature of oil drilling as an investment.  Moreover, the brokerage firm — and by extension, the broker — recommending such an investment, have a duty to first conduct due diligence on the investment.

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stock market chartFormer financial advisor Scott William Palmer (CRD# 817586), who was most recently affiliated with Janney Montgomery Scott LLC (“Janney”) (BD# 463), has voluntarily consented to a bar from the securities industry pursuant to a Letter of Acceptance, Waiver & Consent (“AWC”) accepted by FINRA Enforcement on April 10, 2018.  Without admitting or denying any wrongdoing, the Hackensack, NJ-based former broker consented to the industry bar following his June 13, 2017 termination from employment by Janney.

Mr. Palmer’s career in the securities industry dates back to 1973, and included stints at now defunct Darby & Co., Dean Witter, Citigroup, and — most recently, Janney — from 2007-2017.  In June 2017, Janney permitted Mr. Palmer to resign; according to publicly available information and as disclosed on Mr. Palmer’s Form U-5, his discharge from employment was due to Janney’s “Loss of confidence related to complaint disclosure history.”

FINRA records indicate that Mr. Palmer has been subject to twelve customer disputes, including one case in which relief was denied, and another case that settled in July 2016 for $75,000 alleging that Mr. Palmer had made unsuitable investments in the customer’s account.  According to FINRA BrokerCheck, of the ten customer complaints pending arbitration, a number of them allege that Mr. Palmer purportedly recommended unsuitable investments in certain energy stocks, and further, overconcentrated certain customers in energy sector investments.

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Oil Drilling RigsOn April 2, 2018, EV Energy Partners, L.P. (“EVEP”) filed for Chapter 11 bankruptcy in the District of Delaware (Case No. 18-10814 (CIS)).  While EVEP continues to operate its business, it now seeks to implement a prepackaged plan of reorganization, under which equity investors who purchased EVEP Units will likely sustain significant losses.

Investors who bought into EVEP upon a recommendation by their broker or financial advisor may be able to recover their losses in FINRA arbitration, in the event the recommendation to invest lacked a reasonable basis, or if the investment was solicited through a misleading sales presentation.  EVEP is a publicly traded master limited partnership (“MLP”) specializing in the acquisition and operation and development of onshore oil and gas properties in the continental United States.  EVEP’s holdings include oil and gas properties in the Barnett Shale, the San Juan Basin, the Appalachian Basin, as well as the Permian Basin.

As most recently reported, under the currently proposed plan of reorganization, EVEP Unitholders will receive 5% of the new entity (post-bankruptcy), with 5-year warrants to buy up to 8% of the reorganized company’s new equity.

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Oil production and the pipelineInvestors in the Triloma EIG Energy Income Fund (the “Triloma Perpetual Fund”) and the Triloma EIG Energy Income Fund – Term I (the “Triloma Term Fund”) (collectively, the “Triloma Funds”) may be able to recover their investment losses through FINRA arbitration, in the event that the investment was recommended by a financial advisor who lacked a reasonable basis for the recommendation, or if the nature of the investment was misrepresented by the financial advisor.  The Triloma Funds are publicly registered, unlisted closed-end management investment companies under the Investment Company Act of 1940 (’40 Act) that focus on investing in privately originated energy company and energy project debt.  The Triloma Funds are managed by Triloma Energy Advisors and EIG Credit Management Company.

On March 26, 2018, the Board of Trustees of the Funds approved a plan of liquidation of each respective fund, authorizing the liquidation and dissolution of the Triloma Funds.  Pursuant to the liquidation plan, the Triloma Funds will not engage in any further business activities, except for the purpose of winding down operations and business affairs.  Further, in accordance with the plan of liquidation, the Boards agreed to terminate each funds’ respective distribution reinvestment plan and previously approved monthly distributions.

Under the plan of liquidation, the Triloma Funds have agreed to sell their originated investments to a third-party and will use a portion of the proceeds to pay all of their outstanding debts, claims and obligations.  Triloma Funds’ shareholders can expect to receive an initial cash liquidating distribution on or about May 15, 2018.  To the extent that any assets might remain after such liquidation payments and satisfaction of final expenses, there will be a second liquidating distribution above a threshold of $100 per shareholder made on or before June 30, 2018.

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