Saturday, December 24, 2011

Strategic American Oil (SGCA) All In The Family

I've been sitting on a teaser mailer from one Bob Flaherty that I got around October 2010.  It touted a Flaherty-related investment site called that is no longer active.  It also touted a stock called Strategic American Oil (SGCA) that is slightly more active than that defunct website, but not by much.

The financials resemble so many other penny stocks I've checked off here at Alfidi Capital.  Three years of negative free cash flow, net income, and retained earnings, all of which have progressively become even worse as time has passed.  Okay, the negative free cash flow for 2011 was slightly better than 2010 but not by much.

The company likes to keep its business in the family.  The 10-Q filed on June 20, 2011 reports that the company sold 15% of its working interests in its Galveston Bay fields to a company controlled by the father-in-law of Strategic American Oil's own CEO!  The other company in question, SPE Navigation 1 LLC, was later purchased by Strategic American Oil.  This set of transactions makes absolutely no sense.  Why sell a working interest in property to a company you later acquire outright?  Let's see . . . SPE's corporate cash went to SGCA . . . and cash later went to SPE's owners upon acquisition.  It sounds like a Rube Goldberg method for extracting cash from a company with no change in the value of physical assets transferred.  Press releases in later months make absolutely no mention of the prior deal to sell a working interest to SPE, so claims of increased reserves from "acquisitions" must be taken with a grain of salt given these shell games.

The 10-K filed on Nov. 15, 2011 shows us exactly where these kinds of roundabout transactions will take a company.  Check out just their oil data.  With only five "net" wells they can produce about 6000 bbls/year, and with slightly over 97,000 bbls as proven reserves their fields should be productive for about 16 years with no further discoveries, acquisitions, or engineering improvements.  Productive is not the same thing as profitable.  This company loses money and will only be profitable if it dramatically lowers its costs.  Engaging in sweetheart deals with extended family members does not lower costs.  The section of the 10-K on risk factors mentions the company's limited operating history, but it has "operated" as an exploration company since 2005.  They were originally looking for gold.  Another big risk factor is the auditor's opinion that doubts the company's ability to continue as a going concern.  Folks, you really have to read the 10-K on these kinds of companies.

So where's Bob Flaherty, the guy responsible for sending me the mailer on this stock?  Hey, he's over here at Flaherty Financial News.  He's got his son working for him.  The Flahertys have something in common with Strategic American Oil.  They all keep business in the family.