How oil prices will reveal financial foul play
22 December 2014
Houston Business Journal Online
As oil prices force upstream oil and gas companies to make some hard decisions, investment advisers will be tested on how well they hedged against companies that may have over-reported their production and reserve amounts, said Tom Ajamie, managing partner at Houston-based Ajamie LLP. “Now as oil prices have fallen, you’re going to see who had too much debt,” Ajamie said. “You’re going to see maybe who was inflating reserves and inflating prospects.”Crude harvested from shale represents an area of particular vulnerability to investment advisers who have clients that are exposed in shale extractions because of the lack of industry consensus on how best to measure the volume of crude contained in shale formations. This makes shale gas-related investments more difficult to regulate than those related to wells.
But regulators aren’t ready to say that shale is any more problematic than wells.
“Is fracking more difficult (to estimate) than any other? I don’t know. I’ll leave that to the geologists,” said David Woodcock, regional director at the Fort Worth regional office of the Securities and Exchange Commission. “Are there companies out there that are over estimating? Probably.”
Woodcock did say, however, that financial accounting fraud has gone from taking up roughly 10 to 15 percent of the office’s docket in 2010 to roughly 30 percent currently.
Houston-based investment advisers and brokers should bear in mind that the Bayou City is moving up the ranks to assume top-tier positioning in regulators’ national priorities. Houston is second only to New York regarding the number of publicly traded companies, and last year the SEC gave Houston it’s due respect when it launched a week-long examination sweep across local brokerages, deploying nearly 30 examiners from the Fort Worth regional office.
Woodcock doesn’t refute Ajamie’s reasoning regarding oil prices, but adds that Houston in general is coming up in the world, and with that rise comes an intensifying of public scrutiny.
One high-profile case that keeps regulators’ eyes trained on Houston was the case of Chimera Energy Corp., which was charged with fraud by the SEC in August for allegedly falsely claiming to have access to revolutionary extraction technology and orchestrating a pump-and-dump scheme. Such cases only stimulate the regulatory interest in Houston, said Woodcock.