Sometimes you really have to wonder why people do the things they do. Earlier this week, Quest Resources (QRCP) announced the resignation of Jerry Cash, the firm’s CEO. While details on the events that led to his resignation are unclear, it appears that an entity connected to Mr. Cash defrauded Quest Resources by approximately $10M. While this is an insignificant amount in comparison to past instances of corporate fraud in American history, it still represents ultimate personal failure for Mr. Cash. I find it impossible to understand why executives such as Mr. Cash throw away everything for a small short-term profit. It is disappointing that the board of directors of publicly traded companies fail to weed out spineless, incompetent and selfish men such as Mr. Cash. The fact that this happened to a company such, as Quest, which should be printing money with its MLP structure, is frankly disturbing and incredibly disappointing.
If Mr. Cash had any intelligence at all, he would have simply slowed cap ex spending, allowed organic growth to continue for a few years and then proceed to sell the company after a full year of ‘normalized’ earnings. If such a course would have been followed the company probably could have gotten close to $20 a share, netting Mr. Cash $36M in proceeds from his common stock alone. Instead, Mr. Cash chose to throw his future away by trying to make a quick buck and hoping that the Oklahoma Securities Regulators and the investment community would not notice his deception. I was never very impressed with Mr. Cash but I would never have guessed that he was a common thief.
I would sincerely hope that the new management team and the board of directors would make every effort to regain from Mr. Cash the money that he stole. In addition, I expect them to seek punitive damages to reflect the losses taken by the company’s shareholders and the damage that has been done to the company’s image, if they could collect interest on top of the base amount stolen I would view that favorably as well. Mr. Cash controls 1.8M shares of Quest Resources and hundreds of thousands of options. The new management team should file an injunction to prevent Mr. Cash from liquidating his stake in the company as it could go a long ways to repaying Quest Resources for the money that was stolen. Frankly, I do not care how far the new management team goes in its efforts to collect from Mr. Cash. I would hope that they would go after his financial assets, his personal property and his kid’s college funds if need be. I am sick and tired of watching corporate executives abuse their positions of power. Why they don’t realize that they have a responsibility to the shareholders and employees of their companies is beyond me. If Quest Resources needs to assign Mr. Cash to workout his debt by mowing the grass around the company’s properties for the rest of his natural life that would be just fine with me.
In trying to understand how Mr. Cash succeeded in defrauding the company there appears to be three avenues that he could have taken. The first one, and the most likely, is that it was related to an outsourced drilling and/or servicing contracts awarded by Quest Resources to a company that Mr. Cash controlled. Another possibility could be that it was related to all of the company’s recent M&A activity. Earlier this year the company was working on an acquisition of Pinnacle Gas Resources (PINN), while the deal eventually fell apart because it would have been highly dilutive to current shareholders of Quest Resources the company did manage to ‘steal’ the PetroRidge properties earlier this summer. Because of all this movement and the sizes of these transactions, I would not be surprised to see that Mr. Cash was paying his entity an outrageous M&A ‘consulting fee’ during the entire process. The final possibility, and the one that we must hope for, is that Mr. Cash simply attempted to transfer money from the corporate account to his entity’s account as this would imply the least likelihood that the board of directors was looking the other way when it came to Mr. Cash’s inappropriate behavior.
Quest Resources still has incredibly valuable assets and at these low levels, current and potential shareholders can legally ‘steal’ money. The company’s 12.1M shares of Quest Energy Partners are likely worth in excess of $140M, while the company’s 4.9M units of Quest Midstream Partners are likely worth $90M. In addition the company’s general partnership ownership interests are worth at a bare minimum somewhere north of $90M. Over the last several years the company has been building its stake in the Marcellus Shale play, the company currently has 120K acres that I would value at a minimum of $240M and as high as $360M. Once you factor in the company’s $44M in debt and the $15 million in cash that it should have, which has been reduced to account for Mr. Cash’s $10M withdrawal, you end up with a current book value of the company of somewhere between $365M and $489M. If you divide these figures by the number of shares outstanding you’ll see that Quest Resources is worth somewhere between 11 & 15 dollars a share in buyout. These figures don’t take into account the incredible growth that Quest Resources could have if it managed to fully leverage its MLP structure. This is something that anyone with a dash of brains should be able to figure out how to do so I haven’t quite given up on the company yet as there is simply too much upside to the company’s investment story. I have talked in greater detail on the company's valuation and that article can be found here.
Even with the fraud perpetrated by Mr. Cash, the underlying operations of the company are still strong. Quest Resources will still receive nearly $25M in distributions from its subsidiaries and still likely has nearly $15M in cash in its bank accounts. At below $5 dollars a share Quest Resources is one of my top speculative buys. Given the stocks low price I would not be surprised to see a company like Atlas America (ATLS) come in and make an all cash offer for the company.
I sincerely hope that the board of directors of Quest Resources attempt to make an example of Mr. Cash. Mr. Cash is emblematic of a wider problem in corporate America in that our executives are no longer able to tell right from wrong. While such a failure could be attributed to how men like Mr. Cash were raised, I believe that they are more a product of the culture that are a part of. It is my opinion that all C-level executives of publicly traded companies should be required to take ethics classes in a manner similar to how all lawyers are required to take C.L.E. (continuing legal education) courses.
Disclosure: Long QRCP
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