Update for Block Energy shareholders re: Requirement for Forensic Investigation

On 13 August 2021, the Board of Block Energy plc (the “Company”) issued a Notice of requisitioned General Meeting to shareholders, including a statement by the Board regarding its position on the requirement for a forensic investigation into the actions of the Company. The following statement is published by a group of concerned shareholders (the “Concerned Shareholders”), representing approximately 20% of the shares in the Company. The focus of the Concerned Shareholders is solely to improve the Company’s share price and build shareholder value.

The Concerned Shareholders have proposed this resolution as they believe it is in the Company’s best interests and not to cause unnecessary nuisance or cost. To ensure other shareholders are not forced to commit more funds and to ensure there is no financial impact on the Company to give fellow shareholders comfort, the Concerned Shareholders are willing to meet the full costs of the investigation.

The Concerned Shareholders are willing to discuss the range of potential independent firms that would be suitable for appointment and the scope of the forensic investigation that would be undertaken. The Concerned Shareholder’s letter to the Board on 10 August 2021 sought engagement on these matters, however, the Board has failed to provide any response.

Notwithstanding, the Concerned Shareholders propose that the scope of any forensic investigation be focused initially on the following areas of primary concern:

  • Pre-drill detailed planning and risk assessment cycle: including detailed well planning, pre-drill risk assessment together with mitigation plans to minimise unplanned downtime and associated additional costs in the event downhole issues are encountered in drilling or completion activity. The review of pre-drill planning will also include rig specification, crew selection and choice of service providers and well completion crews;
  • Capital sanction cycle: including examination of controls and governance regarding the selection and approval of vendors and contractors, the Company’s tender and contracting processes and the effectiveness of project management and cost controls;
  • Cash disbursement cycle: including verification and acceptance of work done, confirming variations giving rise to additional costs, and approvals over cash disbursements to vendors;
    Crude oil sales cycle: from production and storage through tender, delivery and final cash receipt;
  • Corporate governance structures: detailed understanding of the rationale for the recent resignations of two of the Company’s Non-Executive Directors; and
  • Compliance with AIM Rules and MAR: with regard to directors dealings between 24 February 2021 and 4 April 2021.

Put simply, if the Company has nothing to hide, is confident that it has met the required standards of corporate governance, and is not going to suffer any financial loss as a result, why would the Company not agree to the request?

It is in all stakeholders’ interests that the Company be given a clean bill of health or, if uncovered, any material issues are rectified as soon as possible to allow the Company to reach its full potential for the benefit of everyone involved. Again, the Concerned Shareholders hold no other motives.

Background to the resolution

The purpose of the resolution is to examine significant long-standing issues that the Board have failed to address, which have contributed to the chronic underperformance of the Company’s share price and have led to the departure of two of its non-executive directors (in short order) with a third non-executive director supporting the removal of the Chairman. These issues include:

  • Failures of Operational Management – Despite investing over £20 million of shareholders’ money, the operational performance of the Company is of major concern. All three wells drilled to date have encountered problems, including one complete well loss and ongoing issues with water breakthrough on WR-16a, and despite requests, the Company has not explained how it will prevent a repeat of these issues. Concerned Shareholders have repeatedly asked the Board to address apparent failings in contracting and operational preparedness to mitigate basic oilfield risks and ensure that the drilling equipment and plan is right-sized for the exercise. Prior to the most recent drilling campaign, Concerned Shareholders again asked the Board to consider making substantive changes to its operational procedures because of legitimate concerns about the Company’s ability to execute a successful campaign. Specifically, the Concerned Shareholders had concerns about the power rating nature of the selected rig and the risk of unplanned overruns, unnecessary costs and unforeseen remedial actions (including unplanned side-tracking) due to the selection of unfit for purpose equipment. The most recent update on well WR-B1 was made on 28 July 2021, with no further update given by the Company since that date. What is the status, both operational and from a cost perspective, of the current well campaign?
  • Corporate Governance Failures – The Concerned Shareholders have raised questions on serious governance issues, including a lack of clarity in market communications, for example, in the disclosure of information about gas sales agreements (GSA) and on director’s dealings. The recent departure of two of the Company’s non-executive directors with a third supporting the removal of the Chairman heightened these concerns. Despite being repeatedly pressed for an explanation, the Company has offered no substantive reason as to why the non-executive directors resigned. These concerns are exacerbated by the non-impartial recruitment process undertaken by the Company for the recently appointed non-executive director who has close ties to the current Chairman and Finance Director. In order to ensure an improvement in governance for the benefit of all shareholders, it would have been logical for any new non-executive-director to be completely independent of the current Board with no past business relationships. This does not appear to be the case.

Further details of these issues can be found here: https://blockenergysupport.group/.

For the purpose of carrying out an independent forensic investigation, the Concerned Shareholders indicated in the Requisition Notice that they believe the Board should retain one of the following firms: Deloitte, PwC, Ernst & Young and/or KPMG. However, in order to ensure that costs are managed and that the identity of the investigator is suitable given the circumstances, the Concerned Shareholders would be willing to work with the Company to agree an alternative third party to carry out the forensic investigation.

The purpose of such forensic investigation is to determine if the transactions or arrangements entered into by the Company and the policies and systems adopted by the Board were carried out or implemented in the best interests of the Company and to the benefit of its shareholders or otherwise.

In response to the concerns raised by the Company on the cost of the investigation and its claim that the proposed resolution was vexatious, the Concerned Shareholders contacted the Company’s legal counsel on 10 August 2021, offering the opportunity to discuss the range of the potential independent firms to be appointed and the proposed scope of the forensic investigation with the Company. The Company’s claim that the proposed resolution was “vexatious” claiming that “nothing changed between 2 July 2021” (when the first requisition was submitted). In fact, two of the three non-executive directors resigned shortly after that date and the third publicly stated that he backed the resolutions to remove the Chairman – a collapse in the corporate governance of the Company. To claim that “nothing changed” is extraordinary and reflects the Board’s attitude that there is “nothing to see here” without offering any adequate answers to shareholders’ legitimate questions.

Despite stating publicly that the Company would engage with shareholders on issues, the Company has made no attempt to engage with the Concerned Shareholders nor did it respond to the 10 August letter.

The priority of the Concerned Shareholders is to ensure the future success of the Company and provide transparency in order that the existing Chairman and executive management team do not repeat past mistakes. It is for this reason the Concerned Shareholders have requested that the independent forensic investigator provides a written report detailing its findings. The Board shall promptly make available to all of the Company’s shareholders an un-redacted copy of the independent forensic investigator’s report.

The Company has encouraged shareholders to vote against the resolution because:

  • Block Energy’s operational and governance framework is, in the context of the Company’s size and status as an AIM-quoted company, of an appropriate standard and adherence to this framework has wrongly been called into question; and
  • Time, effort and money should not be diverted from the Company’s focus on creating further value for its Shareholders, particularly at this critical time in the current, potentially Company-transforming drilling campaign.

To address these points, the Concerned Shareholders make the following comments:

Standards – The forensic investigation is required as the Board has failed to engage with questions raised by the Concerned Shareholders and to address the collapse in corporate governance of the Company following no non-executive directors supporting the Chairman, a highly irregular circumstance and a situation concerning for shareholders. The Company seeks to apply the QCA Code, which provides that: “In the absence of high-quality communication, existing or potential shareholders may conclude that a company’s board is not fully committed to safeguarding their interests”. This situation has arisen because of the Board’s failure to provide high-quality communication to shareholders in line with the QCA Code.

Cost and Scope – The Concerned Shareholders have proposed this resolution as they believe it is in the best interests of the Company and not to cause unnecessary nuisance or cost. To ensure other shareholders are not forced to commit more funds and give fellow shareholders comfort, the Concerned Shareholders are willing to meet the full costs of the investigation. This commitment will be subject to agreement between the Concerned Shareholders and the Company regarding the appointment of a mutually acceptable independent firm to undertake the proposed investigation to a pre-defined scope of work. The Concerned Shareholders have no desire to see Company funds depleted as has been suggested. If nothing adverse is uncovered by the investigation, this would be a positive result for the Company. If adverse findings are uncovered, the Company can remedy those issues and put in place appropriate measures to prevent them from reoccurring – again a positive result for the Company.

Supervision – The Concerned Shareholders propose that appropriate supervision procedures will be established to allow both parties to monitor the progress and any initial findings of the investigation that may indicate that the scope of the work should be increased or decreased. A structure should be put in place to ensure that management time is not adversely diverted from ongoing operations.

By addressing these points, the Concerned Shareholders believe that fellow shareholders should VOTE FOR the resolution.

The Company committed following the last general meeting to engage with all shareholders on their views and concerns going forward. Completing this investigation will help address those concerns.

The Concerned Shareholders have set up a website at www.blockenergysupport.group with additional information.

 

map lines