By Marlize van Romburgh Friday, September 2nd, 2011

A shareholder of Venoco has filed a lawsuit to block a proposal by the CEO of the oil and gas company to buy the half of the company he doesn’t already own, alleging that the proposed buyback undervalues the firm.

Tim Marquez, the CEO and president of Venoco, has offered $12.50 per share to buy the 49.7 percent of the firm held by other shareholders. The proposal, which values the entire firm at $770.2 million, undervalues the company, shareholder James G. Prince said in an Aug. 31 complaint in Delaware Chancery Court obtained by Bloomberg News. Prince asked that the case be a class-action suit including other Venoco shareholders.

Marquez sent a letter Aug. 26 to the firm’s board saying he wants to take the Denver-based company private. His offer of $12.50 per share represents a 39.2 percent premium over Venoco’s closing share price of $8.98 on Aug. 26, but a 9 percent discount over the firm’s total assets of $841.6 million reported in June 30 regulatory filings.

Venoco is based in Colorado but maintains significant oil-drilling operations off the coast of Santa Barbara and Ventura counties.

Michael Edwards, the firm’s vice president of corporate and investor relations, told the Business Times on the afternoon of Aug. 31 that the company hadn’t yet seen the complaint, filed that day, and could not comment. Venoco said in an. Aug. 29 statement that a committee consisting of all of its independent directors excluding Marquez will consider the buyout proposal. The committee will retain independent financial advisors and legal counsel to assist it, the company said.

The company’s greatest growth potential lies in a Monterey shale operation in the Bay Area, Phil McPherson, a Newport Beach-based analyst with Global Hunter Securities, told the Business Times. Marquez’s offer doesn’t appear to price that potential in, he said.

“I think [Marquez] just grew tired of being a public-company CEO,” McPherson said.

Marquez declined to comment for this story, referring media inquiries to Edwards in investor relations.

The offer is a significant discount to the value of the company’s assets, McPherson said. He predicted shareholder lawsuits may follow, because the stock was trading as high as $22.46 in February.

Another oil producer may emerge to make a hostile bid or Marquez may have to raise his offer, he said. Other bidders may include Occidental Petroleum Corp., Hess Corp., Chesapeake Energy Corp. or Plains Exploration & Production Co., he told Bloomberg News.

McPherson owns Venoco shares and rates the company a “buy.” His firm makes a market in the shares.

By Aug. 31, at least 10 other law firms had already issued announcements saying they’re looking into the proposed deal.

“As chairman and CEO, Marquez understands the intrinsic value of the company and its prospects for growth,” New York-based class-action law firm Weiss & Lurie said in an Aug. 29 press release. “Notably, in its most recent quarter, in attempting to offset low gas prices, Venoco invested half its capital expenditure in the oil-rich Monterey shale formation. In making his proposal at this time, Marquez appears to be seeking to take advantage of the recent dip in the company’s stock. In fact, less than a week before Marquez made his proposal, Venoco’s stock hit its 52-week low of $8.18 per share.”

In his Aug. 26 letter to the board, Marquez said he was confident financing for the proposal could be obtained.

“I expect that the company’s senior management team would remain in place. I anticipate continuing to run the business in accordance with our current practice and maintaining the company’s valuable employee base, which I view as one of its most important assets,” he said in the letter. His offer constitutes a 27 percent premium over Venoco’s average closing price in August, he said.

“Really what this is about is a talk about the ownership of the company. It shouldn’t affect day-to-day operations too much,” Edwards told the Business Times.
Marquez and his wife, Bernadette, own 50.3 percent of Venoco. They took the company public in a $212.5 million offering in 2006, partly to help fund their philanthropic endeavors.

The couple gave 2.5 million shares of Venoco stock, worth about $42.5 million, to establish an educational foundation in their name in Denver. The couple gave an equal amount to establish the Denver Scholarship Foundation.

Venoco shares opened at $17 in 2006, climbed into the $20 range over the next year, plunged into the $2-$3 range in late 2009 and then rebounded to trade between $10 and just over $20 during the last year.

Although the stock’s performance has been mediocre, McPherson said his firm recommended it to investors because of the potential it saw in the Monterey shale holdings.

“That’s where [Venoco has] really been focusing their growth capital,” he told the Business Times.

Venoco owns 214,000 net acres in the Monterey shale — making it the second-largest landholder in that oil-shale formation — and plans to finish the year with 300,000 net acres, Marquez told investors on an Aug. 2 earnings conference call.

The Monterey area holds an estimated 15.4 billion barrels of oil, about 64 percent of the total U.S. oil-shale reserves, according to a July 8 report by the Energy Information Administration.

Before news of the buyout proposal, Venoco had fallen 51 percent after spending $40 million to drill six horizontal wells that didn’t produce, McPherson told Bloomberg News.

Venoco shares had soared 30.3 percent to $11.70 in afternoon trading on Aug. 29 on news of the proposal and stayed in that range the next day. Shares fell 17 cents, or 1.4 percent, to $11.59 in after-hours trading on news of the lawsuit.

• Bloomberg News contributed reporting to this article.