Big Debate Over a Small Energy Firm’s Prospects : Finance: Benton Oil’s stock has soared in the last year. Skeptics say it is vastly overpriced and oppose the company’s plan to quadruple the number of shares outstanding.

To its true believers, Ventura-based Benton Oil & Gas Co. is the seed of a $500-million energy company of the 1990s.

To its detractors, Benton Oil is an outrageously hyped little oil exploration firm whose market value is inflated and whose financial situation is tenuous at best.

The bulls and bears have been battling over Benton Oil for more than a year, in which time the company’s stock mushroomed from $2 a share to more than $18 before backing off to $10.50 now.

Even at the current price, Benton Oil’s market value is a stunning $95 million, with about 9 million shares outstanding. That for a 2-year-old firm whose earnings were just $159,444 last year.

Today, Benton Oil’s shareholders gather for the firm’s annual meeting in Ventura, where they will be asked to boost the company’s authorized shares to 40 million from 10 million now. That move is key to Benton Oil’s future, because the company itself admits that it must raise a huge amount of money over the next year to make its grand plans work.

Ironically, the ease with which Benton Oil has raised capital in its short history is a major reason that its critics have zeroed-in on the firm. Through a series of stock sales and limited partnerships, Benton Oil has raised $26 million from investors since 1989, while many competitors have struggled.

The bears--many of whom are “short-sellers,” or professional investors who look for stocks that they believe are headed for collapse--contend that Benton Oil has presented a vastly exaggerated view of itself.

“I can’t figure why this stock trades above $1,” argues Joe Feshbach, whose Palo Alto firm is one of the biggest investment boutiques specializing in short selling. Benton’s finances, Feshbach contends, “border on the ludicrous.”

In an interview, an unruffled Alex E. Benton expressed mild surprise at the short-sellers’ arguments. As the founder of Benton Oil, the 48-year-old Russian emigre also has been the company’s chief promoter. Asked why he thought a highly vocal group would be gunning for him, Benton shrugged and said, “I think it’s because the stock has done very well.”

Indeed, short-sellers lose big if they bet on a stock’s decline and the price instead rises. To sell short, you borrow stock and sell it, expecting to replace the loaned shares later at a cheaper price, assuming that the price drops. But if it rises, the short-sellers must scramble to buy back the stock to close out their bet.

Feshbach and other short-sellers don’t deny that they have an interest in having the stock decline. But they insist that their criticism of Benton Oil is proportional to what they view as the company’s hype.

The central issue in Benton Oil’s future is whether it can grow into a major “stripper”--a firm that extracts oil and gas deposits from old fields abandoned by major oil companies.

Benton, a geophysicist by training who has worked in exploration for such major firms as Amoco and the now-defunct May Petroleum, founded Benton Oil in 1988. His goal from the start was to buy interests in old fields and use state-of-the-art seismic technology to find and profitably extract leftover oil and gas.

Benton admits that the technology itself is not unique to Benton. But the major oil firms, Benton said, don’t want to deal with residual petroleum pockets left after a field has been largely depleted.

With a convincing sales pitch and the help of a network of individual stock brokers in the Southland, Benton Oil has stunned many observers with its ability to attract investment dollars, mostly from individuals.

For their money, Benton Oil shareholders now own a company that explores for oil and gas in three principal regions: the Gulf of Mexico, off Louisiana; Oklahoma, mainly in Osage County, and the Sacramento Basin.

In the first quarter ended March 31, the firm said it pumped 70,000 barrels of oil, versus 11,000 barrels in the first quarter of 1990, and 117 million cubic feet of natural gas, up from 19 million cubic feet.

With production rising, first-quarter revenue leaped to $2.35 million from $303,460 a year earlier. And Benton Oil reported net income of $166,740, or 2 cents a share, contrasted with a loss of $227,826, or 4 cents a share, a year earlier.

Benton, who was paid $155,383 in salary last year, promises that the first-quarter numbers are just the beginning. “Our revenues this year are going to be three to five times what they were last year ($4.7 million),” he said.

Charles Strain, an ex-Houston stock broker who now is an oil-industry consultant, believes that the firm can earn 80 cents a share this year as it pumps oil and gas from its properties. The company itself, however, isn’t comfortable with that number.

David Pratt, Benton Oil’s chief financial officer, said that the 80-cents-a-share number “was based on very aggressive development” of the company’s crown jewel, its West Cote Blanche Bay oil field, five miles off the Louisiana coast.

In fact, Pratt said, “We’ve had a delay in getting barge equipment in there.” Though that is expected to be remedied soon, Pratt said, “at this point we really don’t have a number” to use as a comfortable earnings estimate for 1991.

Feshbach and other short-sellers who have pored over Benton Oil’s paperwork contend that the firm’s root problem is that it has overestimated its ability to profitably pull up its oil and gas reserves.

Benton Oil said its “proved” oil reserves at Dec. 31 were 12.18 million barrels, versus just 22,631 barrels a year earlier. The soaring reserve total is a major reason why the stock price has rocketed: Investors believe that they are buying a huge asset base.

But just using simple math, Feshbach takes the $21 million asset value of Benton Oil’s properties, as carried on its balance sheet, then subtracts the company’s $10 million in debt. That leaves a net value of about $11 million for the oil and gas assets.

Why, Feshbach asks, should the market value of the company’s stock be almost nine times that sum? “The world of economics just doesn’t work that way,” he said.

What’s more, Benton Oil’s critics slam the company for failing to disclose, until recently, that its West Cote property is embroiled in a court case. The state of Louisiana refused to approve the transfer of a major stake in the field from Texaco to Benton Oil because the state is suing Texaco for disputed royalties.

Benton Oil spent $13.7 million to acquire a 28.9% working interest in West Cote in 1990, beginning last summer. But the clouded-title dispute wasn’t disclosed to Benton Oil investors until April 17 of this year, in an SEC filing.

The company maintains that the suit will be settled without harm to Benton Oil’s interests. The dispute wasn’t disclosed earlier, Benton said, because “we have had a great deal of confidence that the risk of us losing our lease was very small.”

Despite its disbelievers, Benton Oil continues to plow ahead. Just this week, the company bought a further 13.3% interest in West Cote for $9.5 million, giving it about 42% of the field. Texaco has most of the rest.

Yet even its strongest supporters admit that Benton Oil’s finances have reached a major crossroads: Benton must raise an enormous amount of capital this year to make ends meet. In addition to its U.S. ventures, Benton Oil has been negotiating for oil and gas deals in such far-off places as Venezuela and the Soviet Union.

“The company is burning cash very rapidly,” Strain said. “There’s no question they need financing.”

By its own account Benton Oil will need $15 million to $20 million this year to fund new property acquisitions, conduct seismic surveys in its West Cote field, drill development wells in other fields and rework existing wells.

One measure of Benton Oil’s financial bind is that on March 31, current liabilities of $9.7 million (payments it owes near-term) were nearly double current assets of $5.2 million (cash and other liquid assets).

To date, Benton Oil has been able to arrange a $5-million credit line, secured by some of its properties, with the finance arm of US West Inc., the regional phone company. Benton Oil drew on $2 million of that line in April.

But the bulk of the company’s capital needs clearly will have to be satisfied by new stock sales or from long-term financing with banks or other lenders.

In recent weeks, Benton Oil has been marketing a complex private-placement stock offering designed to raise up to $7.5 million. The offering is being marketed only to investors whose net worth tops $1 million or who have annual income exceeding $200,000.

Even if Benton Oil can raise the full $7.5 million in the private placement, Alex Benton agrees that the company will need to issue much more stock this year to meet its financing needs. “We’ll need a wider audience,” he said.

That is why the company is seeking to quadruple the shares it can have outstanding, to 40 million, with the shareholder vote at today’s annual meeting.

The problem with significant stock sales, however, is that each offering further dilutes the ownership of existing investors. So unless Benton Oil can accelerate its discovery of proved reserves, shareholders may see their piece of the pie shrink.

Thus, the company’s offerings could become an increasingly tough sell--especially given that Benton Oil has so far floated all of its stock sales on its own, without an investment banker’s assistance or stamp of approval.

Yet Benton shows no worry about attracting new investors. “There are people out there who know we are honest guys . . . and they believe in us,” he said.

Feshbach doesn’t believe that Benton Oil can even come close to raising the money it needs this year. And given the company’s debts and its meager production, Feshbach believes that Benton Oil is on a fast track to financial ruin--and with it, its shareholders.

“The chance that they can go bankrupt this year is incredibly real,” he contends.

Benton, asked how he would reply to a short-seller who was betting on Benton Oil’s demise, remained unruffled. He smiled and said simply, “I’d say you better cover your short position.”

BENTON’S SHARE PRICE STAYS HIGH... Weekly closing price of Benton Oil and Gas Co. stock, now traded on the American Stock Exchange. Wednesday close: $10.50

Dec. 31, 1989 Dec. 31, 1990 Revenue (full year) $408,997 $4,667,256 Net income or loss -513,352 159,444 Net income per share -0.13 0.02 Total assets 4,514,203 27,253,477 Annual oil/gas data Oil production (barrels) 2,966 137,890 Gas production (million cubic feet) 101,825 329,910 Oil proved reserves (barrels) 22,631 12,180,022 Gas proved reserves (million cubic feet) 366,996 15,886,654

Source: Benton Oil and Gas