Cadogan Petroleum chief executive officer Ian Baron, a career oil man, has seen his London-traded company through a challenge to its licenses by the Ukrainian government, an attempted hostile takeover by a minority shareholder and a continuing lawsuit against former management. But he’s still keen on the prospect for investment in Ukraine’s lucrative energy sector.
In a Nov. 23 interview with the Kyiv Post, the 50-something Scotsman said Cadogan, due to its ample cash reserves and recent license victories, is still a safe bet for investors.
Kyiv Post: Can you tell me what your background is?
Ian Baron: My degree is in geology. I graduated in 1977 from the University of Manchester. My first job was working on rigs in the Middle East. I kind of worked my way through a whole series of companies as an exploration geologist. Most of my career was spent with Conoco, a U.S. company. The longest period was really in the Middle East and then the Caspian in Russia.
KP: How did you get selected for your current job as CEO of a troubled company?
IB: Well, probably about seven or eight years ago I set up as a consultant in Dubai, where I had been living for a large part of my career. I started in the technical-operational side of the industry and then got into the commercial side and business development. I worked with a number of private equity funds and investors, helping them look after their investments. So I sat on a number of boards of start-ups and listed companies. I was asked to join the board of Cadogan before the IPO [in 2008], essentially just bringing in operational eyes and ears as comfort to the investors.
KP: So you were hired, left and then came back?
IB: When it came to IPO, I really didn’t qualify as an independent non-executive director, so I resigned from the board. I got involved again later because I obviously knew some of the board members and initial shareholders. So when the company was in a little bit of trouble they asked me if I could find some time to help out as an interim executive.
KP: Cadogan has working interests in eight license areas of Ukraine, correct?
IB: Yes.
KP: In terms of production from wells, it’s been reported by media that you have a total of $1 million in revenues. Is that right?
IB: Gross revenues are about $900,000 or something like that.
KP: How about operating costs, do they exceed this figure?
IB: Broadly, we are close to covering our costs for non-exceptional items. But we don’t cover yet capital costs: the cost of drilling the well, shooting the seismic, buying equipment to produce – as different to the cost of people to run the business.
KP: Your stock price is now at around 0.20 British pounds but the IPO price was 2.30 pounds. How do you explain that?
IB: When I came into the company it was in total disarray: Heavily overstaffed. It was a very dysfunctional organization because of the way the company had been formed. So we cut a number of staff, started running things more efficiently, and got rid a number of licenses that were far too risky.
KP: How did Cadogan get into such a mess?
IB: The company didn’t really look at the full risk profile. For example, they [the former management] ordered gas plants way before the gas plants were needed. You don’t order gas plants while doing exploration. And I found there were things that weren’t being properly carried out.
KP: Would you say there was incompetence?
IB: Some people might bluntly put it as incompetence. There was a concern, and so the [former] executive management was replaced. Then we went in and just did the basic work properly and patiently, sorted all the pieces out and just looked at where we could cut costs, be more efficient and get the company on track.
KP: But then the company decided that it wasn’t enough to get rid of the old management but actually decided to sue them in court.
IB: We can’t talk about that. What we have said in the public domain is that the management left – two of the management were asked to leave – and then we discovered after they left that there were procurement irregularities associated with some of the orders that had been placed.
KP: What was the financial sum that these procurement irregularities reached?
IB: We cannot talk about that.
KP: OK, you came in and saw these problems and then, as they were being revealed, you were physically attacked in Kyiv near the funicular on Podil – was this attack related to efforts to uncover irregularities under the former management?
IB: I don’t know.
KP: Cadogan under your leadership also managed to resolve a dispute over two of your licenses with the Ukrainian government – a real feat. How did you accomplish this?
IB: We stuck with it, we patiently went through it, tried to understand it. We patiently developed our relationship with the authorities. I think they began to realize that we are a serious company, actually trying to drill wells and get things done.
KP: Was the change in government that took place earlier this year instrumental in your resolving your license problems?
IB: I think we found the new team easier to work with, more consistent, more pragmatic, perhaps. I mean this in a business sense, not in any kind of a corruption sense. We have refused as a company – since I’ve been involved – adamantly refused [to pay bribes]. We told all the staff: If I ever find out that anyone has paid any kind of kickback or bribe, you’re fired. It’s in your contract. We are a public company for heaven’s sake. I cannot afford for that to happen. I’m not going to jail.
KP: What about what looked like a hostile takeover attempt by the company’s largest shareholder, Weiss Asset Management LP? You resolved this problem by bringing in another investor, SAE Capital Holdings. Who found these guys?
IB: They were introduced to the company through a boutique investment fund in London.
KP: So essentially what these guys had to do was turn to Weiss and offer to buy them out?
IB: Exactly. We cannot get involved in this because we are only management. Basically SAE came along and said they were interested in the company and understood it was undergoing a takeover. We said: You are going to have to talk to the guys who are trying to take the company over and see if you can negotiate a deal. And that’s pretty much how it went down.
KP: Did you get the licenses straightened out before SAE Capital Holdings came in?
IB: No, they came in before.
KP: So they came into a company with licenses under dispute – why?
IB: Well, I think when you look at the company, you see $40 million in the bank, it pretty much covers its costs, and it has receivables of $36.5 million [from sale of gas plants ordered by former management] – just do the numbers. So anything that you can get from the licenses is upside.
KP: What was SAE’s total investment into the company?
IB: Well, 29 percent of the company is about $22 million.
KP: After all that your company has been through, and taking into account that other Western energy companies such as Marathon and Cardinal have already left Ukraine, is the country still worth the trouble?
IB: When you gather together the proper data, you see opportunity. Ukraine has a very good market: The country consumes about 65 billion cubic meters (bcm) of gas and produces about 20 bcm. It has good infrastructure: the one thing that Ukraine does well is pipes and facilities. Our view is that there is still a lot to be done here, but there are a lot of challenges.
