Just Lost $24,000 In Advantage Energy

by Dual Income No Kids on February 13, 2009 · 0 comments

Hi All,

Sometimes life gives you an opportunity to eat a big slice of humble pie.

Today I hit the sell button on one of my stocks – Advantage Energy Trust (AAV). This locked in a loss of nearly $24,000. I bought a block of 2,750 shares in the company back in early 07 at an average price of $14 bucks. I sold today at $3.16. To be entirely fair, AAV paid me over $6,000 in dividends during that time, but the total loss is something like $24,000 thousand dollars.

Why did I decide to sell and take such a huge loss? – Its a lot, about a years worth of savings for myself and my wife.

Advantage had gotten hit pretty hard by the stock market shock. But the price decline wasn’t so much of an issue. What really did it was the company’s debt and increasingly poor management decisions.

1) Debt. Over the past two years, AAV doubled its long term debt from $333 million to $760 million. Based on my correspondence with investor relations, these expenditures were incurred for largely for operating costs and overhead. In short, at lot of this went just to keep the lights on. In addition, Advantage had no plans to actively reduce this debt level.

2) Lack of Management Accountability. Several red flags have been raised in recent weeks. First, the Chief Finance Officer was let go (1). This is suspicious because the CFO was hired on back in 04, and had a background as controller and auditor (1). In the midst of poor economic conditions, why would the company let go someone whose background was in ensuring financial integrity? While one can’t say anything firm about Advantages motivations, it strongly suggests internal governance problems.

The second red flag is insider trading. Its been alleged that Patrick J. Carins, one of Advantages bigwigs, dumped nearly 700,000 shares before an announcement came that AAV was going to cut their dividend by 50% (1). The timing strongly suggests that Carins new ahead of time about the dividend cut. Insider trading is illegal, and its a bad sign when one of the companies officers commits illegal conduct.

Finally, there have been a number of other management issues. For example, the company no longer conducts quarterly conference earnings calls and had recently attempted to implement a “poison pill” shareholder rights plan to prevent a possible takeover. This is problematic, as it has less to do with shareholders and more with protecting the jobs of the current management.

If you bought shares after reading about AAV on this blog, please accept my apologies. My initial expectations about the company have failed to materialize.

Thanks,

James

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