November 26, 2009 14:54 ET

Address of Mr Peter Simpson, Chief Executive Officer of Circumpacific Energy Corporation to the General Meeting on Thursday November 26, 2009 at Vancouver, Canada

CALGARY, ALBERTA--(Marketwire - Nov. 26, 2009) - Circumpacific Energy Corporation (TSX VENTURE:CER)


Ladies and gentlemen, my name is Peter Simpson, and I am the Chief Executive Officer of Circumpacific Energy Corporation.

I am pleased to welcome you to today's Annual General Meeting of Circumpacific, and to be able to report to you on the company and its business.

Overview of Financial Position

The 2008/2009 year presented a challenging economic environment. 

The global financial crisis required your Board to review carefully the strategic direction of the company. During the past fiscal year, the company's reserves and production volumes were negatively impacted by the decision of many of its property operators to reduce, defer or cancel capital expenditure programs.

Through these economically challenging times, the Board and Management of Circumpacific have focused on maintaining sufficient working capital through its cash reserves. The Company has maintained its bank facilities in good standing, with a reduced bank facility of up to $1.5 Million. I am pleased to report that the company remains debt free apart from our ordinary trade creditors. 

As they say, cash is king. 

Reduction of debt has been a high priority of the current Board. 

The position was very different when this Board took over a cash-starved and debt ridden company in 2007. 

At that time, your Board inherited a significant debt burden that hindered the Company's ability to pursue business opportunities. Getting rid of that debt was a priority of the current Board.

In July 2008 this Board was instrumental in the elimination of more than $3 million of debt with the company's major shareholder, Drillsearch Energy Limited, through a capital raising. With the conversion of debt to equity, Circumpacific was put in a debt free position. The retirement of that debt created an excellent debt to equity ratio that is now attractive to external and independent financiers and investors.

The Board and Management have continued to implement decisions and policies to control debt and maintain cash reserves that can be called upon as needed to fund the company's ongoing operations. 

Despite challenging market conditions experienced during the year, cash reserves were a positive $2.1 million as at year end June 30, 2009.

I want to make it clear - just so that there is no misunderstanding about the Company's position on this - that Circumpacific's cash reserves are exactly that – the cash reserves of Circumpacific

You may have seen information released by Circumpacific's major shareholder, Drillsearch Energy Limited, such as its June 2009 Quarterly Report, where Drillsearch is pretty quick to report the positive results at Circumpacific as if it owns 100% of the company. Drillsearch's June 2009 quarterly report even announces the cash position of Circumpacific as if it is part of Drillsearch's own cash base. 

It is not

There are several hundred shareholders in Circumpacific who rightly expect that their company's cash reserves will be applied for the benefit of Circumpacific, not Drillsearch. 

The positive cash reserves of $2.1 million as at June 30, 2009, are cash reserves of Circumpacific to be used by Circumpacific for the benefit of all of its shareholders.

Capital Raising

This Board's preference is that ideally working capital should be raised through equity injections, rather than medium or long term debt. This is especially so in uncertain economic times where the cost of funds is volatile and there is a risk that debt funding may be called up unexpectedly by banks or financiers because of changing market conditions or sentiment. The bank facility was reduced from $3.5 million to $1.5 million due to reserve valuation and not the economic conditions.

Looking to the future, there are several potentially valuable business opportunities for the Company on the horizon. The Company will need additional working capital if it is to seize those opportunities and make the most of them. Over the past few months the unanimous view of the Board has been that the Company needs to be able to have a tilt at a larger project - "to bat a bit higher up the order" was, I think, the description used at a recent board meeting.

And to do that obviously requires additional capital. 

That additional capital can come to Circumpacific in three ways. 

First, working capital can be generated out of the retained profits of the Company. However, to "take a tilt" at a much larger project will require more funding than, in my view, would be achievable out of retained profits in the immediate future. Those profits are also needed elsewhere – for example, to continue the Company's joint venture with Drillsearch in South West Queensland in Australia - which I'll talk about in a moment.

Second, working capital can come from debt funding. We could borrow the money from a bank or an external financier. Of course, the risk of debt funding is that the Company subjects itself to volatility in interest rates and uncertainty in the debt markets. This translates into higher interest rate margins, higher bank charges, and more stringent bank covenants and security.

Third, the Company can raise funds from capital raisings. Either through placements or rights issues.

Over the past 6 months or so the Board has identified new opportunities for potential capital raising through equity, not debt. That is to say, by a share placement, or by a rights issue to existing shareholders. 

Unfortunately the opportunity for capital raising has been dogged by threats made against Company and some of its directors by the Company's major shareholder, Drillsearch. Effectively we have been threatened that if the Board tries to raise capital otherwise than on the terms and conditions suitable to Drillsearch, then the Company and Board will be met with legal action to stop them doing so. 

The Company has received legal advice from Canadian corporate lawyers - advice in which the Board has confidence. It is simply contrary to basic tenets of Canadian securities law for such demands to be made of the Board. Under Canadian securities laws, the Board is required - as a mandatory obligation - to manage and supervise the affairs of the company. And this includes decisions about funding and working capital –and the best way of raising capital, such as from placements or from rights issues to all shareholders. 

This Board and Management, and indeed future boards and management, must be free to make decisions about raising working capital in the best interests of all shareholders - not just one shareholder - and the Company as a whole.

Your Board is not interested in subjecting your Company to unnecessary legal action. 

Unnecessary legal action results in unnecessary cost and unnecessary distraction to the Board and Management.

In those circumstances, I urge the members of the Board that will be elected today at the behest of Drillsearch, whoever those directors may be, to pursue vigorously and diligently all opportunities for capital raising through equity injection of funds, either by a rights issue to all shareholders, or a placement. Alternatively, Drillsearch could make a proper bid to takeover the company. As our Chairman has previously stated; Drillsearch wants to get its hands on Circumpacific's assets through the back door, including Circumpacific's cash reserves, and to control the Circumpacific board for its own commercial objectives. If Drillsearch really wants absolute control, then why not come in the front door and make a fair and reasonable Drillsearch scrip bid to our Circumpacific shareholders for 100% of the Company.

Circumpacific is now in a position that it must obtain additional capital generated through a capital raising that will allow the Company take on larger projects - to "bat higher up the order" - and to continue to build value for all Circumpacific shareholders as this Board has done. 

And without committing taking on a crushing debt burden.

Management Team

I turn now to the Management team of Circumpacific.

Over the past year, the Company has closed a number of important deals. These deals have been in the pipeline (if you'll excuse that pun) for up to 18 months now. 

They have come to fruition through the tireless hard work of the company's Management team, particularly;

our company secretary, Mr Peter Toy,

our operations manager and landman, Mr Roy Beavers, apologizes not present, not fiscally prudent.

our business development manager, Ms Lori Wright and finally

our new chief geologist, Ms Elizabeth Petrie who joined us from Drillsearch, in September of this year. 

These deals include, but not limited to, the assessment of an acquisition at Grand Forks that would carry with it significant savings in water disposal costs. There is also the disposal of the Spring Coolee site which had no remaining upside and would have left the Company with liability for abandonment costs. There is also the recent acquisition of the Duel Energy rights, which was unanimously supported the Board.

Details of the Company's acquisitions and disposals over the 2008/09 fiscal year are of course set out in more detail in the Company's Annual Report. 

The Annual Report can be found on the company's website Copies available here for distribution.

The Circumpacific Management team has worked, collaborated with, and supported the Board. Management has identified a number of new business opportunities for the Company, and has evaluated and analysed those opportunities and supported the Board at all levels. 

We are a small team and everyone has pulled their weight. 

I sincerely thank the whole Circumpacific Management team for their efforts, and I urge them to continue to provide the same high level of management support to the new Board to be elected here today into the future.

Cooper Eromanga Basin, Queensland Australia

As shareholders are aware, through releases by Circumpacific, Circumpacific presently holds preferred status for 7 blocks in the emerging Cooper Eromanga Basin area in southwest Queensland in Australia. 

Drillsearch Energy holds preferred tenderer status for 1 block. 

Together, Circumpacific and Drillsearch have entered into a joint evaluation agreement to evaluate the potential opportunities for both companies from those interests in the Cooper Eromanga Basin.

The Circumpacific management team continues to be actively involved in the Company's interests in the Joint Evaluation Agreement. 

It is pleasing to note that Drillsearch has, after several requests by Circumpacific, now provided to Circumpacific information relating to the evaluation plan, and has agreed to a management committee meeting to discuss the future opportunities in the interests of both companies. 

I am also pleased to report that Circumpacific and Drillsearch are presently considering a Joint Operating Agreement to move to the next step under their Joint Evaluation Agreement.

I am presently Circumpacific's nominated representative on the Joint Evaluation Management Committee. Mr Beavers is my alternate. Mr Ian Bucknell, who is the company secretary of Drillsearch, is the secretary of the Management Committee. Drillsearch is represented on that committee by Mr Jim Whaley or his alternate Mr Chris Carty, from Drillsearch.

The Cooper Eromanga Basin presents exciting opportunities for Circumpacific, but it will come at a significant cost of more than $120 Million. Circumpacific is committed to half of this South West Queensland project, and mangement's view is that its interests will need to be financed or significantly farmed out in order to be successful. 

This Board and Management team has set the course for the Company to maximise its investment and its status as preferred tenderer of 7 of the 8 blocks. I look forward to seeing positive results and a positive return to all Circumpacific shareholders in the years to come as a reward for their patience in this 50/50 joint venture.

Legal Proceedings

Shareholders will be aware of legal proceedings brought by Drillsearch in the Supreme Court of British Columbia against Circumpacific, and against 3 of its directors being myself, Roger Tidmarsh and Paul Johns.

I really don't want to bore shareholders with the Drillsearch legal action. The company's position in relation to those proceedings is set out in several press releases that are available on the Circumpacific website.

I don't propose to say anything about the legal technicalities of those proceedings, but I do express concern, dismay and some puzzlement at why Drillsearch would put Circumpacific to the unnecessary trouble and unnecessary costs of having to deal with such legal action. Legal actions are stressful to the management of your company, no matter how big or small, no matter how ill-founded they may be. It is true of course that the legal proceedings issued by Drillsearch have caused stress not only to management but also the board. Regrettably, significant legal costs have and will be incurred, perhaps tens of thousands of dollars.

All at the instigation of Drillsearch, not Circumpacific.

The legal proceedings came about because Drillsearch first threatened, on September 10, 2009, that if the Board of Circumpacific did not agree to an onerous set of protocols within one business day – protocols that would have given Drillsearch control of the company - then Drillsearch would apply to the Court for orders. 

As I pointed out earlier, it is a fundamental principle of Canadian corporate law, and as reflected in the governing Articles of the company, that the responsibility for management of the Company rests with the Board. It is mandatory for the Board to manage and supervise the affairs of the Company in the best interests of the Company and all of its shareholders as a whole. 

The Board is not entitled, under law, to abdicate its responsibilities, or to fetter those obligations, by lying down and acceding to the wishes of one shareholder, even if that shareholder happens to be a majority shareholder with 79% of voting shares. The fact remains, that there are over 200 other shareholders in this Company, holding between them over 20% of voting shares in this Company, and the interests of all shareholders must be considered, not merely the sole majority shareholder.

We advised Drillsearch of that basic home truth on September 15.

We heard nothing further. So much for the urgency. So much for one day's notice that we were given in which to comply by surrendering to Drillsearch's protocols.

A month later, on October 14, Drillsearch served legal proceedings on Circumpacific. Having issued proceedings on October 14, Drillsearch has done nothing further since then – now over 6 weeks later. 

Circumpacific filed its Appearance, and then filed its Statement of Defence on October 23, well within the time required by Canadian court rules. A copy of the Statement of Defence, setting out Circumpacific's response to the claim, is available on the Circumpacific website.

It is somewhat surprising that Drillsearch has taken no further steps. 

Drillsearch's statement of claim says that Drillsearch wants interlocutory injunctions (that means urgent interim injunctions) that prevent Circumpacific from doing all kinds of things, including important things relating to this general meeting today. Drillsearch also wants Circumpacific to pay all its costs of bringing its legal action against Circumpacific. Yet Drillsearch has done nothing further. It has not brought any application or motion to have its injunctions heard before the Court – injunctions that were apparently so urgent in September and October. Urgency is the key to an injunction. You can't ask for an urgent injunction if you sit on your hands for over month doing nothing. Drillsearch, it appears, is not actually interested in going ahead with those injunctions.

So why did Drillsearch bring these proceedings?

Answer: To intimidate the existing Board of Circumpacific for its own commercial objectives, and to scare Circumpacific management and the Board into doing nothing pending the holding of the company's general meeting at which time Drillsearch would have an unassailable opportunity to appoint its own representatives to the Board. 

I can only say that it is entirely disappointing that Drillsearch should act in such a poor manner towards Circumpacific and in particular its other shareholders. Drillsearch would have got its hands on this Company soon enough

It would have taken control of all management, assets and joint assets and decision-making soon enough. 

It would, soon enough, have been able to appoint the three directors specified in its requisition notice, and thereby take control of this Company through a board with no remaining independent directors.

Today, in fact.

At this Annual General Meeting.

That is exactly what an Annual General Meeting is for – is is the forum to elect the Board and deal with important Company matters. 

The Articles provide that the Board is to serve until the directors' positions are automatically vacated and the positions up for re-election at the AGM. That is the proper course. That is what will happen today.

And that is why your Board, elected as it was to serve a fixed term until this AGM, has refused to bow out along the way simply because of pressure from one shareholder for its own motivations and commercial objectives. 


In conclusion, my belief from my role as CEO over the past years, is that this Company is well placed now to achieve its strategic plans for 2009/10. 

Circumpacific has a strong balance of oil and gas reserves and solid production results in Canada. 

Properly managed, an independent Circumpacific will continue to provide value for all shareholders in these challenging economic times.

I would like to take this opportunity to sincerely thank Circumpacific shareholders for their past and ongoing support. I would like to thank those shareholders who have, over the past few months in particular, conveyed their support for me in my role as CEO and my dedicated management team. They have urged me to focus on the tasks at hand and not to be distracted by the threats and dubious diatribe of information being fed to the press to unsettle our management team and to cause harm to me personally and to this Company. 

I don't know why representatives of Drillsearch have made such a persistent and venomous personal attack on Mr Johns and Mr Tidmarsh and me, both directly and through certain Australian media.

Drillsearch has also chosen, for several months now, to copy to Canadian securities officials every conceivable piece of its correspondence to Circumpacific in circumstances where there has been no breach, or threatened breach, by the Circumpacific board or management of any Canadian laws.

I have acted as CEO, and the directors have acted as a Board, in what we have always believed to be the best interests of Circumpacific and its shareholders as a whole.

Drillsearch's tactic may have been to try to intimidate and discredit us in any way possible, simply because it wasn't getting its own way with Circumpacific - a company which Drillsearch seemingly treats as its own.

To my mind, the constant attacks on me and my fellow directors have been motivated by an ulterior purpose of seizing control of Circumpacific and its assets as quickly as possible. I merely wish to record my view that it is inappropriate and somewhat cowardly for Drillsearch to use the tactics that it has to try to force us out of the Company and to hand over control to Drillsearch.

I urge the incoming Board that will be elected today to remember that there are over 220 Circumpacific shareholders. The Board should, in all respects, act in the best interests of all Circumpacific shareholders.

As this is likely to be my last report as CEO, I wish all shareholders every success in this Company and into the future.


The TSX Venture Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this news release.

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