In the Company of Owners

Stock options have earned a bad rap lately on Bay and Wall streets because of a string of “backdated” stock-option scandals. Yet stock options are a key part of executive compensation and perhaps the only thing that keeps management’s interests aligned with those of shareholders.

Research in Motion and Apple are two examples of companies that have hit the front pages of newspapers recently. These companies allegedly issued options at one point in time, but backdated them to when the stock prices were lower. This practice inappropriately rewards stock option holders, adding millions of dollars of extra value to their compensation. And to the detriment of the company, financial statements are misstated because the costs of the options are inaccurately recorded.

Though the restated RIM financials showed no material difference, stock options can be very material. For example, even though Apple CEO Steve Jobs takes home a salary of only $1 US annually, he ranks as a top-paid CEO from realized stock options worth $647 million US.

Regardless of the recent backlash against stock options, they remain a proven incentive for management to align its interests with that of shareholders. The better management performs in maximizing shareholder value, the better its compensation.

Naturally, shareholders want management to have significant options so that executives are interested in increasing stock prices, rather than solely taking home a fat paycheque.

Investors can take advantage of the timing of the issuance of stock options as a possible sign that the stock price may rise in the future. Typically options are issued when the stock price is near a low or is expected to increase. Rarely are options issued when the stock is expected to fall. Otherwise the options will be “out of the money,” meaning the strike price is above the current trading price of the underlying security, and therefore worthless. The following companies recently granted stock options to employees. The time may be right for investors to buy

CORDY OILFIELD SERVICES INC. (CKK: TSX.V $2.00) is an oilfield and construction services company which is currently acquiring specialized, well operated, growth-oriented companies in the oilfield services and construction industry. On Apr 11, 2007, Cordy granted incentive stock options to certain employees, officers and consultants to acquire 200,000 common shares at the exercise price of $1.60 per share. The board of directors timed this well, as the stock started climbing up from its low of $1.27 to now trade in the $2 range. With the stock still far from its 52-week high of $5.50, there may still exist a fair bit of upside.

EAGLE ROCK EXPLORATION LTD. (ERX: TSX.V $0.51) is an emerging junior oil and gas exploration and production company that is growing reserves and production through a combination of low- to medium-risk drilling, strategic acquisitions and industry alliances. On Apr 26, 2007, Eagle Rock announced the granting of incentive stock options to certain directors, officers, employees and consultants, acquiring up to 550,000 common shares at price of 50 cents per share. The stock had already fallen from a high of $1.54 a year ago and has recently starting rising from its low of 37 cents. With the share price coming off a bottom, the board of directors may feel that the stock has nowhere to go but up.

RICHARDS OIL & GAS LIMITED (RIX: TSX.V $0.51) is a junior exploration and production company focusing on coalbed methane. On Apr 18, 2007, it announced the granting of 250,000 stock options to officers and directors at an exercise price of 72 cents per common share in addition to 100,000 options granted to its new president a week earlier. Over the year, the stock has fallen from a high of $2.08 to hit a low of $0.48. With directors granting options during this period at $0.72, they must have believed the stock was near its bottom. Though they may have mistimed the bottom, management is definitely motivated to see its share price rise above the 72-cent level.

Christopher Gulka, CA, CFA is the Prairie Trader. He is an avid investor, sometime day trader, and owner of Working Capital Corporation.

Prairie Trader is an independent overview and assessment of Alberta-based companies in the public markets that have investment potential. The author declares that he has no investment or business interest in any of the recommended companies described herein. Alberta Venture assumes no responsibility for the accuracy of any stock recommendations. You can reach Gulka at prairietrader@albertaventure.com or send feedback to feedback@albertaventure.com.

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