Advisory Research Announces Opposition to Quest's Proposed Acquisition of Pinnacle Gas Resources.CHICAGO -- Advisory Research, a shareholder owning 7.9% of Quest Resource Corporations's outstanding common stock, issued the following letter to Quest's Board of Directors on January 17, 2008: VIA FAX AND OVERNIGHT MAIL January 17, 2008 Board of Directors Quest Resource Corporation 210 Park Avenue, Suite 2750 Oklahoma City, OK 73102 Attn: Jerry D. Cash, Chairman CEO and President Dear Board Members: Advisory Research, Inc. ("ARI ARI Acute respiratory infection, see there ") currently holds an aggregate of 1,781,602 shares of Quest Resource Corporation's ("QRCP" or "the Company") common stock. This represents approximately 7.9% of QRCP's total shares outstanding1. Based on publicly available information, we believe it makes ARI the Company's largest shareholder. We are writing to you to express our strong opposition to the Company's proposed all stock acquisition of Pinnacle pinnacle (pĭn`ĭkəl), minor architectural motif of vertical tapering shape, usually crowning a pier, buttress, or gable. Although sometimes it appears in Renaissance design, as in the Certosa di Pavia, it is almost exclusively a medieval Gas Resources, Inc. ("Pinnacle"). We expressed our view of the proposed acquisition to several QRCP executives in a meeting at the Company's offices on January 14, 2008. At this time we feel it is imperative that we make our position known to the Company's Board of Directors (the "Board"). We believe that QRCP is currently trading at a very substantial discount to its measurable net asset value, and as such we find it incomprehensible that management and the Board would consider a highly dilutive and value-destroying transaction involving the issuance of nearly 20 million additional shares of common stock. Instead, we insist that the Board terminate the merger with Pinnacle, and immediately retain an industry knowledgeable investment banking firm to assist in evaluating strategic alternatives to enhance shareholder value. We believe these alternatives include, but are not limited to, the immediate implementation of a share repurchase Share Repurchase A program by which a company buys back its own shares from the marketplace, reducing the number of outstanding shares. This is usually an indication that the company's management thinks the shares are undervalued. program or the sale of the Company. We recognize that the Company may have to incur To become subject to and liable for; to have liabilities imposed by act or operation of law. Expenses are incurred, for example, when the legal obligation to pay them arises. An individual incurs a liability when a money judgment is rendered against him or her by a court. a $3 million fee if it terminates the transaction, but this should not serve as a deterrent de·ter·rent adj. Tending to deter: deterrent weapons. n. 1. Something that deters: a deterrent to theft. 2. - as this $3 million fee pales in comparison to the amount of shareholder value that will be destroyed if the merger is consummated con·sum·mate tr.v. con·sum·mat·ed, con·sum·mat·ing, con·sum·mates 1. a. To bring to completion or fruition; conclude: consummate a business transaction. b. . We believe that QRCP's net asset value is currently in excess of $12.00 per share. This net asset value is highly measurable for a small-cap Small-cap A stock with a small capitalization, meaning a total equity value of less than $500 million. small-cap 1. Of or relating to the common stock of a relatively small firm having little equity and few shares of common stock energy company due to QRCP's transformation over the past 18 months. For example, the values of QRCP's two most significant assets can be readily derived from recent public and private market transactions. The following is a brief description of what we believe to be QRCP's material assets: * 55.9% limited partner interest in Quest Energy Partners, L.P. ("QELP QELP Quantitative Environmental Learning Project "). This asset consists of 3,201,521 common units and 8,857,981 subordinated units in QELP. The current market price of the common units traded on the NASDAQ NASDAQ in full National Association of Securities Dealers Automated Quotations U.S. market for over-the-counter securities. Established in 1971 by the National Association of Securities Dealers (NASD), NASDAQ is an automated quotation system that reports on is approximately $14.75 per unit2. Simple math would suggest that this asset alone may be worth almost the entire current market capitalization Market Capitalization A measure of a public company's size. Market capitalization is the total dollar value of all outstanding shares. It's calculated by multiplying the number of shares times the current market price. This term is often referred to as market cap. of QRCP. * 35.7% limited partner interest in Quest Midstream mid·stream n. 1. The middle part of a stream. 2. The part of a course that is neither at the beginning nor at the end: the midstream of life. Noun 1. Partners, L.P. ("QMP QMP Quality Medical Publishing QMP Quality Management Plan (USACE) QMP Quality Management Program (Canada) QmP Qualitätswein Mit Prädikat (German wine certification) "). This asset consists of 35,134 Class A subordinated units and 4.9 million Class B subordinated units. On October 15, 2007, QMP sold 3.75 million common units through a private placement at a price of $20.00 per unit. While QMP's units are not currently publicly traded, QRCP has committed to taking QMP public by the end of 2008. * 100% of the general partner interest in QELP. This asset includes potentially lucrative incentive distribution rights, whereby the general partner stands to receive 25% of all incremental Additional or increased growth, bulk, quantity, number, or value; enlarged. Incremental cost is additional or increased cost of an item or service apart from its actual cost. distributable income once annual distributions to the limited partner units exceed $2.00 per unit. * 85% of the general partner interest in QMP. This asset includes incentive distribution rights that could be even more lucrative than those held by QELP's general partner. The general partner will receive an escalating share of incremental cash flow as measured by the distributions paid to limited partners, eventually resulting in the general partner receiving 50% of all incremental distributable income once the annual distribution to limited partners exceeds $2.55 per unit. * Exploration acreage outside the Cherokee Basin. This consists of undeveloped acreage in New Mexico New Mexico, state in the SW United States. At its northwestern corner are the so-called Four Corners, where Colorado, New Mexico, Arizona, and Utah meet at right angles; New Mexico is also bordered by Oklahoma (NE), Texas (E, S), and Mexico (S). as well as 22,300 net acres in Pennsylvania Pennsylvania (pĕnsəlvā`nyə), one of the Middle Atlantic states of the United States. It is bordered by New Jersey, across the Delaware River (E), Delaware (SE), Maryland (S), West Virginia (SW), Ohio (W), and Lake Erie and New York that management believes are prospective for the emerging Marcellus Shale play. It is our estimate that the combined value of the above assets translates into a valuation in excess of $14.00 per share for the Company. After subtracting the approximately $40 million of long-term debt Long-Term Debt Loans and financial obligations lasting over one year. Notes: For example debts obligations such as bonds and notes which have maturities greater than one year would be considered long-term debt. that we estimate to still exist at the QRCP level, we arrive at a net asset valuation in excess of $12.00 per share for the Company. As such, we believe the Company's net asset value is more than 70% greater than the current market value of the Company's common stock, which has been trading at a price of less than $7.00 per share3. With the Company's common stock trading at such a substantial discount to its net asset value, it is incomprehensible for management and the Board to pursue such a large, all stock acquisition. As QRCP's largest shareholder, we will not stand by as management and the Board pursue such a highly dilutive and value-destroying transaction. The acquisition of Pinnacle is even more detrimental det·ri·men·tal adj. Causing damage or harm; injurious. det  ri·men to QRCP's
shareholders when it is weighed against the Company's opportunity
to use its free cash flow to repurchase re·pur·chase tr.v. re·pur·chased, re·pur·chas·ing, re·pur·chas·es To buy (something) again. n. The act of buying something that one previously sold or owned. Noun 1. shares of its common stock at a substantial discount to its net asset value. QRCP's management has publicly stated that during 2008 the Company expects to receive approximately $23-25 million in distributions from its interests in QELP and QMP. This stream of cash flow would enable the Company to begin repurchasing a meaningful number of shares of its common stock, while still enabling it to service its existing debt obligations. We understand that prior to implementing a repurchase program it may be necessary to amend the Company's existing credit facility. However, given the Company's strong financial position and dramatically reduced debt levels, we feel this could be accomplished without undue strain and should therefore not stand in the way of implementing a repurchase program. With QRCP's stock currently trading at such a substantial discount to net asset value, there is no question that share repurchases represent the most attractive use for the Company's free cash flow. We would like to remind the Directors of their fiduciary fiduciary (fĭd  `shēĕ'rē), in law, a person who is obliged to discharge faithfully a responsibility of trust toward another. obligation
to the shareholders at this pivotal time in the Company's history.
When a public company's stock is trading at a substantial discount
to its net asset value - as we believe QRCP's clearly is - both
management and the Board have the responsibility to take the necessary
steps to enhance shareholder value by eliminating this discount. As
such, we believe the Board should immediately terminate the Pinnacle
acquisition and retain an investment banking firm to assist the Company
in evaluating strategic alternatives to maximize shareholder value.
Should the Company proceed with the highly destructive acquisition, we are ready to take the necessary steps to protect the value of our investment. Such steps may include, but are not limited to, soliciting outside parties that may have an interest in acquiring QRCP for fair consideration, seeking representation on the Board or taking other such steps as we deem appropriate. < < < < < < < < < < Sincerely, < < < < < < < < < < < < < < < < < < < < < < < < < < < < < < Brien O'Brien Matthew W. Dougherty < < < < < < < < < < Chairman & CEO Vice President < < < < < < < < < < 1 Based on 22,483,276 total shares outstanding 2 Bloomberg Bloomberg A major global provider of 24-hour financial news and information including real-time and historic price data, financials data, trading news and analyst coverage, as well as general news and sports. , LP 3 Bloomberg, LP |
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