Given what’s happened recently to the share price of Emerald Oil (NYSE: EOX), and how wrong I’ve been about what should happen to this stock, you should take my opinion on today’s action with a nice medium-sized boulder of salt.

My view is that the company is right to effectively suspend its Bakken drilling program after the first quarter of 2015.

Today’s 24% stock plunge below $1 a share likely has more to do with management’s much more questionable decision to allow two holders of its low-yielding convertible notes to convert them into low-priced common stock. Emerald has effectively turned debt on which it was paying a very favorable annual interest rate of 2% into equity dilution in the neighborhood of 24% at the current share price, in a deal with undisclosed counterparties that frankly reeks.

The newly announced deal will convert $21 million of the $172 million in outstanding convertible notes due in 2019 into common stock, $10 million at $1.99 per share and the rest at a volume-weighted average price of the stock over eight trading days starting Dec. 12.

Emerald will save the relative pittance of $420,000 annually on the 2% convertibles coupon, but inflict significant dilution on its common shareholders at potentially the worst possible time. Assuming (hardly a safe thing to do) that the share price averages $1 over the next eight days, Emerald will be issuing some 16 million shares on top of the 66.5 million outstanding at the end of the last quarter.

I’ve reached out to the company for comment, but nothing in my reading of the convertibles redemption rules suggests that Emerald was required to do this deal — which, to reiterate, turns extremely low-yielding debt not scheduled to mature for another four-plus years into a major dilution of common equity at these bombed-out levels. It’s hard to fathom how this transaction fulfills the spirit if not the letter of management’s fiduciary duties to shareholders.

We’re downgrading EOX to Hold pending a fuller explanation by the company. And if one isn’t forthcoming, we’ll regretfully soon be downgrading Emerald to a Sell, even in the absence of the chronically overdue oil bounce. Once trust is lost, we can no longer recommend a stock regardless of how rosy management paints the future. 

Now about Emerald’s decision to stop drilling soon. The company said it would drill and complete just five new wells over the next 12 months, spudding four of them before the end of the first quarter. It will retain just one of its current three rigs for the work, and even that one’s likely to be idled for much of the year barring an upturn in oil prices.

That’s a comedown from a capital spending plan the company laid out on Nov. 3, which called for spending between $210 million and $240 million on drilling to increase output by at least 35% in the course of 2015.

Emerald now expects to spend just $62 million to $81 million on drilling next year, and to end 2015 with daily output some 10% below its projected 2014 exit rate. According to the company, “under the variable one rig program Emerald will move into a free cash flow generative position in the second quarter of 2015 in the current oil strip environment and will allocate free cash flow into the acquisition of both Emerald common equity and convertible bonds in the open market and reduction of borrowing base debt.”

This is prudent conservation mode for a company whose drilling, like that of many other oil producers in the Bakken, has become uneconomical amid the ongoing crash in crude prices.

But the convertibles transactions don’t seem prudent at all; in fact “predatory” is the word that comes to mind. It’s hard enough to succeed in energy investing even when managers consistently act in the best interest of shareholders. It’s an impossible task in cases where there seems to be a different agenda.