That started out with a bang almost 30 years ago is ending with a whimper.
By early October, the largest share sale in Canadian history should be over and the Canadian government will no longer have a presence in Petro-Canada.
But the divestiture is little more than a formality, removing the final shadow of government ownership from Petro-Canada, without measurably altering a commercial strategy that has long since been conducted independently of its largest shareholder.
When Petro-Canada was created in 1975 as a state-owned enterprise to provide a “window on the energy industry” at a time of soaring oil prices and rising foreign ownership, the company became an instant symbol of the animosity between Western Canada and the government.
The bitterness grew in the early years, when Petro-Canada embarked on a breathtaking binge, investing about C$10 billion of taxpayers’ money and snapping up assets such as Atlantic Richfield Canada, Pacific Petroleums, Petrofina Canada and the refining and marketing operations of BP.
In the words of Calgary analyst Ian Doig it was “born to spend money ... and it sure the hell did.”
The ill will spawned bumper stickers, declaring” “I’d rather push this thing a mile than fill up at Petro-Canada.”
There was not much support for the view of Maurice Strong, Petro-Canada’s first president, who argued that when the company was formed “80 percent of Canadians thought that the whole industry should be nationalized. Petro-Canada was created as an alternative to nationalization, rather than as an instrument of nationalization. It was simply inserting a Canadian presence into the industry.”
Shut out of industry organizations, Petro-Canada’s head office tower of the time was labeled Red Square. Toss in corporate jets, a gourmet kitchen, a multi-million dollar corporate art collection and a payroll of about 11,000 and the company’s place among the pariahs was secured.
Government began selling in 1991But, despite the government’s decision to hang on to its remaining 18.74 percent stake in Petro-Canada in the face of relentless pressure to sell, Petro-Canada has largely operated on equal terms with its peers since 1991 when the government completed the first of three share sales that yielded combined gross proceeds of about C$2.6 billion.
The final tranche has been awaited for nine years, with investors, analysts and some political leaders arguing there was no reason for the government to delay the inevitable.
The breakthrough occurred in March, when Finance Minister Ralph Goodale announced that the government’s final 49.4 million shares would be sold before March 31, 2005.
From there on, he and the company effectively imposed a news blackout, worried that any statements influencing the stock price ahead of a sale could get Petro-Canada into hot water with securities regulators and perhaps affect its listings on the New York and Toronto stock exchanges.
Word leaked Sept. 15But the rumor mill spun out of control Sept. 15 when word leaked that CIBC World Markets, RBC Capital Markets and Merrill Lynch would lead a syndicate of 22 brokerage firms in selling shares worth about C$3.1 billion at current market prices.
Adding to the speculation, Petro-Canada abruptly cancelled a presentation scheduled for Sept. 15 at a Peters & Co. investment conference, citing “business reasons.”
On Sept. 16, Goodale said he would have “absolutely no comment on all of (the latest) speculation ... (because of) very important legal and regulatory requirements that I adhere to. I will provide no running color commentary about timing or any other details.”
Just hours later, after the markets closed, Petro-Canada said it had been told by the government to file notice of the share sale with securities regulators in Canada and the United States.
Goodale issued a simultaneous release, saying: “Based on the best independent expert advice, we believe now is the right time to following through on the announcement we made in Budget 2004 that we intend to sell our remaining shares in Petro-Canada.”
Observing that the sale would have symbolic importance in Western Canada, he said it was the “end of a very long and very sorry history of Ottawa dabbling in the oil patch and I’m glad it’s over.”
Analysts believe shares will climbAmong analysts there is a widespread belief that once the stigma of state ownership or influence is removed, Petro-Canada share values could start to climb.
The prospectus indicated the shares would be sold for no more than C$62.10 each.
But Wilf Gobert, vice chairman at Peters & Co., has rated Petro-Canada at a price-to-diluted-earnings per share ratio of 10.3 in 2005, compared with an average of 14.7 for all of Canada’s integrated oil firms and 13.9 for EnCana.
If Petro-Canada were to get the same investor response as EnCana its shares would climb by 30 percent, Gobert said.
Petro-Canada said in a news release that it will resume a share buyback program once the government sale is completed.
In June, it set a target of buying 21 million shares, limiting the buyback to 2 percent of the total in any 30-day period.
At current values, the repurchase of 21 million shares would cost the company C$1.3 billion.
CEO says company has up to $C5 billion for acquisitionsChief Executive Officer Ron Brenneman said earlier this year that the company was in a financial position to make acquisitions worth up to C$5 billion.
With 4,500 employees, its core operations cover five major units:
• North American natural gas, with production in Western Canada and the U.S. Rockies, exploration activities in Alaska and the Mackenzie Delta and partnership roles in offshore Nova Scotia.
• Oil off Canada’s East Coast, where it is 33.99 percent operator of Terra Nova and owns 20 percent of Hibernia (with the two fields pumping a combined 350,000 barrels per day) and 27.5 percent of White Rose that is about 15 months away from start-up. Petro-Canada is also seen as a contender to acquire the government’s 8.5 percent stake in Hibernia, if and when that is unloaded.
• Alberta’s oil sands, where it has a 12 percent stake in the giant Syncrude Canada consortium and has its own project at MacKay River, plus leases at Meadow Creek.
• An international arm that followed its 2002 purchase of Germany’s Veba Oil & Gas for C$3.2 billion and now an attempted entry into the liquefied natural gas business that has included talks with companies such as Russia’s OAO Gazprom to secure LNG supplies.
• Refining and marketing, with three plants that give it 17 percent of Canada’s refining capacity and a network of 1,600 retail and wholesale outlets.
How will market react?The two immediate questions are how the market will react to the share offering and what it might mean to the future of Petro-Canada.
Because the sale is so big, Gobert is counting on a sudden awakening of interest from U.S. and international investors at a time when there is a hunger for energy investment.
Amir Arif, an analyst with Virginia-based Friedman, Billings, Ramsey and Arlington said the challenge will be for the market to digest so many shares, but the government’s departure removes an overhang that has been holding the share value back.
Petro-Canada has announced it will resume a share buyback once the government sale is completed, targeting a maximum 21 million shares or about 8 percent of the total, worth C$1.8 billion at current trading levels.
It will limit that buyback to 2 percent of the total in any 30-day period.
What has been ruled out is any possibility of a takeover bid.
A spokesman for Goodale said the government will retain the Petro-Canada Public Participation Act, which prevents anyone from owning more than 20 percent of the company and is seen as effectively a poison pill to block any hostile bid.
He said Canadian taxpayers should continue to benefit from the company’s operations, given the risks they carried to establish and develop Petro-Canada.
Next to the government, Petro-Canada’s leading shareholders are Capital Management & Research of California, 20.5 million shares, or 7.7 percent of the total; TD Asset Management 6.4 million, 2.4 percent; Fidelity Management 5.6 million, 2.1 percent and Fidelity Management 5.37 million, 2 percent.