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Penn West board recommends switch to energy income trust
Gary Park
In a moment of rare insight into his character, Canadian oil patch wizard Murray Edwards said “there are no eras … we’re all just sands in time. There’s no permanency to anything.”
That was intended to signal his lack of emotional attachment to Calgary-based Penn West Petroleum, a company he has been instrumental in building from a C$3 stock in 1992 to about C$66 today with a market capitalization of C$3.6 billion and a senior producer, pumping 107,000 barrels of oil equivalent per day, including 330 million cubic feet of natural gas.
Against a backdrop of rumors that he was fighting tooth-and-nail to preserve Penn West as a traditional exploration and production company and prevent a switch to the burgeoning income trust ranks, Edwards insisted he was “indifferent” to the trust structure that now holds 30 oil and natural gas producers. Under mounting pressure His comments came on the afternoon of Aug. 20 when, amid considerable tension among shareholders at Penn West’s annual meeting, the board of directors recommended moving all of the company’s assets into a trust, setting Penn West up for a possible C$1 billion market gain and creating easily the largest energy trust.
The company has been under mounting pressure over the past year from big institutional investors, including Salida Capital, CanFund VE Management and the C$75-billion Ontario Teachers Pension Plan Board.
Edwards, who is believed to hold 6.5 percent of Penn West shares and is a co-owner of the Calgary Flames franchise in the National Hockey League, said his only priority is to build shareholder value as much as possible.To that end, he suggested trusts can “serve a purpose at times” and can be “abused at times.”
“I think they have a role to serve at the right time with the right structuring. Are they the perfect model? No.” In a bull cycle Continuing on his philosophical path, Edwards said “you go through transitions and cycles. Right now, none of us in Calgary are as smart as we think we are ... $47 oil means a lot of us look pretty smart.
“We are in a bull cycle and as much as we are in a bull cycle, we will have challenges and we are going through a phase right now in Western Canada.”
Penn West president Bill Andrew, conceding shareholder pressure was a consideration in the board recommendation, said Penn West had reached a point “where a different way of looking after the shareholders” was needed.
Apparently, less than a majority of shareholders wanted to take the plunge into the trust pool. Not yet a done deal A proposal to seriously consider the trust model was defeated by 52 percent of shareholders at the annual meeting.
But the conversion is not yet a done deal. The board said that unless it gets a favorable ruling from the Canadian government on a number of “complex” but unspecified tax issues, Penn West “will continue as an oil and gas exploration and development company while it examines its strategic alternatives.”
A formal review started six months ago, with three options on the table: Trust conversion, outright sale or merger, or maintaining the status quo, although Andrew is reported by insiders to have said the review was not started to choose a do-nothing strategy. The trust stable now holds 30 energy companies, of which 24 reported total production of 630,000 barrels of oil equivalent per day in the second quarter and distributed C$2.29 billion to unit-holders, or 71 percent of their cash flow.
That share of cash flow was down from earlier trust days when upwards of 90 percent was distributed, showing that more trusts are turning to traditional exploration rather than acquisitions to maintain production volumes.
But, unlike some recent trust converts, Penn West chose not to recommend spinning a portion of its output into a junior E&P.
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