Tag: PGF

Two shareholder votes to watch out for this week – Canfor and Pengrowth

Two shareholder votes happening this week which will be of interest:

Vote #1: Canfor

Canfor (TSX: CFP) will vote on Wednesday, December 18, whether they want their minority shareholders (49%) to be taken out by the majority (51%), which is currently owned by entities controlled by Jim Pattison. The proposed takeout price is CAD$16/share, which was higher than its trading range for most of 2019, but lower than last year when things were looking a lot better in the forestry sector. The majority of minority shareholders is required for the vote to pass.

My guess is that this will pass. The only significant shareholder other than Pattison’s entity is through director Barbara Hislop, who controls about 2.5 million shares (out of 125.2 million shares outstanding). The rest of the shareholder base is likely to be institutional in nature and I do not think they will put up much of an opposition. At Friday’s closing price of $15.45, this seems like an easy 3.5% gain in two days of trading for those that are brave to place a bet.

Most other forest companies have gotten killed – WFT, IFP, WEF and especially CFF – picking look slim right now.

I think Pattison’s sense of market timing is excellent with this one – buy low and collect the cash when the times are better again, and they will be. The fact that this isn’t a no-brainer suggests that he’s getting a good price on the acquisition – indeed, if 99% vote to agree to it, he probably paid too much. But if 60% of the minority agree to the deal? That’s a perfect price.

(Update, December 16, 2019: The deal was rejected with 45% of the minority in favour of the deal, with 50% required. Guessing that Pattison wished that he added another 50 cents on this one to seal the deal!)

Vote #2: Pengrowth Energy

Pengrowth Energy (TSX: PGF) will also be voting December 18. The proposed acquisition price is 5 cents a share, mainly because the company has debt maturities outstanding that will likely be defaulted on if the vote goes negative. The only real question mark at this juncture is why Seymour Schulich, who owns 28% of the common shares, all of which have been purchased at significantly higher prices, is going along with this. He purchased a couple million shares as late as July of this year (for approximately 50 cents a piece) and owns 159.4 million shares out of the 560 million outstanding. Is this going to be the mother of all capital losses? Or did he cut a deal with Cona Resources (the acquirer) that will take place after the transaction concludes?

For somebody with patience, I think Cona is getting an excellent deal. With the debt eliminated, Pengrowth is very highly leveraged to ambient oil prices and if there is any revival in the market, the pain that these companies have gone through in the past half decade will be nowhere close to the rewards that will be gained in the future.

Another mid-stream Canadian oil and gas producer bites the dust – Pengrowth Energy

… I’m not talking about Ovintiv either (TSX: ECA), which is pretty much an admission that any dot-com name for a company has already been taken up, so companies now have to resort to pharmaceutical-style naming conventions for their firms.

Pengrowth (TSX: PGF), which I have written about extensively in the past on this site, announced on Friday they were going to accept a takeover bid of CAD$0.05/share plus the payout of debt. The amount of debt outstanding was approximately $700 million and the total purchase price is $740 million.

The effect on their stock price was fairly dramatic:

It reminds me of the expression I tell people around me when they mention that something is cheap at 20 cents per share – “When it goes to zero, your loss is always the same – 100 percent”. In this case, investors took a 75% haircut on the last Friday of trading after the announcement.

This is the next (former) mid-tier oil and gas player to effectively go belly-up, the previous one being Bellatrix Exploration. At the rate things are going, only Suncor will be the last one standing in Canada.

The buyout of Pengrowth is going to be interesting for a couple reasons.

One is that the press release does not make mention in any way of any shareholder consent agreement from Seymour Schulich, who owns 28% of the company. Perhaps he is planning on taking a huge capital loss. One does not do big merger deals without getting consents from major shareholders with deep pockets, so the absence of this is very mysterious. To reverse the merger will cost some other suitor $45 million dollars – in light of the existing deal, this is a huge windfall that would be paid out if somebody were interested in the assets.

However, I deeply suspect in the shopping around process they couldn’t find anybody that was willing to finance the company at an acceptable price. The management information circular that will come out should yield some further clues on the process they undertook.

The other is how the deal is structured – Cona Resources used to be public, but it was majority owned by the Waterous Energy Fund, which is relatively secretive in its dealings (it is private). Waterous took its minority share of Cona private in May 2018 and we can infer from its SEDAR filings that were available that this entity is still not making money. Cona was bought out at about 45% of book value ($2.55/share on 101 million shares) coupled with $332 million in debt.

That said, Pengrowth, stripped of its leverage situation, actually makes money. Not a lot (especially in the current Canadian context), but while I am not surprised that shareholders are taking a massive bath on the company, I am surprised that this is the best agreement they could find. I am guessing the existing debt holders were completely unwilling to consider a debt-for-equity swap.

If Canadian oil and gas does come back from the dead, however, Pengrowth’s thermal oil assets are top notch and Waterous will be making a mint on this one. They effectively are going to wait this one out until the climate gets better. Parking $740 million of capital to do this seems like a reasonable gamble. I can see why they made it.

My last position in Pengrowth was in their unsecured convertible debentures, which matured at par in early 2017. I’ve been tracking it ever since and have taken no positions in their stock.

Mid-tier Canadian oil on the ropes

A couple pieces of evidence to indicate the malaise in the Canadian oil sector.

First one was Pengrowth (TSX: PGF), who announced:

The Company’s $330 million Credit Facility (all amounts in Canadian dollars) is provided by a broad syndicate of domestic and international banks and had a scheduled maturity of September 30, 2019. The lenders have agreed to provide the Company with a 31 day extension of the maturity date under the Credit Facility to October 31, 2019 with a maximum facility draw of $180 million under the Credit Facility and a $5 million Excess Cash provision.

Holders of the Secured Notes have agreed to the extension of the Credit Facility and to a 31 day extension of the maturity date under the October Notes to November 18, 2019.

The Company will continue to operate its free cash flow positive business as usual. This short-term extension will allow the Company to continue to advance discussions with its lenders and noteholders with the objective of completing a long-term extension transaction. The mutual goal of Pengrowth and its senior debtholders is to negotiate a three year extension that allows the Company the flexibility to reduce its outstanding debt with the benefit of additional time and improved market conditions.

The Company believes it has made significant progress with its lenders and noteholders on a number of key areas in respect of the potential extension transaction, but there remain ongoing detailed discussions which require additional time. A transaction may result in dilution of the outstanding common shares of the Company (with an associated impact on the value of such shares) as part of any consideration provided to affected lenders and noteholders. There can be no assurance or guarantee that a long-term extension transaction will be agreed to or on what terms.

Pengrowth has CAD$57 million (denominated in foreign currency) in secured debt that is due on October 18, 2019 which has been extended a month as a result of the above release. They also have significant debt in 2020 and 2022, and also a line of credit which was set to expire on September 30, 2019. Current debt outstanding is $362 million, and non-current portion is $340 million.

The only way the company could pay the upcoming bond maturity is by the extension of its term facility, which of course the banks are unlikely to give without security, but the security has already been pledged to the noteholders. So this is a very sticky situation where both secured entities (noteholders and credit facility) have an incentive to pulling the pin to getting instant payment. Pengrowth also has covenants relating to the secured notes that they are likely to break imminently (even though they were relaxed in the past).

This is not likely to end very well for Pengrowth shareholders. The only wild card here is whether Seymour Schulich (who owns 159,400,000 shares of PGF or about 28.5% of the company) will be asked to put up a bunch more money to salvage his investment, which, needless to say, is seriously under water at the moment.

Second item: Bellatrix Exploration (TSX: BXE) went into CCAA today. Shareholders will probably get little out of it. While an energy company going into CCAA may not necessarily be unexpected news, the surprise here was that it took place after a recent capitalization (June 4, 2019). However, it is pretty clear in retrospect that the replacement of 4 of the 7 directors resulted in them changing gears and instead are representing the debtholders with this action.

Pengrowth is hitting the financial wall

Pengrowth Energy (TSX: PGF) is an entity I have been following for a very long time. I used to own their debentures, which matured at par a few years ago. Today, their financial situation is much more dire and from their annual report (released today), we glean the following:

Suffering from low prices and high capital costs, the company is still bleeding money. In addition, when looking at their balance sheet:

This is not a happy situation. Although management is “positive” they can strike a new credit agreement by the end of this month (when their secured credit facility becomes due), every bank in this syndicate will see CAD$59 million going out the window in October and another CAD$128 million going out eight months later. Considering the banks are the senior secured creditors in this arrangement, I very much doubt they will be willing to extend credit to the point where the October 2019 noteholders will be paid.

There is also the issue of the covenant, where the interest coverage ratio for Q4-2019 has to be better than 4.0, while presently (for the 2018 calendar year) such ratio was 1.6 – barring a huge increase in oil prices in the remainder of this calendar year, PGF stands no chance of meeting this covenant, which applies to both bank debt and notes.

PGF is going to have to negotiate immediately with their secured creditors a 6 month extension (which is currently what they disclosed) but during this six month period will have to negotiate with noteholders and the banks alike to come to a consolidated credit agreement. This is not going to be easy. In other words, we have a credit crunch.

The stock took a nose dive from 73 cents down to 51 cents in today’s trading, but has somehow managed to recover to the 74 cent level despite this news, which I found very fascinating.

The only real wildcard in this entire matter is (billionaire and former large Canadian Oil Sands investor that opposed the merger with Suncor) Seymour Schulich’s huge equity stake in the entity, owning about 29% of the company. Will he bail them out before the banks decide to take the entire firm for themselves?

TSX Bargain Hunting – Stock Screen Results

I’ve been doing some shotgun approaches to seeing what’s been trashed in the Canadian equity markets. Here is a sample screen:

1. Down between 99% to 50% in the past year;
2. Market cap of at least $50 million (want to exclude the true trash of the trash with this screen)
3. Minimum revenues of $10 million (this will exclude most biotech blowups that discover their only Phase 3 clinical candidate is the world’s most expensive placebo)

We don’t get a lot. Here’s the list:

September 1, 2017 TSX - Underperformers

1-Year performance -99% to -50%
Minimum Market Cap $50M
Minimum Revenues $10M
#CompanySymbolYTD (%)1 Year (%)3 Year (%)5 Year (%)
1Aimia Inc.AIM-T-74.89-72.74-86.9-84.6
2Aralez Pharmaceuticals Inc.ARZ-T-73.77-76.19-56.6
3Asanko Gold Inc.AKG-T-62.86-71.4-38.8-58.1
4Black Diamond GroupBDI-T-58.41-56.78-93.7-91.4
5Cardinal Energy Ltd.CJ-T-60.91-51.8-79.7
6Concordia InternationalCXR-T-42.81-85.24-95.6-69.2
7Crescent Point EnergyCPG-T-53.04-56.72-80.8-79.1
8Dundee Corp.DC.A-T-51.6-51.76-84.7-87.4
9Electrovaya Inc.EFL-T-42.72-61.8822201.2
10Home Capital GroupHCG-T-55.42-52.16-74.3-45.2
11Jaguar MiningJAG-T-54.31-62.14-55.8-99.7
12Mandalay Resources CorpMND-T-53.75-66.36-65.7-52.6
13Newalta CorpNAL-T-56.9-59.68-95.5-92.7
14Painted Pony EnergyPONY-T-64.97-60.94-77.4-65.9
15Pengrowth EnergyPGF-T-60.62-59.57-88.9-88.6
16Redknee SolutionsRKN-T-51.92-64.95-78.2-41.4
17Tahoe ResourcesTHO-T-53.04-66.27-78.2-66.9
18Valeant Pharmaceuticals Intl.VRX-T-15.25-56.68-87.4-67.3
19Western Energy ServicesWRG-T-61.61-55.09-88.6-82.7

Now we try to find some explanations why this group of companies are so badly underperforming – is the price action warranted?

1, 8, 10 and 18 are companies with well-known issues that have either been explored on this site or obvious elsewhere (e.g. Valeant).

2 is interesting – they clearly are bleeding cash selling drugs, they have a serious amount of long-term debt, but they have received a favorable ruling in a patent lawsuit against (a much deeper-pocketed) Mylan. There could be value here, and will dump this into the more detailed research bin.

3, 11, 12 and 17 Are avoids for reasons I won’t get into here that relate to the typical issues that concern most Canadian-incorporated companies operating foreign gold mines, although 12 appears to be better than 3 and 11. 17 has had huge issues with the foreign government not allowing them to operate their primary silver mine.

4, 13 and 19 are fossil fuel service companies.

5, 7, 14 and 15 are established fossil fuel extraction companies with their own unique issues in terms of financing, profitability and solvency – if you ever predicted a rise in crude oil pricing, a rising tide will lift all boats, but they will lift some more than others (specifically those that are on the brink will rise more than those that are not). 14 is different than the other three in that it is mostly natural gas revenue-based (northeast BC) which makes it slightly different than the other three which warrants attention.

6 If you could take a company that clearly makes a lot of money, and drown it in long-term debt, this would be your most prime example. It just so happens they sell pharmaceuticals. Sadly their debt isn’t publicly traded but if it was, I’d be interested in seeing quotations.

9 A cash-starved company selling a novel lithium-ceramic battery at negative gross margins would explain the price drop. Looks like dilution forever!

16 Lots of financial drama here in this technology company. They went through a debt recapitalization where a prior takeover was interrupted by a superior bid. Control was virtually given at this point and the new acquirer is using the company for strategic purposes that do not seem to be in line with minority shareholder interests. A rights offering has been recently conducted that will bring some cash back into the balance sheet, but the underlying issue is that the financials suggest that they aren’t making money, which would be desirable for all involved.