Gentility in short supply as activist investors muscle into oil patch

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Zach's back.

The co-founder of Connecticut-based FrontFour Capital Group, Zachary George, has amassed a sizable stake in Canada's Legacy Oil + Gas, and unless its board sees things his way, and fast, things could get unpleasant.

Mr. George, of course, is an activist investor who made a splash in Calgary in 2013 when he questioned the independence of directors at Renegade Petroleum and locked horns with its chairman, former investment banker Tom Budd – no shrinking violet himself.

FrontFour ultimately failed to win control of Renegade, even after enlisting Mr. George's father, onetime Suncor Energy chief executive officer Rick George, for some public fireworks.

Now, the 37-year-old is pushing to nominate three directors, including himself, to the board of debt-laden Legacy in a bid to ensure it "acts in a manner consistent with governance best practices and maximizes value for all shareholders." Its shares skidded as oil prices crashed, prompting a margin call on its CEO Trent Yanko's shareholdings that the company opted to backstop.

Legacy is far from alone among companies struggling to keep debt in check in a lousy operating environment. Many have been forced to slash spending on drilling, reduce staff and cut dividends, which has sent investors scurrying for the exits, betting the downturn could be long and painful.

In its current state, the industry is very fertile ground for activist investors who can buy meaningful positions on the cheap and proffer ideas for fixing companies, such as selling off large chunks, kicking out managers and directors, and looking for merger partners.

There are undoubtedly a host of oil and gas producers that could do with just that kind of shakeup, and more than enough shareholders who would welcome it.

But this is Calgary, and high-profile and contentious displays of shareholder activism have been relatively rare. Often, disputes are settled quietly, as one would expect from a relatively small burg where an entire industry is situated within about eight square blocks.

Support for the home teams has also kept hostile takeover activity to a minimum since the 1990s, when former Gulf Canada Resources boss and transplanted Texan J.P. Bryan had seemingly half the industry in his sights at any given time.

Now, though, conditions may have worsened to the point where niceties go by the wayside.

FrontFour announced its move on Friday. On Tuesday, West Face Capital disclosed it owns 9.8 per cent of Gran Tierra Energy and said it plans to nominate a half-dozen directors. That's two more than are on the current board of the South America-focused explorer.

It said Gran Tierra has "no coherent strategy," suffers from "bloated overhead," has ventured too far from its main Colombian operations and generated "dismal" results. West Face wants top management replaced. It's tough talk, indeed.

In some recent cases, activist investors have blasted onto the scene, pushing up a target's shares initially, then agreeing with boards to work together to fix problems. Results have not been good.

Last year, New York investor Julien Balkany tried to right the ship at GasFrac Energy Services, which had struggled to attract new customers to its unique rock-fracturing method, only to find the problems too big to solve quickly enough. GasFrac sought creditor protection in January.

Carl Icahn, one of the most famous activists, announced he had a big position in Talisman Energy in late 2013, igniting a long-languishing share price. He agreed to work with Talisman's board to try to untangle operational problems in the North Sea and sell enough assets to put Talisman on solid footing.

But the issues proved insurmountable, especially as oil prices weakened, and following a dance that lasted for several months, Spain's Repsol struck a deal to buy Talisman for less than Mr. Icahn paid.

Now, as share prices remain depressed across the sector and gutsy investors from Canada, the United States and elsewhere look for places to deploy capital, Calgary's management groups and directors may find their peace increasingly shattered.