Pacific Rubiales investors stuck between a bid and a hard place

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Shareholders of Pacific Rubiales Energy Corp. face an age-old dilemma: Cut their losses or hold out for a better deal that may or may not materialize.

The lengthy downturn in oil markets only makes their decision tougher, as stock prices across the energy industry have drifted lower and stalled. Pacific Rubiales has a few woes of its own, too, that have led the Toronto-listed and South American-focused oil producer to this position.

To hear co-chairman Serafino Iacono tell it, the best way to avoid a debt-hobbled, low-growth future is to accept a $6.50-a-share cash offer that executives hammered out with Mexico's Alfa SAB and private-equity-backed Harbour Energy Ltd. That seems simple enough, especially when one considers that the bid is $1.50 more than initially discussed.

Here's where it gets complicated. A group of dissident shareholders that now has the largest stake in Pacific Rubiales says that the $2-billion bid is a lowball one that doesn't even reflect the value the company's management said as recently as March was hidden in the assets.

The mostly South American group, which owns 19.82 per cent of the shares, is led by O'Hara Administration Co., a firm headed by Leopoldo Alejandro Betancourt Lopez. He is among a young generation of Venezuelan business types who prospered under the socialist government of late President Hugo Chavez .

O'Hara has been clear about its staunch opposition and its intention to seek support for its position from other shareholders. It has not offered an alternative, though.

In fact, the only discussion between Pacific Rubiales and O'Hara representatives took place at the oil company's annual meeting in late May, Mr. Iacono said.

"They voted, and then we had literally a 10-minute conversation, where we asked what their intentions were, what their thoughts were out of this thing," he said during a conference call with investors and analysts on Tuesday.

"The answer was, 'We are against the deal,' but [they] offered no solutions, no other alternatives other than saying that. That's all we know."

As it stands, it's not clear which vision will win when shareholders vote on the transaction July 7. The shares are mired well below the bid price, showing how investors are not convinced it's a done deal. The company is feeling some heat, hence the conference call to explain the takeover circular it mailed out last week.

A year ago, Pacific Rubiales was flying high with its shares worth more than $22. Then oil prices began their skid, exposing the company's high debt levels – about $5-billion, 2.5 times the equity value of the Alfa-Harbour bid.

Then in March, Ecopetrol SA, Colombia's state oil company, ruled out extending the company's contract to operate the Rubiales field, the country's most prolific oil project.

By March, the stock tumbled to $2.65. Before the takeover was announced in early May, the O'Hara group had amassed 10 per cent of the shares, and has increased that in the ensuing weeks.

There is no indication that the dissident group has been in contact with the Alfa side to discuss the possibility of raising the offer, or whether there's some other suitor hunkered down in the tall grass.

A big hurdle to any other would-be bidder is a $100-million break fee that Pacific Rubiales would have pay to Alfa and its partner should it accept a richer deal.

A spokesman for O'Hara declined to comment on whether there are discussions behind the scenes, or plans for them. He did say that Pacific Rubiales officials have failed to answer key questions the group has posed, such as why its chief executive officer had said before the deal was agreed to that the company had a value equivalent to $9.22 a share.

"We reviewed the slides and listened to the call but heard nothing new from Pacific Rubiales regarding how the offer makes sense for shareholders," O'Hara's Joel Shaffer said.

There are better times to be discussing oil deals than when the industry is dealing with sharply lowered expectations on all fronts, but this is the situation Pacific Rubiales finds itself in.

In the absence of some other – any other – proposal to weigh the Alfa-Harbour bid against, it's tough to imagine minority shareholders won't want to take the money and run.