A Texas investment firm run by two billionaire brothers started buying up stock in Calfrac Well Services Ltd. last year as a friendly investment in Canadian oilfield services. The relationship has fractured.
A big clue is the $100-million lawsuit that Calfrac launched at the end of May. In it, the Calgary-based company accuses Wilks Brothers LLC of attempting to drive up its financing costs. Calfrac suggests that Wilks’s real goal is to acquire Calfrac’s U.S. operations.
Calfrac provides hydraulic fracturing services to oil and gas companies in Canada, the United States, Argentina and Russia. It has traded at a discount to its U.S. competitors, against a relatively slow Canadian market and debt of more than $900-million.
Wilks, in its statement of defense filed last week, says Calfrac caused its own problems, because its actions to deal with the debt were not drastic enough, and that it is trying to deflect blame for its high debt and sub-par performance.
The clash shows just how nasty things can get when a passive investor becomes an activist.
The firm run by Dan and Farris Wilks, who are active investors in the energy sector, made a series of Calfrac share purchases last year. The brothers sold their hydraulic fracturing company for US$3.5-billion in 2011. They started a U.S. firm called ProFrac Services LLC in 2016, according to Calfrac’s suit.
Wilks had amassed 17 per cent of Calfrac by Aug. 25, 2017. Its statements announcing the purchases said the acquisitions were for investment purposes only.
However, by Nov. 23, the stake had increased to 19.95 per cent, making it the second-largest shareholder, just behind the 20-per-cent-plus held by Ron Mathison, the Calgary financier who was a founder of Calfrac. Wilks changed its messaging – it said in its announcement of the later share purchases that it might seek changes to the board and management and push for asset sales – its main complaint being the debt level.
Clearly, this was no longer a passive investment for the brothers, who are well known as funders of socially conservative causes in the United States. They were among the largest donors to Texas Republican Senator Ted Cruz’s unsuccessful bid for the White House in 2016.
The statement of claim says the two sides agreed to discuss ways to fix the balance sheet as a path to a higher share price. They signed a non-disclosure agreement so they could talk about confidential information such as potential deals, Calfrac says in the statement of claim.
During the talks, the lawsuit says, Wilks learned that Calfrac might consider spinning off its U.S. operations, which compete with ProFrac in the United States. “Wilks Brothers indicated, both orally and in writing, that it would be interested in ‘a strategic level conversation with the U.S. side of Calfrac if it becomes a standalone entity,’” the suit says.
At Calfrac’s annual meeting on May 8, Wilks withheld its votes for the seven directors, including Mr. Mathison. As a result, no nominee won more than about 75 per cent support – a poor showing in an election of directors.
The next day, Calfrac announced it was issuing US$650-million of debt securities, with the interest rate to be determined. Proceeds were earmarked for retiring some of the existing debt.
Wilks then issued a news release it said was in response to queries about why it withheld its votes. The firm said in the release that it had several meetings, calls and e-mails with Calfrac’s board and management, and that it believed they lack the attention and execution to deal with Calfrac’s “bloated” balance sheet. Wilks said it had urged Calfrac to hire advisers to study ways of splitting up the U.S. and Canadian businesses, and said the note issue had done little to reduce the company’s debt.
Not only did the news release breach the non-disclosure agreement, Calfrac asserts in the suit, but Wilks’s annual meeting theatrics and subsequent public criticism of Calfrac’s management drove up the cost of the debt offering by as much as three quarters of a percentage point, pushing the rate on the notes to 8.5 per cent. That’s what the $100-million it seeks represents.
In its court filing, Wilks denies its moves affected the bond pricing, calling Calfrac “the author of its own misfortune.” It does not mention any interest in Calgary’s U.S. division.
“Its management team has conducted its business and affairs in a manner that has resulted in unfavourable financial performance and a highly leveraged balance sheet and negative investor commentary (excluding any commentary by Wilks Brothers),” Wilks said in the statement of defence. “This impacted Calfrac’s ability to negotiate or achieve favourable commercial terms, including for its note pricing.”
Officials with the companies declined to comment, although Calfrac executives could have more to say when the company reports its quarterly results on Wednesday.
Calfrac has contended that asset sales remain a possibility, but they have to serve all investors, not just Wilks, which it says has a vested interest. The issue could end up going to shareholders to settle in a proxy fight.