The spectacular downfall of a Calgary energy company once viewed as a national success story has resulted in one Canadian billionaire recording his biggest ever business loss, but the new buyer sees nothing but opportunity.
Once valued at more than $4-billion, Pengrowth Energy Corp. disappeared from the Toronto Stock Exchange earlier this month after being acquired by Calgary-based energy investment firm Waterous Energy Fund for $740-million.
But Waterous president and CEO Adam Waterous, once the global head of investment banking at Bank of Nova Scotia, is convinced his gamble in buying the debt-laden oil company will pay off.
That’s because of its key asset, the Lindbergh steam-driven heavy-oil project in eastern Alberta, completed just before oil prices began a years-long downturn in 2014.
Waterous has invested close to $1.4-billion in Canada’s oil and gas patch over the past two years – something of an anomaly for a sector that has seen international and Canadian investors turn their backs over the past few years.
For the most part, the company has eyed long life, low decline assets with high cash flows. That’s where Lindbergh – with its 10-per-cent decline rate and its $200-million in free cash flow last year – fits in.
Mr. Waterous also likes Lindbergh’s 60-year life index.
“To give you a sense on that, fewer than 1 per cent of oil and gas assets in North America would have a reserve life that long,” he said in an interview.
Waterous acquired Pengrowth by way of one of the investment firm’s portfolio companies, Cona Resources Ltd.
The move makes Cona the largest privately owned heavy-oil producer in North America and, according to Mr. Waterous, the plan is to almost double oil production at Lindbergh from 18,000 barrels a day to 35,000.
No decisions have been made on the future of Pengrowth’s other major asset, its natural-gas property near Groundbirch in northeastern B.C.
Under a prepackaged bankruptcy deal, Pengrowth shareholders were paid 5 cents a share – 75 per cent less than the company’s trading price when it announced the acquisition plan in November.
Pengrowth’s largest stockholder was Seymour Schulich, an 80-year-old Canadian mining and energy financier. He lost $180-million on the deal.
“This is the biggest loss I’ve ever taken,” he told The Globe and Mail.
Mr. Schulich said the acquisition plan presented a stark choice for shareholders – to take a nickel, or take nothing at all.
“The deal’s done now. It’s the best deal they could do. I think the buyer exercised a great knowledge of opportunity and did exactly what I would have done in his shoes,” he said.
Pengrowth, once one of Canada’s largest and most prominent energy trusts, enjoyed a market capitalization of $4-billion in 2011. But it struggled after its transition to a regular corporation when Ottawa essentially put a stop to income trusts.
In late 2018, the company sought new financing in the high-yield debt market. It couldn’t find any, so instead put itself up for sale.
In the end the buyer was Waterous, through Cona, which also picked up Pengrowth’s $780-million of debt in the transaction. It will dramatically reduce that debt by rolling Pengrowth into Cona and injecting $584-million of equity.
Mr. Waterous said the acquisition deal was reached through “a lot of good diplomacy.”
“It was a multimonth negotiation with all of the relevant stakeholders to meet a consensual transaction,” he said.
“It’s difficult when people are taking a haircut, especially when you’re a shareholder getting a 75-per-cent reduction from the share price.”
But Mr. Schulich called the acquisition of Pengrowth “a Canadian tragedy” representative of a tumbling oil and gas sector facing political, economic and access challenges.
“In my mind the villains here are the banks. Had the banks exercised a little patience – not a lot, just a little – oil would go up and this would be one of the great success stories in Canada.”