If this is Crescent Point Energy’s idea of winning, imagine what losing would look like.
Sure, the company was able to fend off an activist shareholder and get its slate of director nominees elected on Friday at its annual meeting in Calgary. The fact we’re even having this conversation, however, shows how vulnerable the current regime is. If Crescent Point doesn’t straighten itself out, they won’t nearly be as lucky next time.
The drama began a month ago when Sandy Edmonstone, a former investment banker at Macquarie, formed a company called Cation Capital and put forward a slate of four directors. His goal was to capture 40 per cent of the seats on Crescent Point’s board, despite owning just 0.3 per cent of the company’s shares. The key message: Crescent Point’s performance is woeful and its executive compensation is grotesque.
That message is compelling. The stinkeroo shareholder return is indisputable, with the shares down 55 per cent since the start of 2015, versus 19 per cent for the S&P/TSX energy index. It’s down 71 per cent since it announced the May, 2015, acquisition of Legacy Oil + Gas.
The longer-term results have been just as putrid. Down nearly 70 per cent over 10 years, Crescent Point ranks 58th out of the 60 companies in that august club of blue chips, the S&P/TSX 60.
So it's understandable investors might be a little grumpy at a management team that has a habit of taking fresh capital through repeated equity issues, then incinerating it. All the more so when management is also paid richly for it: $93.5-million for the top executives over five years, according to Cation.
While Crescent Point has been repeatedly redoing its executive compensation since multiple negative reviews, it still hasn’t found the right formula, as evidenced by the “no” verdict the shareholders delivered on Friday in the so-called “say on pay” vote.
Institutional Shareholder Services (ISS) had advised investors to vote “no” on compensation, citing misalignment between pay and stock performance. Another proxy advisory firm, Glass Lewis & Co., advised shareholders to vote “yes,” but noted that its four most recent pay grades for Crescent Point, starting for the 2017 fiscal year, are D, F, F and D. Quite the report card.
You’d think this would have been enough to recommend Cation’s slate, and for ISS, it was enough to support two of the four director nominees. ISS says Crescent Point hasn’t adequately cut costs, its high debt levels have weakened it and the result is one of the worst stock performances of its peer group. And while Crescent Point points to how it has “refreshed” its board with new directors, ISS says, very politely, “it does not appear that the nominees added over the last few years by the company have been ideal choices in terms of improving board oversight.”
Glass Lewis could not be persuaded that the situation was bad enough to give the existing directors their walking papers and instead endorsed the Crescent Point slate. It said it is “more apt to seriously consider actions undertaken by long-term shareholders of the company or by investors who have made a substantial economic commitment to the company.”
Therein lies the real lesson from today’s vote: Glass Lewis has laid out a roadmap for what would constitute a successful activist campaign at Crescent Point. Cation, which is neither a long-term or major shareholder, compounded these issues by publishing a plan that was, Glass Lewis said, “decidedly vague and bereft of any meaningful substance.”
And yet, two of the Cation nominees still managed to win significant support of more than 100 million votes.
How, then, would Crescent Point fare against an established activist investor with a track record of turning around the companies it invested in — and which had purchased a meaningful stake in the oil producer? It only takes about $250 million to buy 5 per cent of Crescent Point.
And maybe it will take less, next week; shares dropped nearly 2 per cent today on news of the company’s “victory.” We’ll see if investors are truly sold that Crescent Point’s leadership knows the way to turn around some truly remarkable shareholder destruction, or will preside over more of the same.
The company’s final communication before Friday’s vote urged shareholders to “vote and preserve your investment,” which is comical. We would, of course, tell you how Crescent Point made this case at the meeting on Friday, but the company disgraced itself by barring the media from the event (it didn’t webcast it, either).
Loud clapping was apparently heard when the voting results were announced. But if Crescent Point listens only to the applause of its small number of satisfied shareholders, the next vote may not turn out like this one.