Don Gray's done more than his share of oil patch deals over the years. Heck, he did a few on Tuesday.
So with industry transaction activity heating up, the chairman of Peyto Exploration & Development Corp., Gear Energy Ltd. and Petrus Resources Ltd., a guy known for ruffling feathers in the energy and finance sectors, is warning investors to be wary of the pitch.
The one he refers to is the promise of the sun, moon and stars based on the acquisition of a large land spread alone.
When it comes to oil and gas, Mr. Gray says, the hard part comes after a company acquires acreage, helped by a big equity or debt financing. There have been numerous such deals this year. In fact, oil companies raised more money in the April-June period than in any other quarter since before the financial crisis.
"You have a lot of investors who want to hear that all the resources have been identified. Now it's just a question of poking holes and making your money – like picking apples from the tree," Mr. Gray said from his home among the saguaro cacti in Scottsdale, Ariz.
"It's not that simple. The companies that tend to promote that way have the land, they've actually identified the resource, but they haven't figured out how to get it out economically, so they can't make money on it. But they can convince you to come in at a high enough price that they can make money on issuing their shares."
Of course, there are success stories, and Mr. Gray, 49, is not afraid to count his operations in that group. But with the taps on capital having been loosened for the oil industry this year, there are sure to be stumbles and flame-outs as companies discover the geological or engineering devils in the details of drilling. Hot demand for dividends puts even more pressure on managers to deliver early and often.
He pointed to Manitok Energy Inc., which acquired a large land spread from Encana Corp. last year and made hefty commitments to drill on it, all while replacing its chief operating officer. On Thursday last week, Manitok announced that it fell short of production and financial targets for a number of reasons, leading to a 22-per-cent drop in the shares since then.
Using such an example won't enamour Mr. Gray with the executives as they try to pull Manitok back into favour. It's an admittedly controversial style that has at times scared large investors off.
Several years ago, when he was still Peyto's CEO, he complained some analysts were touting favourable operating costs and reserve lives of his rivals, and ignoring his.
"I went out and actually created comparisons, and educated people and showed them what our operating costs were and what others' were, and I ranked [other metrics]. And I felt like so many other parameters that the market was using at the time were really meant to just mislead and make people believe that things were cheap," Mr. Gray said.
"So what I set out to do was go out there and say to people, 'Listen: I don't have to be the GM [General Motors] of oil and gas – where you're just trying to sell the most cars regardless of whether you can make money. What I want to do is make money on each barrel that I sell.'"
Mr. Gray's Petrus Resources, a privately held producer run by CEO Kevin Adair, was one of a handful of companies to announce acquisitions and financing this week.
Petrus is buying a junior oil company called Ravenwood Energy Corp. and is also in the process of closing a takeover of another firm called Arriva Energy Inc. It arranged a credit facility and term loan totalling $290-million and is issuing up to $110-million in private equity. The latter was said to be popular with investors.
Mr. Gray is adamant Petrus is more than a land grab, with acquisitions that boost production and cash flow negotiated by executives with enough experience to have learned from past mistakes.
There is no plan to follow the lead of some management teams and build it up to an appetizing size for a larger producer. It is seen as a candidate to go public in the coming months.
"I'm trying to replicate some of the things that I was trying to do at Peyto with these other companies in different geographic areas," he said. "I'm trying to build future leaders of oil and gas, not just taking my own name and being narcissistic about it and saying, you're just buying me."
Jeffrey Jones