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Don Gray had a problem doing his 2003 tax return. One input field in QuickTax couldn't accommodate enough digits, so Gray called the help desk. The woman on the other end of the line was confused: "Why are you doing your own taxes?"

Why indeed. There are few CEOs who don't hand their taxes over to an accountant. But there are also few CEOs who prepare their companies' statistical reports singlehandedly. Or who produce results like Don Gray has. Over the past five years, his natural gas producer, Peyto Energy Trust, has generated the second-biggest return of all TSX-listed companies (coming in behind a surging gold firm). It turned 63 cents in November, 1999, into $42.61 by late November, 2004--a gain of more than 6,600%.

Gray is only 39. And here's another singular thing about him: He has the sharpest tongue in the oil patch. He's not at all hesitant to question his competitors' talent and motives, recently dismissing many of them as "just good promoters." Even while breakfasting at the Petroleum Club, he refers to CEOs sitting nearby as "clowns." This is staying on the publishable side of his comments.

Such behaviour does not go down well in Calgary. The brain trust of the energy industry is cosied up within a square kilometre of downtown offices. A competitor one day is a co-worker--or a boss--the next. Politesse rules. And along comes Don Gray, with his breathtaking results and his brash talk. Now he's projecting Peyto will double production again in three years, thanks to a long list of promising targets. "Some of these wells will flow for a hundred years," Gray boasts. Other people would love to see it all implode. "He's such an opinionated ass," says one senior investment banker in Calgary. "Everybody in this town would be happy if he was crushed."

on Gray does not drink coffee, which is a good thing. He's a bit manic, gesticulating as he fires off points, trying to convince people of his view. His idea of a vacation is emulating the riders on the Tour de France, grinding up the switchbacks of the Alpe d'Huez.

The energy business is in his genes. Gray was born in Oxbow, Sask., in 1965. But he didn't see snow until his father's career at Schlumberger Ltd., an energy-services firm, brought the family to Calgary after stops in Houston, Venezuela and Australia. In Calgary, Mel Gray ran Schlumberger of Canada.

Lorne Paperny, a Calgary businessman, recalls his high-school friendship with Don Gray as a sort of two-man debating society. Gray was "extremely tenacious" and "always backed it up with cogent evidence," Paperny says. They'd be at McDonald's, arguing politics, with Paperny leaning left and Gray leaning right. After an hour, Paperny had often come around toward Gray's point of view. Paperny says his friend's vigorous personality and rapid-fire mouth owe something to "coming from a big family with a lot of overachievers"--three brothers and a sister.

Like two of his brothers, Gray went to Texas A&M University, a top-ranked school for petroleum engineering. (All three of Gray's brothers have since scored their own successes in the energy business; his sister is a teacher.) Foreshadowing his professional forte, Gray was already an avid number-cruncher at A&M in 1983, one of the first students on campus to use a PC.

His second job back in Calgary after graduation from A&M in 1988 was at Anderson Exploration Ltd., led by J.C. Anderson, who set that period's oil-patch standard for singular personality, driving a Caddy to work from his 700-acre ranch south of Calgary.

Gray's job was petroleum engineer, helping to find and exploit reserves. His penchant for piquant observations soon got him into trouble. In 1996, he came to the conclusion that Anderson's takeover of Home Oil Ltd. the previous year had created a company that was too bureaucratic. He presented his numbers to his superiors, arguing that their operational rules of thumb were leading them to make bad decisions. "It was not welcome whatsoever," Gray says. His firing was rough, and he says his former bosses did not hide their feelings by providing golden references. "They made it out that I was a disruptive force," he says.

After a year-long sojourn in the software business, Gray returned to the energy game at Pinnacle Resources Ltd., where he did his first work on the Deep Basin, one of Alberta's major producing regions, west of Edmonton. In the spring of 1998, Renaissance Energy Ltd. made an offer to buy Pinnacle. Gray didn't warm to the idea of working at a larger company, but the news brought a dividend: a phone call from his next-door neighbour, Rick Braund, who had casually suggested earlier in the year that the two of them think about a business collaboration. Braund was a landman, a specialist in securing rights to drill, so the two had complementary skills. Now Braund laid the idea of an energy startup on the table. He and an associate had a shell company named Desco Resources Ltd. and some cash ready to go. Gray pitched in $70,000 of retirement savings. "I put everything I had into it." He named the company for Wild Bill Peyto, a legendary turn-of-the-century guide in the Rockies and amateur geologist.

Peyto Exploration & Development Corp. came into being in October, 1998, with Gray, age 33, as president and CEO. He remembers Braund's general instruction: "Have at 'er."

ray was convinced, then as now, that too many oil-patch players focused on acquiring already producing properties. None of that for him: He wanted to drill. He had an idea about a geological layer in the Deep Basin called the Cardium Formation. Swinging in an arc parallel to the Rocky Mountains, from southwestern Alberta through to northeastern British Columbia, the Cardium was deposited between 80 and 90 million years ago as sediment along the shore of an ancient sea. The Cardium in the Deep Basin typically contains natural gas in tight pockets rather than easily accessible pools. That means it requires production methods such as "fracing": injecting sand-bearing fluids into a new well to fracture the subsurface formations, which gets the gas flowing. By studying logs of subsurface data from Cardium wells, Gray concluded that the natural gas in the Cardium promised a supremely sweet combination of low risk and high return.

So long as costs could be controlled, that is. A typical Deep Basin well is drilled to depths of 2,000 metres or more, an effort that consumes several weeks and at least $1 million. That large ante highlighted just how much Gray, the young upstart, was up against the economics of scale in the oil patch.

The industry's top tier is occupied by the wellhead-to-gas-pump leviathans such as Petro-Canada and Imperial Oil Ltd. Then come the senior explorers and producers, led by EnCana Corp., Canadian Natural Resources Ltd. and Talisman Energy Inc. Much smaller are the junior explorers that, in the past, would aim to build themselves up to be biggies (Canadian Natural is an example) but now have much shorter life spans, often selling themselves to income trusts. In the Deep Basin, the biggest producers are BP PLC, Burlington Resources Inc., Canadian Natural and Talisman.

Gray's pitch to conquer the Cardium wasn't a hit with potential investors. "Naively, we would roll out the map and the logs and show them what we were going to do, and they'd look at us with a stunned look," Gray says. Murray Edwards, the legendary Calgary financier and vice-chairman of Canadian Natural, was among those who heard from Gray when he was trying to sell stock at 20 cents (the same level, in fact, at which Edwards had helped recapitalize Canadian Natural). Edwards was "very nice and took some time," Gray says, but kept to his policy of investing only in companies he has a hand in.

Gray, alas, was looking for money when commodity prices were at rock-bottom lows. He raised less than $2 million in three private placements in late 1998 and early 1999. This inauspicious start nonetheless allowed Gray to drill two wells into the Cardium. One, at a spot named Hanlan, was a failure, taking more time and money than planned. It would have killed the infant company had it not been for the other well--a hit, about 70 kilometres away, at Sundance, followed by a series of hits in the vicinity.

At the end of 1999, Peyto was producing less than 100 barrels a day of natural gas. A little more than two years later, Sundance was producing about 6,000 barrels a day.

The well gave Gray a chance to put his ideas into action, to show he could create, not just critique. At each step, Peyto's bid for longevity relied on Gray's aptitude for netting superior results at low cost.

Companies had drilled the Cardium before Peyto. Rio Alto Exploration Ltd. had tried exotic techniques such as horizontal wells and using oil-based fluids for fracing, "needlessly complicating the process," Gray says. Peyto experimented successfully with water-based fracs, which are cheaper. (Partly because it spent too much money drilling for too little return in the Cardium, Rio ended up overextended and in need of a rescue: a buyout by Canadian Natural.)

Another Peyto trick was doing re-entries, taking a second gamble on wells that had been abandoned by another company. It's cheaper than drilling a fresh well. Sundance was a re-entry, as were many efforts that followed. The first driller at Sundance went right through the Cardium looking in vain for gas at a lower level.

Under Alberta's tenure system for subsurface rights, land in the Deep Basin is tied up for at least five years, even if the company holding it doesn't drill. In this environment, "farm-ins" are an effective way for a smaller operator to establish a position, and Peyto built the majority of its land base this way--it drills a well on another company's idle land in exchange for a stake in the mineral rights and a share of the proceeds from the well. Some deals required delicate negotiations. As Peyto's success increased, some companies it approached were hesitant to okay a farm-in, not wanting "to be upstaged," Braund says. "We kept knocking on doors." (Gray calls Braund a "pretty aggressive" landman, one who "never tires of doing a deal.")

Another crucial early move was Peyto's decision to build its own gas-processing plant and ancillary infrastructure. It gave Peyto full control over the product, allowing the company to bring new wells on stream at its discretion rather than having to wait until it could connect with a third-party processor. This, Braund says, gave little Peyto the muscle to compete in a region alongside giants such as Talisman. The approach also secured Peyto's status as one of the industry's lowest-cost producers.

If Peyto is something of an oil-patch outsider, a final factor in its early success was a relationship with a player, the intermediate-sized Paramount Resources Ltd., run by the Riddell family. The connection came courtesy of Braund. Paramount supplied money and land--some of the first wells Peyto drilled were Paramount farm-ins. Paramount sold its stake in 2002 for a $40-million profit, but could have made much more if it had hung in. Jim Riddell, Paramount's president and a one-time Peyto board member, can't help but be impressed: "I'm surprised at how fast they've been able to do it."

ray likes to say that what Peyto's doing is unique. It's more accurate to say that while the building blocks of Peyto have been employed elsewhere, Gray has done an uncommonly good job of assembling them into a neat package. A small package, mind you: The team directly employed by Peyto numbers 19, including Gray, as of November. As is typical in the industry, field operations, including drilling, are outsourced. But Peyto also contracted out the job of overseeing drilling. As much as it relies on drilling, Peyto isn't about that operation itself, to Gray's mind. It's about good ideas.

Once the brainstorm is in place, Gray tries to stay out of the way, letting those he leads do their work without being micromanaged. "I've never found myself saying, 'Gosh, I'm the smartest guy here,' " he says. "I have a lot of respect for real work. Management is way overrated in most companies. They impede, not facilitate." He sketches what he sees as a standard scenario in the industry: managers hearing a drilling pitch from a lower-level engineer. The bosses "beat the guy down with so many questions" that he's discouraged from ever raising another idea.

Out in the field at Sundance, in the wooded foothills northeast of Jasper National Park, Gray is excited to hear stories from his contractors at the gas plant and the new drilling rigs. Unlike most Type A's, he's interested in everyone he meets, listening carefully to see what he can learn.

Nolan Severson's job is to help see that everything runs smoothly at the plant and at the connected wells. Standing inside a refrigeration unit at the plant, where gas is cooled in preparation for transport and sale, Severson remembers the hoops he had to jump through when on contract for other companies. At Peyto, Severson says, "a lot of times we just do something and then call Calgary and say we did it."

Sitting on a couch in a trailer at the plant, Gray reveals another aspect of his abstinence from tradition. He's chatting with a local mechanical contractor, listening closely and nodding, "Okay, cool, neat, neat." The conversation turns to budget-making, a subject that makes Gray's voice rise. Projecting precise production and capital spending figures, Gray says, is "not an intelligent" way to run an energy firm. Such a "static system" is too constraining. For 2004, Peyto gave investors a capital spending range of $110 million to $160 million. By November, it was clear it was going to be more than $200 million because drill-right-now ideas kept emerging. "We constantly sit down, thinking: What should we be drilling next week?"

No surprise then that Peyto kept company with the likes of EnCana and Talisman among the top nine companies drilling in the Deep Basin during November. Doug Stuckey has worked in the oil patch for four decades and has done Peyto work for the past five years as a supervisor at Dura Energy, a firm that tests wells set to go into production. Speaking with Gray at a near-ready well that had just gone through a ground-shaking fracing, Stuckey shakes his head in disbelief. "I shouldn't say this to you," he says to Gray, "but you can't help but think, When is this going to stop? I've never seen any company, big or small, drill as aggressively as Peyto."

Peyto's success obviously has not gone unnoticed: Competition in the Deep Basin is increasing. Jim Buckee, CEO of Talisman, says there has been "a real resurgence in optimism" about the region, thanks to new technology in drilling and seismic work. That's helping everyone, including Peyto. Steve Laut, chief operating officer at Canadian Natural, says that the land picture is "very, very tight," adding, "If you're not there now, it's tough to grow." While Laut wasn't speaking specifically about Peyto, its potential has often been said to be limited in this way. "Guys think we're running out of land all the time," Gray says. Braund laughs at the notion that Peyto is hemmed in: "That'd be bullshit."

n April, 2003, Don Gray unveiled Peyto's plan to become an energy trust. The trust model for oil and gas companies until then had been to tap out aging assets and distribute almost all the cash to unitholders, hoping to ease declines in production by issuing new units to buy new properties. "That model is really more of a Ponzi scheme," Gray says. Like other trust conversions, Peyto was making the move to minimize taxes. But it told its investors it would distribute only half of its cash to unitholders. The rest would be spent drilling wells.

"That was sort of blasphemy," says Gordon Zive, who has owned Peyto stock since 2001 as a senior money manager at RBC Asset Management Inc. John Boyd, a Peyto board member who's also currently the largest investor in the company, still shakes his head at the initial reaction. "We were told it wasn't going to work by the investment bankers, and this and that. It's a joke. Now [the units have]tripled since then. It's incredible." Boyd says Peyto could find added momentum if Americans, who own about a quarter of the company now, get interested. "[Peyto's]not well-known in the United States yet. But it will be."

Less than two years after the trust conversion, Peyto's model has become the new normal. Energy trusts previously paid out an average of more than 90% of cash to unitholders. That's now down to about 70%. Harvest Energy Trust, Bonavista Energy Trust and Zargon Energy Trust are some of the players that, alongside Peyto, are paying out around half.

Chalk up another idea to Don Gray. "The guy," Zive says, "even though he's a difficult person, he's an amazing clairvoyant." Gray saw the market was ready for something new, just as he saw something in the geology of the Deep Basin.

Still, a little perspective. Compare Peyto with the most valuable and most prolific Canadian oil-patch producer, EnCana. Peyto's market capitalization is $2 billion. EnCana's is more than $30 billion. Peyto predicts its production, which is mostly gas, will hit an average of 20,000 barrels a day for the first time in the fourth quarter. EnCana's daily output, about two-thirds of it gas, is almost 800,000 barrels.

So Gray's freakishly profitable company has gone, in the big picture, from being a tiny anomaly to a smallish anomaly. No time for Gray to lighten up. He spares no targets. Take David Johnson, who's widely respected in the oil patch, most recently in his role as chairman of Progress Energy Trust. Progress got Gray's back up by headlining its third-quarter release: "Building through the drill bit."

Thinking that slogan was a better fit with his own company, Gray took umbrage, critiquing Progress piece by piece in an e-mail to me. It's not meeting production predictions. Its payout ratio is unclear. "They have plenty of excuses for why their [production forecast]story hasn't worked out," Gray wrote, before signing off slanderously.

On being told of Gray's e-mail, Johnson is restrained. "He seems to love slamming people, so I don't really feel like wasting my time [getting]involved in that kind of behaviour." Pressed on Gray's brash style, Johnson says, "If a young fella has as much success as he's had, I just don't understand where he's coming from. Why couldn't you just enjoy it?"

One analyst, who like some others interviewed for this story asked not to be named, says, "There's a schadenfreude-type concept....Don is like, 'I am the best. And you are not.' "

Gray's motivation is twofold. One is recognition for Peyto. A September, 2004, Peyto presentation--72 pages long--features chart after chart ranking Peyto No. 1 versus its peers, all the numbers put together by Gray himself, in contrast to the usual corporate practice of synthesizing work from friendly analysts. But the overarching motivation is a truth warrior's. Gray sees little original thought in the oil patch, just a bunch of people chasing the latest trend. "I see them almost as cowards," Gray says, adding that people become too averse to risk as they climb to the top rungs of the business. "They're quite happy with just being average, being the mediocre....It's hardly my competitors that challenge us. It's more my mouth that challenges us."

One outlet for his combative critiques is Peyto's website ( "I love the fact that I have a bully pulpit," he says, "where I can educate people....I take a lot of pride in having intelligent people as my investors, as opposed to some of these other guys." His mind jumps to a company (not Progress) that happens to have reported its third quarter on the day we're talking. It boasted of an increase in production of 30%. But on a per-unit basis, it was down 34%, a figure not highlighted. This is common, Gray says. "It really bothers me when people make money that they don't really deserve."

According to Gray, the people who sell the energy business to investors--bankers, analysts and executives--are all too willing to peddle ersatz goods. A TD Securities report toted up that in the first nine months of 2004, energy trusts raised $3.4 billion in new equity and convertible debt, helping fund 24 acquisitions that cost $5.1 billion. "To me," Gray says, "the real loser in the end is the shareholder.

"The majority of these businesses are very mediocre, and they're prepared to look around it....The type of companies that exist in Calgary today lend themselves to what the analysts want to talk about and what the investment bankers want to do, which is issue equity."

Issuing equity is exactly what Peyto did on Nov. 16, announcing a deal to raise about $90 million at $42.65 a unit. This was its first issue (excluding placements to workers) since a financing at $2.20 a share in 2000. The new money was used to pay down debt, so Peyto could redraw on its bank lines to help finance a capital program that Gray estimates could approach $300 million for 2005. Gray insists his move for money is far more honest than his peers' grabs for cash, saying it's "not to go buy something that's already overpriced and just a shell game." He says the company has always counted equity among its financing options but adds, "We've never been greedy." And while the explanation holds water, it undermines Peyto's claim to be "unique." In the end, everyone goes to the market for money. In the end, everyone faces a major company-crunching challenge.

eyto's success to date, after all, is entirely based on one great hunch. Gray's statistical interpretation of the Deep Basin data uncovered something others hadn't figured out. But that doesn't mean Gray could march Peyto over to another region and replicate his success.

What Peyto has done, however, is expand beyond Sundance in the Deep Basin, and drill wells at varying depths, reducing its reliance on the Cardium. The company has built a second gas plant and is adding a third. Boutique energy investment bank FirstEnergy Capital Corp. said in September that Peyto's second key drilling spot, Smoky/Kakwa, "is looking identical, if not better, to the way Sundance did before Peyto initiated its development."

If Peyto is deemed to be a one-trick company, so be it, Gray figures. The whole strategy, after all, was focus. Braund says the usual mistake that derails growing companies is jumping into something new after the flush of early success. Why not stick to the initial game plan, Braund wonders, unless that plan is limited--"which ours is not."

Still, numbers such as that $300 million in 2005 capital spending get people talking about Peyto's future, asking the same question that's been asked all along: How long can this keep going? "They won't have $250 million or $300 million of projects every year," says Mark Bridges, an analyst at CIBC World Markets Inc. Gray's projection of doubling production to 40,000 barrels a day by the end of 2007 will be "pretty tough" to meet, Bridges says. "When they acknowledge things are slowing down, that's when the hit will come." That said, he believes the next year looks solid, saying that increasing production by 25% to 25,000 barrels a day is within reach, and that Peyto units could climb to $47.50.

Peyto's principals see no immediate exit--say, a sale to a large competitor with deep pockets. Gray sees the future as a climb up the Alpe d'Huez: "I'm not at the top. I don't see any reason why we won't just keep on going." For any of the insiders, there is no particular motivation to depart, given how much money they're making. Distributions alone bring Gray $4.6 million a year. The bonus pool at Peyto looks like it'll be close to $50 million for 2004, reflecting the big gains in Peyto's unit price and increases in the company's reserves. Not too shabby, given the small number of people who will split it. Employees have the option of putting money straight back into the company in an annual private placement. Last year, 85% of the after-tax bonuses went to buy new units. "People look at the compensation and say, 'That's excessive,' " Boyd says. "You don't see the unitholders complaining."

(Insider ownership of the company is more than 20%. Gray, who owns 2 million units worth $85 million, and Braund, with 1.3 million worth $55 million, rank right behind the largest holder, Boyd, who has 4.3 million shares worth $183 million. All three are on the company's seven-member board. Boyd, however, is considered an independent director, one of four.)

Peyto will need more Sundances to keep its trajectory steady. Continuing high gas prices would help too. Over the past five years--the lifespan of the Peyto success story--gas has averaged more than $5 a gigajoule at the benchmark Alberta trading hub, about triple the figure through much of the 1990s.

Then there's the fact that the trust card can only be played once. CIBC's Bridges points to a chart of Peyto's valuation that shows a huge bump in the year after it became a trust, suggesting that such a jump won't be repeated. For investors, an important concern is the potential for the valuation to fall even if production rises. "It's almost priced for perfection," Bridges says.

Chris Guthrie, president and CEO of Hillsdale Investment Management Inc., sold his firm's Peyto stake recently on that thinking. "I'm all excited he thinks he can double production, but I can't count on another pop in the multiple," Guthrie says, estimating that on most measures, Peyto is valued in the market at at least double what it was in 2002. "People have already paid for the [growth] Replicating it becomes much harder."

True: The wild growth spurts of Peyto's early days are probably gone for good. While it has that claim as No. 2 on a chart showing top TSX names on a five-year scale, Peyto ranks near the bottom on a list of two dozen companies that have produced a gain of more than 1000% in the past three years.

Gordon Zive of RBC Asset Management sees around four more years of drilling opportunities, but he also has perhaps the most pragmatic warning. "When you're young and you've been successful, you become complacent and, therefore, vulnerable to a shakedown. ... In the fullness of time, guys like [Gray] who think that they're almost infallible because of their success, are the ones who fall the furthest. ... I've seen that happen many times. I think Don Gray is an excellent example of a guy who's setting himself up for that fall."

Gray, of course, foresees a different legacy. "It wouldn't surprise me for a minute that the Cardium that we're pursuing here is recognized as one of the largest gas pools in Canada in years to come." And it's early days yet in his career, of course. At home in Springbank, on Calgary's western fringe, Gray enjoys carpentry and is married with five kids, aged two to 14.

When he and neighbour Braund got started in business, they were just acquaintances. The two are now best buddies, Braund says, neighbours not only in Springbank, but now also on Lake Windermere, a mountain getaway three hours from the city. Braund says he's still amazed by his partner. "There's a lot of brilliant people in this city, don't get me wrong. But I've never seen one as sharp as Don."

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