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ROB MAGAZINE

Meet the unluckiest man in the oil patch

Last decade, few Canadian CEOs made more money for investors than John Wright. This decade, few CEOs cost investors more. Is the Calgary oilman to blame for his series of failures, or is he just unlucky?

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The two mountain-shaped towers that compose Eighth Avenue Place in downtown Calgary are home to thousands of people who make the oil and gas industry run. And on Dec. 12, 2016, most of them were in a downright festive mood. Over the weekend, major non-OPEC oil nations had struck a deal to take 558,000 barrels of oil a day off the market. That followed the 1.2-million-barrel production cut OPEC had agreed to two weeks earlier. The news was sending the shares of virtually every Canadian oil and gas company higher, with some up more than 40% over those two weeks. Santa Claus had come early.

On the 28th floor of the east tower, however, the mood was decidedly less celebratory. Employees of oil producer Lightstream Resources had watched their company's shares sink over recent years until, in October, Lightstream entered bankruptcy protection and the stock was delisted from the Toronto Stock Exchange. At a 3 p.m. meeting that day, the staff would learn what their new bosses—Blackstone Group's GSO Capital Partners and Apollo Global Management, two of the top names in private equity and two of Lightstream's largest creditors—were planning for the company. It would be up to CEO John Wright to deliver this message, marking the official end of what was once his Petrobank mini-empire.

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Wright, the man who had spent nearly a decade building Lightstream into a major player in the oil patch, is surprisingly upbeat on this Monday morning, given the task that awaits him. His corner office, with its clutter of papers, framed photos and keepsakes from his Latin American travels, feels more lived-in than the typical C-suite, and there is no PR handler minding his every utterance as he dives into the subject of his company's high-profile failure. Taking a sip of coffee from an oversized "World's Greatest Dad" mug, Wright reports a palpable sense of relief around the Lightstream offices now that the 18-month battle among creditors for control of the company is finally over. "There seems to be a really good vibe here," he says cheerfully, seated at a small table by a window looking out to the Rocky Mountains. "Considering what everyone's been through, that's no small miracle."

This is not how the John Wright story was supposed to unfold. After all, between the mid-1990s and late 2000s, few Canadian energy executives made more money for their investors than he did. At Pacalta Resources, he took a company with a tiny market capitalization and sold it three years later for a billion dollars. That was just his warm-up act. He went on to turn a small natural gas producer called Petrobank into a conglomerate that contained a heavy oil company, a light oil company and a Latin American oil company. By the end of the '00s, all three were trading publicly, each valued in excess of a billion dollars. Think of it this way: If you'd bought shares in Petrobank on their first trading day in 2000 and held them to the end of the decade, you'd have been sitting on a 31 bagger by the time your 2010 New Year's hangover wore off.

You would have been wise to sell those shares then, however, because Wright's fortunes turned sharply around that time. Since 2010, his various companies have been sold at a steep discount from peak value (Petrominerales), forced into the corporate equivalent of an arranged marriage (Petrobank) or taken over by creditors (Lightstream). For investors, the Lightstream experience has been particularly brutal. The company's shares debuted on the TSX in 2009 at around $35 and went pretty much straight downhill. In recent years, Lightstream's stock chart has looked like a double black diamond run, and in the wake of the oil price crash that started in 2014, investors began to panic about the company's dangerous combination of high debt and low growth prospects. "We went into hunker-down mode, where we hoarded all of our non-perishable goods and hid in the basement," Wright says with characteristic verbal flourish. "But the tornado kept raging, and sooner or later we had to come out of the basement."

To hear Wright tell it, Lightstream's downfall, capping a string of Petrobank-related failures, is more the result of bad timing than of bad management. "I'd say I failed miserably—as did most of the prognosticators, I guess—in understanding just how long [the downturn] and how low [the price of oil] could go," he says. "The banks panicked early, and everybody else got in line." Wright doesn't regret any decisions he and his executive team made, and he stresses that the company is still generating cash. "We always produced a ton of money," he says. And despite the company's demise as a publicly traded entity, he insists it shouldn't be regarded as a failure. "For the majority of its life, it was a big success."

Perhaps. But that's a bit like saying that for the majority of its life, the Titanic was a seaworthy vessel. For the passengers, all that really mattered was how their voyage ended. And, like an overconfident ship captain, Wright remained so persistently optimistic that he was blind to the dangers lying in wait—including a big one still to emerge. "Lightstream's level of debt was just too high during the good times," says Thomas Matthews, an analyst at AltaCorp Capital in Calgary. "When we did get a downturn—and downturns are inevitable—they just couldn't get out of it." Since 2009, Lightstream and its Petrobank siblings collectively vaporized almost $10 billion in shareholder wealth, representing one of the largest financial meltdowns in Canada's energy industry. The question investors are left with is whether Wright was the author of his—and their—misfortune or a particularly conspicuous casualty of a price collapse that ravaged the sector.



John Wright says he was destined to end up working in the energy sector. As a third-generation Calgary oilman (two of his three sons, one of whom is an engineer at Lightstream and the other a geologist, have made it four), Wright has been around pumpjacks and wellheads for as long as he can remember. "I just thought the oil business was the coolest thing ever," he says.

After getting his petroleum engineering degree at the University of Alberta in 1981, Wright jumped straight into the business—and right into a crushing downturn. When the young engineer joined Merland Exploration, it didn't take him long to get noticed. Tom Buchanan, an oil patch veteran who was Merland's finance manager at the time, remembers a smart, innovative guy. "You could tell John was on the fast track," he says.

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Wright would take those skills to Morgan Hydrocarbons in 1989, where he worked as vice-president of production and later as chief operating officer. That was where he first fell in love with the potential of Latin America's oil fields. Morgan was one of the biggest users of a then nascent technique called horizontal drilling, and Wright believed it would help tap the hidden bounty down south. He pitched the idea to executives at the region's state-owned oil companies, even taking Spanish-immersion classes to make conversation easier. But when he finally took a deal back to the Morgan board—a partnership with a company called Pacalta Resources to purchase assets in Ecuador—they balked.

After what he describes as a "come to Jesus" meeting with Morgan CEO Bill Trickett, Wright left. During a vacation in Mexico a few weeks later, Wright and his friend Brett Wilson, the former Dragons' Den panellist who was at the time a merchant banker, devised a different way to do the deal: convince Pacalta's board to hire Wright and then raise money to buy the Ecuadorian assets. Wright joined Pacalta as president and CEO in 1996, and developed those and other sites in the region. Three years later, Alberta Energy Co. (AEC, later Encana) bought Pacalta for $1 billion.

Having proven his oilman instincts, in 2000, Wright took the reins at Petrobank Energy and Resources, a small natural gas company with a $50-million market cap. Still enamoured of South American oil plays, he used his new base to buy Pacalta's Colombian subsidiary. "I went down there after we'd done the deal [with AEC], and in my file I still had a key to the door, and all the employees were the people I'd hired," he says. "It was like I never left."

His vision for Petrobank, though, was about much more than South America. He saw an opportunity to apply new technologies to a variety of oil assets and regions, housing all the ventures under one corporate umbrella. They included a Canadian light oil business (PetroBakken, later renamed Lightstream), a Latin American unit (called Petrominerales) and a heavy oil company (Petrobank). He intended to float a portion of the first two units in initial public offerings, with Petrobank retaining majority interests at the outset and using the dividend payments to support the development of proprietary—and potentially revolutionary—technology for heavy oil extraction.

For a while, the plan seemed to work perfectly. Petrominerales, which debuted on the TSX in 2006, grew its production in Colombia and Peru from 1,000 barrels per day in 2005 to more than 40,000 when Petrobank distributed its remaining stake to its shareholders in 2010. PetroBakken, which operated in Saskatchewan and Alberta, went public in 2009 and, after three quick acquisitions, emerged as one of the largest dividend-paying light oil producers in Western Canada—albeit one saddled with a mountain of debt it used to finance those deals. Petrobank spun out the remaining stake to its shareholders in late 2012.

That left Petrobank with just the heavy oil assets. Wright always envisioned this business as the real company-maker, and he turned it into a living laboratory for heavy oil extraction technology. The process, called toe-to-heel air injection (THAI), involved igniting the oil in the reservoir and injecting air into it from one side. Theoretically, the resulting "fire flood" would work its way across the deposit, simultaneously liquifying and upgrading the oil as it was forced out of the reservoir. And because THAI didn't require steam to extract the oil, nor natural gas to create that steam, it was a more eco-friendly and cost-effective way to produce heavy oil. Wright describes the process as a kind of on-the-spot refinery. "If you could create some chemical transition in situ, and you had oil that could pump without having to add diluent? Well, boom—it's the holy grail."

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The premise behind THAI was bound to invite skepticism, and it got its fair share. But it was also the subject of several academic papers, and The Street saw a chance it might work: In an October, 2007, report, Raymond James analyst Justin Bouchard assigned it a 25% probability of success. However, the company's demonstration project in Conklin, Alta., never managed to get production up to commercial levels. Another attempt at a Saskatchewan property also failed. In the end, while the science seemed to work—at low volumes, at least—the economics clearly didn't.

The failure of THAI, into which Petrobank had sunk about $300 million, wasn't the only problem Wright was facing by the early 2010s. A series of dry exploration holes Petrominerales drilled in 2011 and 2012 dragged its stock down from over $40 a share to the single digits. The company's shareholders were effectively rescued by a buyout by Pacific Rubiales in the fall of 2013. Meanwhile, Lightstream's meagre growth, combined with its high debt, left it dangerously vulnerable to even a moderate correction in oil prices. By the time the company decided to start selling off assets to pay down its obligations, it was already too late. "I don't know if they could have done anything differently," says AltaCorp's Matthews. "They tried as best they could to unload assets and get cash in the door," but the falling oil prices knocked down those assets' market value.

Wright concedes that he struck out with the THAI technology, but he doesn't regret having stepped up to the plate. "We had to get it into the field at full commercial scale to know whether it worked," he says. "We did that, and I think we did it relatively efficiently, but unfortunately, we
haven't quite cracked the code on how to make it commercial." Rafi Tahmazian, a portfolio manager at Canoe Financial who has known Wright for two decades, says it was always clear Wright was swinging for the fences with THAI. "He didn't hide anything from anybody," says Tahmazian. "He didn't sugar-coat anything. Everybody knew if he cracked that nut, they were going to make a lot of money."

Not everyone is so charitable. Eric Nuttall, the manager of Sprott Asset Management's Energy Fund, thinks Wright has always been more about the hype than the hydrocarbons. At a time when peak oil was a popular topic of conversation in Calgary and economist Jeff Rubin was telling everyone oil was headed to $200 (U.S.) a barrel, it's not hard to see why a technology that promised to tap hard-to-reach deposits of heavy oil and extract them without using (increasingly expensive) natural gas was attractive to investors. "It was the perfect environment in which to promote the Petrobank story," Nuttall says. But when that environment changed, so did Petrobank's fortunes. "Promotion comes to an end when you have to fall back on results—of which they had literally none."



Today, our hypothetical Petrobank buy-and-hold investor is in a tough spot, having given up almost all the gains of the previous decade. If it's any consolation, Wright lost more money in Lightstream's carnage than most of us can ever hope to make. "I can't add up the zeros, but it was an eight- or nine-figure loss for our family," Wright says.

Further consolation? A pair of U.S. hedge funds filled with whip-smart managers took it in the teeth too. Jason Mudrick, president and chief investment officer of Mudrick Capital Management in New York, started scooping up Lightstream's unsecured bonds in early 2015, following the oil price crash, eventually building a position worth $32 million (U.S.). He viewed the bet as reasonably safe: If oil prices rebounded quickly, the bonds would see equity-like appreciation. If prices took longer to recover—or, worse, fell lower—he would have a claim to the company's assets, creating an ownership position at a substantial discount. "The only way that trade didn't work was if they allowed certain debt holders to move senior to us," Mudrick says. "We went to the company and said, 'Could this happen?' And they said, 'No, that will never happen.' And then they turned around and did it."

"It," in this case, was a debt swap that went down in July, 2015, in which Lightstream traded $465 million of the earlier bonds for new notes from Apollo and GSO Capital. The rate was slightly higher, and the deal eliminated $70 million of Lightstream's debt, but it was the terms that truly mattered: The new bonds gave the two private equity firms first dibs on Lightstream's assets in the event of a liquidation. Investors holding the remaining earlier unsecured bonds saw their value plunge. Wright categorically denies ever making promises to Mudrick. "I've been running public companies for more than 20 years, and you're never going to find anyone who said, 'Oh, yeah, John gave me a special assurance,'" he insists. "Because that's not how you do business."

Mudrick and another aggrieved hedge fund sued Lightstream over the debt swap. Their refusal to resolve the matter ultimately scuttled a proposed restructuring of Lightstream, brought forward last July, that would have seen Apollo and GSO take 95% of the company, with common shareholders and subordinate debt holders like Mudrick splitting the rest. Instead, Lightstream filed for creditor protection, a process that has left GSO and Apollo in control. "We didn't want this to happen," Wright says. "We didn't want to blow up the company. Nobody got any value out of it."

Mudrick, whose lawsuit is still wending its way through the courts, is convinced he will have the last laugh, and not just because he expects to recoup some of his losses through court-awarded damages. "[Lightstream's management] got into bed with the wrong guys, and they'll pay the price," he said back in December. "I assume you'll see relatively shortly that they're stepping down."

Wright dismissed the idea that Lightstream's new owners were preparing to get rid of him, and insisted he was looking forward to a bright future at the company. After spending two years trying to unload assets, he even envisioned a change in direction. "Clearly, [Apollo and GSO] don't want to sell. Clearly, we don't think this is the right environment to sell in. Which means it's probably a good environment to buy."

As it turned out, Mudrick was right. In early March, Wright sent an email to friends and colleagues saying that the company, now renamed Ridgeback Resources, was indeed overhauling management. He didn't frame it that way, of course—instead, Wright announced his retirement as president, CEO and board director, effective June 30. There were the usual niceties about his agreeing to "provide advice to Ridgeback's board" and helping to "put a new CEO in place and provide a full and seamless transition." But given Wright is stepping down from both the C- suite and the board, it's hard to see this as an entirely amicable parting.

Ever cheerful and gung-ho, Wright is already busy setting up a new firm, Analogy Capital Advisors, with his wife. It will invest in and advise "fun projects globally that involve people we really like," he says. He isn't entirely without regrets, mind you. He acknowledges the complexity of Petrobank's corporate structure may ultimately have harmed it, as institutional investors shied away from what they saw as a convoluted Russian doll of a company. He seemed to sense this as far back as 2008, when, in his president's message in Petrobank's annual report, he noted, "When we speak to the investment community, with limited time it is often difficult to convey the explosive growth potential." He has also done his share of Monday-morning quarterbacking about the decisions he made at Lightstream after it became clear the days of $100 oil were over. "We went back and forth a lot: Should we have done a financing? Should we have cut the dividend? There are all kinds of tweaks and micro things we could do. But the macro thing was that the price of oil crashed."

Of course, Wright isn't the only executive who got side-swiped by that crash. Buchanan, Wright's onetime colleague at Merland who later built Provident Energy into one of Alberta's leading energy trusts, had a similar disaster unfold at Spyglass Resources. Formed in 2013, the company, like Lightstream, piled on too much debt (Wright, as it happens, sat on Spyglass's board). In the end, Spyglass's shareholders wound up with the same thing Lightstream's did: zilch.

Such failures, says Buchanan, are not uncommon in the oil patch, an industry defined as much by its busts as its booms. "If you can show that you did everything in the best interests of the shareholders all the way through, then you can hold your head high and move on," he says. "And I think that's how the market looks at it: People who know John and me would be there to support us again tomorrow."

Perhaps. But while plenty of energy companies went broke during the recent downturn, none was as big as Lightstream or Spyglass. Meanwhile, Crescent Point Energy, the company Lightstream was most often compared to—due to their shared status as Saskatchewan-focused, dividend-paying oil producers—is still very much a going concern. Yes, Crescent Point had better assets in the Bakken field, but it also had a straightforward corporate structure, a simple story for the market and less debt. And if Wright gets credit for building value in Petrobank's early days, he deserves the blame for eventually destroying almost all of it.

In the end, Wright's biggest take-away from the demise of his Petrobank dream is a kind of fatalistic belief that while he could have prepared more diligently for that raging tornado, it wouldn't have saved what he had built. "We learned the lesson before we got taught our lesson," he says.

But for all the crushing setbacks he has faced in the past few years, Wright's innate optimism is unshaken. And he remains keen on the part of the world where he first made his name: Latin America. In addition to his new venture, he is chairman of Alvopetro, a Brazil-focused exploration company carved out of Petrominerales; and of Touchstone Exploration, the Trinidad-focused junior that Petrobank merged into in 2013 (and which now owns the intellectual property on THAI). While both are tiny companies with share prices in penny-stock territory, Wright is characteristically bullish about their futures. Asked whether they can repeat the success Petrobank's South American division enjoyed in its early days, he is unequivocal: "Hell, yes. Both of them." Investors, though, can be forgiven for treading more carefully into these particular jungles. After all, if recent history is any guide, they might not make it back out.

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