Snakes and ladders

Energy companies sometimes get caught in the spotlight of the market and are caught up in a game of investor snakes and ladders where either designation may be unwelcome.

Calgary-based Connacher Oil and Gas Ltd has been dodging the snakes up until recently when it was presented with a ladder that it didn’t want much either. The oil, gas and oil sands operator has around CAD880m worth of debt but a net pre-tax asset value of around CAD2.9bn. Basically, the company seems to have valuable assets that it simply cannot exploit. With those numbers equating to around a value of CAD3.70 per share after tax and contingencies and with Connacher stock trading in the mid-CAD0.50 range, it is little wonder that the company has attracted attention.

On 8 December 2011 Connacher was required by the Investment Industry Regulatory Organisation of Canada (IIROC) to comment on the trading activity of its shares, which had surged suddenly to around the CAD1.00 mark. In a statement, Connacher said that, “It has received a confidential, non-binding, unsolicited proposal to acquire all of the outstanding shares of the company. The proposal is conditional upon, among other things, due diligence, negotiation of all definitive documentation and approval of the board of directors of Connacher and of the interested party.” The interested party was not named and remains anonymous at the time of writing. Five days later Connacher issued its decision on the takeover saying in a statement: “Its board of directors has determined not to pursue the unsolicited, non-binding and conditional proposal received from a third party to acquire all of the outstanding shares of the company. The board determined, upon extensive and thorough deliberation and following receipt of advice from its financial and legal advisors, that the proposal was not compelling.”

When the market digested the news Connacher’s stock fell around 13% to CAD0.78. However, that is unlikely to be the end of the story. Connacher has been trying without success to get a joint-venture partner on board for its 100%-owned Great Divide oil sands project and farming out or selling its natural gas properties. The company also has a heavy oil refinery in Montana producing around 9500bpd. Investment adviser Audley Capital Advisors LLP has publicly urged the company to consider the deal. “Audley believes Connacher’s fair value to be well in excess of the current market value and that the valuation discount can best be corrected through a sale of the company provided Connacher’s highly competent operational and technical teams can be retained and well incentivised as part of this transaction,” said Audley in a statement. Connacher may have to take this ladder.

Xcite’s snake effect

Through its 100%-owned subsidiary, Xcite Energy Resources Ltd (XER), Xcite Energy Ltd is working to bring heavy oil into production in the North Sea to the east of Shetland for its 100% interest in block 9/3b, has undergone a definite snake effect when its stock plummeted around 21% on 1 December 2011. XER was awarded the working interest in the block back in 2003 and Xcite has perhaps drummed up a little too much, and forgive the pun, xcitement, to investors. Whatever the case the operating statement issued by the company on 1 December 2011 went down with shareholders like a lead balloon. It was, basically, a change of plan for the Bentley block in which commercial rates of oil production would not take place until 2013 when there was hope, even expectation perhaps from shareholders that production could commence in late 2011. With the prospect now of “jam tomorrow” shareholders were quick to contact Xcite eliciting a quick public response from the company, “Over recent days we have received a number of messages from our shareholders expressing concern with respect to the current share price and requesting more information from the Company. The board of directors and management team recognise your concern and your desire for timely information.” The company went on to say that it remained committed to the commercial development of the Bentley field and that, “We recognise that the announcement of 1 December 2011 comprised an evolution of our field development plans from those set out earlier in the year. We believe these changes provide the company with a viable and more financially efficient solution to achieve our shared objective of commercialising the Bentley field,” said Xcite. Explaining further Xcite said that, “The update to the market of these plans was not previously announced as it has not yet received a response from DECC (Department of Energy and Climate Change). We had hoped, and remain optimistic, that this response will be received shortly and that the field development update could have been made in conjunction with the announcement of a number of other important events for the company in the coming weeks.”

Xcite said that it was waiting for the response from DECC regarding the Field Development Plan (FDP) for Bentley and confirmed that it was optimistic about it will be able to convert 87mbl of oil of contingent reserves to 2P reserves in, “due course,” giving Xcite around 115mbl in total. Meanwhile, the company’s stock price is recovering somewhat. However, it is very likely that investors will be keeping a very close eye on developments now and for its part, Xcite is possibly looking at its communications with shareholders as the announcement the company made on 1 December 2011 was perceived by Xcite as positive, yet, was received in exactly the opposite way by the investors it was supposed to inform. Xcite rode the snake downwards that could have been of its own creation, illustrating just how important it is today in very fickle and indeed, nervous, market conditions for companies to communicate effectively. Whether Xcite’s difficulties would have occurred anyway if it had told investors earlier of its change of plans we will never know.