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By John Tilak
TORONTO, Aug 13 (Reuters) - With a sinking oil price driving
Canadian energy shares to decade lows, activist hedge funds are
pushing hard for companies to look at mergers and acquisitions
or asset sales to curb costs and help the funds reduce their own
investment losses.
The funds' shift away from a focus on smarter capital
deployment, such as dividend payments and share buybacks, comes
as a renewed price slide deals another blow to many companies'
financial results and balance sheets.
Activist involvement in the Canadian energy sector has been
increasing, with more proxy contests so far this year than in
all of 2014, according to proxy solicitation firm Kingsdale
Shareholder Services. U.S. hedge funds FrontFour Capital, Orange
Capital and Livermore Partners, as well as Toronto-based West
Face Capital, have been the most active.
"The activists are more emboldened than ever. They are
carrying a bigger stick than they have in the past," said Shane
Fildes, head of global energy investment banking at BMO Capital
Markets.
To be sure, putting pressure on energy company executives
alone won't make buyers appear and get deals done.
The second quarter was the worst in nearly a decade for
Canadian energy M&A, according to Thomson Reuters data. But
bankers predict a pickup in M&A later this fall or early next
year once crude prices finally bottom out.
U.S. hedge fund Livermore Partners has pushed for change at
Zargon Oil and Gas Ltd ZAR.TO , whose shares have lost 74
percent of their value in the past year and 25 percent since
May. The fund, which built most of its stake in the last three
months, owned about 3 percent of Zargon in July.
Livermore Managing Director David Neuhauser said while he is
not looking to force a near-term sale of the entire company,
Zargon should be considering asset sales or a joint venture.
Zargon did not respond to a request for comment.
"At some point, the market is going to improve, the pricing
is going to improve," Neuhauser said. "I'm not in a rush to do
anything. But my view is that we should look strategically,
whether it is internally or by engaging a banker."
An example of a fund that is probably staring at big losses
on an investment is New York-based Orange Capital. When it
announced it had a 5.3 percent stake in oil and gas company
Bellatrix Exploration Ltd BXE.TO last August, the shares were
trading at C$7.91. On Thursday afternoon they were at C$2.29.
Thomson Reuters data shows Orange has been increasing its
stake through the downturn and now owns 16.4 percent of
Bellatrix. Seth Klarman's Baupost Group, another U.S. hedge
fund, has also been accumulating a position in Bellatrix and
owns 11.4 percent.
Bellatrix is trying to sell some of its midstream assets
following pressure from Orange, two sources familiar with the
process said. A Bellatrix spokesman declined comment. Orange did
not immediately respond to a request for comment.
"Activists typically prefer the quick capture of a takeover
premium, as compared to the time and effort it could take to
restructure a lagging portfolio company," said Chris Young, head
of contested situations in the M&A group at Credit Suisse (SIX:CSGN). "The
M&A option is often particularly appealing when a fund manager
is seeking to unload an underwater position."
Gran Tierra Energy Inc GTE.TO , a Calgary-based oil and gas
company with operations in South America, has been pressured by
West Face, a Canadian hedge fund.
In April, West Face expressed dissatisfaction over Gran
Tierra's strategy and succeeded in getting its nominees on the
board. One source involved in the process said that West Face is
pushing the company to look at acquisitions in Colombia while
assets are cheap. Gran Tierra and West Face did not respond to
requests for comment.
(With additional reporting by Shailesh Kuber in Bengaluru;
Editing by Jeffrey Hodgson and Amran Abocar)