Analysts view Connacher as buyout target

Analysts say Connacher Oil and Gas Ltd. is ripe for a buyout now that the longtime CEO who vehemently opposed such a move, as recently as last week, has departed the company.

Investors pushed shares of the small oilsands player up more than nine per cent Thursday after Connacher announced that chief executive Dick Gusella had "relinquished" his positions, including his role as chairman, president and interim chief operating officer.

Gusella, 67, had been with Connacher for 11 years and the company offered no explanation for the development.

A week after three other senior executives exited Connacher, Gusella's departure is being called positive by analysts. He was viewed as a barrier to pursuing strategic alternatives at Connacher, including a potential sale, which has come under fire from some investors over its high debt load, operational struggles and sagging stock price.

Connacher is likely "for sale," now, Andrew Potter of CIBC World Markets said.

"Although the company has not formally indicated what its plans are, there is little doubt in our view that the company will undertake a strategic review with an aim at an outright sale," Potter said in a note to clients.

"Now that all of the management team is basically being revised, you might see more companies being willing to come to the plate, most likely to put in bids for the company," said BMO Capital Markets research analyst Jared Dziuba, in an interview.

"With Dick being gone, having been the guy who drove the business to the point where it was in the penalty box with investors, I think the market views new leadership coming in there as possible refreshing."

Gusella declined to comment on his departure Thursday, but last week he had vowed to lead for years to come. Directors on the Connacher board did not respond to requests for comment.

Shares of Connacher on the Toronto Stock Exchange closed up nine cents at $1.02. That's down 69 per cent from five years ago.

Gusella was the second chief executive to depart the oilpatch this week. Nexen Inc. announced Monday that Marvin Romanow had left the top post of the international oil and gas producer, not offering an explanation.

The firm had faced investor discontent over operational challenges in the oilsands and North Sea and the stock had traded at a discount to its peers since Romanow moved into the corner office, in January 2009.

Though circumstances differ between the two companies, what the scenarios share is the rarity of an abrupt high-level departure at a publicly-traded Canadian firm.

"It's not a common event for a CEO to make a quick exit from a company," said Peter Chapman, executive director of the Vancouver-based Shareholder Association for Research & Education.

A takeover has been suggested by analysts as a potential outcome in both cases.

On the radar as prospective suitors for Connacher are foreign oil companies looking for a foothold in the oilsands. Dziuba suggested that since Connacher's technical team is in place and cash is coming in the door thanks to production, a foreign firm without operating experience need not be dissuaded. Potter also said foreign national oil companies are the most likely bidders.

Any takeover of Connacher comes with a hitch, though. A clause in the agreement with holders of $900 million in long-term, high-yield debt - with interest rates of 8.75 per cent and 8.5 per cent, due in 2018 and 2019 - allows them to require any company taking over Connacher to buy this debt at 101 per cent the principle. If the acquiring company has a solid credit rating, it's more lucrative for creditors to hold on to their debt.

Connacher's 8.5 per cent bonds due August 2019 traded up about five cents Thursday in New York at about 97 cents on the dollar. Since takeover suggestions began swirling last month, bonds have been buoyed, off a low Nov. 3 at 70.81 cents.

Potter said he was not surprised by Thursday's news, given last week Gusella "fired" three senior executives, suspended the search for joint venture partners at its Great Divide oilsands lease and conventional assets, and announced ramped up spending plans for 2012. Connacher said it would boost production this year by 15 per cent and planned to spend $37 million.

At the helm of Connacher's day-to-day operations now, on an interim basis, are directors Colin Evans and Kelly Ogle, the firm said. Evans is president of consulting firm Evans & Co. Inc. and Ogle is president and CEO of Trafina Energy Ltd., a junior oil and gas firm.

An internal candidate previously viewed as Gusella's likely successor, Peter Sametz, left his post as president and chief operating officer, last week. Sametz had been promoted to president in mid 2010. Richard Kines, formerly vice-president finance and chief financial officer, and Grant Ukrainetz, formerly vice-president of corporate development, also left. Gusella said their departures were "initiated" by him.

But his moves were counter to what activist investors had been calling for - debt reduction, prudent spending and either partnerships or a sale of the company. The Connacher board has faced lobbying for months by investors to pursue a review of strategic alternatives, above and beyond its joint venture process.

In December, activist shareholders West Face Capital Inc. of Toronto and London-based Audley Capital Advisors LLP took their campaign public. Audley, which describes itself as an "event-driven" money manager, bluntly called for Connacher to put itself up for sale, after the company announced it had received an unsolicited, non-binding buyout offer.

West Face is the largest shareholder of Connacher, after reporting Wednesday that it owned 10.26 per cent of the company's shares as at Dec. 31. The activist hedge fund has said it is a significant senior holder of Connacher's long-term debt, though it hasn't disclosed how much.

Without revealing a price for the takeover proposal, Connacher decided not to pursue the buyout offer in favour of the joint venture process it then suspended last week.

Connacher has about 500 million barrels of proved and probable reserves on its Great Divide oilsands leases and is producing from two in situ projects. The company has conventional oil and gas properties in Alberta and a small oil refinery in Montana. Connacher exited 2011 with roughly 14,000 barrels per day of production.

rpenty@calgaryherald.com

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