KELT EXPLORATION’S CHIEF FINANCIAL OFFICER IS AN EXPERT AT PLAYING THE LONG GAME – AND HELPING HIS SHAREHOLDERS WIN BIG IN THE END
Right now, most companies are spending more time trying to stay afloat than preparing for the next time they’ll be able to soar. But Kelt Exploration is one of the few that’s thinking ahead, and that’s a direct result of its longtime chief financial officer Sadiq Lalani. Take the company’s acquisition of Artek Exploration completed last April, one that saw Kelt take out its Montney neighbor in an all-share deal that valued Artek at $307 million, inclusive of debt. There were some obvious synergies between the two companies that made the deal a good one for Kelt, most notably the fact that they shared a joint venture in the Montney that was producing some very promising well results. “We were afraid that if these Montney results actually sank into the marketplace, it might be difficult to buy Artek at a later date, even though commodity prices were still coming off,” Lalani says. “So we made the move and approached them, and we were able to get them engaged.”
Kelt also raised $90 million in a private placement in conjunction with the transaction, one that allowed it to take on the deal debt-free. But the telling detail in the transaction wasn’t in the top line terms but instead the way it was structured. “The easy thing to do would have been to amalgamate Artek into Kelt and have everything run under Kelt,” Lalani says. “But we didn’t – we kept Artek as a wholly owned subsidiary, changed the name to Kelt Exploration LNG, and moved all of Kelt’s assets into this subsidiary and took all of the Alberta assets out of Artek and put them into Kelt.” The reason? Kelt Exploration LNG now has its own tax pools, its own financial statements and will run with its own set of books, a decision that makes it much easier for Kelt to sell those assets should somebody take an interest in them down the road. “If we had done it the other way and somebody offered us a big amount for our B.C. assets it would have created a tax liability [for Kelt]. But now, that same person can come in and buy Kelt LNG, and because we have a cost base in Kelt LNG shares, our proceeds will be a capital gain based on that.”
That sort of foresight is typical for Lalani. Back in 2008, when he was the CFO of Celtic Exploration and oil was trading at $140 per barrel, most of his peers were dreaming about the upside they thought lay ahead. Celtic, on the other hand, locked in some major hedges for calendar 2009. By March, oil was at $35 a barrel, and those hedges were worth $40 million. “We kept the hedge on, took the proceeds of that hedge and started acquiring land at a fraction of the price that you would normally have paid in that July 2008 period.” But while that seems like a no-brainer in retrospect, Lalani says that being the CFO of a publicly traded company means having to defend those sorts of proactive decisions. “In the last two years of Celtic’s life, we sacrificed production growth to grow the land base. And it was really that land base that attracted Exxon.”
That attraction eventually led to a $3.1-billion takeover offer from the supermajor, one that rewarded Celtic shareholders handsomely for the patience and discipline their management team had shown. But those qualities aren’t always appreciated by investors, Lalani says. “You have to make tough calls like that, and these are tough calls to make when you’re a publicly traded company because you’ve got investors to answer to.” He says he received his fair share of those phone calls back when oil was trading over $100 a barrel and Kelt was still keeping its powder conspicuously dry. “I had institutional investors from the United States tell me that we weren’t using our balance sheet correctly, and that we needed to have more debt because it was a cheaper cost of capital. Good thing I didn’t take their advice.” No kidding. As the recent downturn has demonstrated, the companies that get too levered up in the good times are the ones most likely to crash and burn in the bad ones.
Kelt, Lalani says, isn’t going to be one of them. “This is the perfect market for Kelt – right now.