Twin Peaks – then Crashes

TWIN Butte En­ergy, one of Al­berta’s most in­no­va­tive small­cap oil pro­duc­ers, went from A nearly $900-mil­lion mar­ket cap to bank­ruptcy for one rea­son: def­er­ence to its share­hold­ers

Alberta Venture - - Contents - By Rob­bie Jef­frey

Twin Butte En­ergy, one of Al­berta’s most in­no­va­tive small-cap oil pro­duc­ers, went from nearly a $900-mil­lion mar­ket cap to bank­ruptcy for one rea­son: def­er­ence to its share­hold­ers

The end was near for Twin Butte En­ergy. It was June 2016, the con­clu­sion of a pro­longed ­com­mod­ity rout – the price of WTI had briefly sur­passed $50 – and a group made up of Hong Kong-based Reign­wood Re­sources and the Cana­dian Hori­zon Hold­ing Group was pre­par­ing to buy the be­lea­guered ju­nior pro­ducer. Twin Butte’s bankers had given it one credit line ex­ten­sion after an­other to keep search­ing for a buyer – some as short as a day, Bloomberg News re­ported – to no avail. By the end of the year’s first quar­ter, it was $294 mil­lion in debt. On June 23, it de­faulted on pay­ments. The next day, not a mo­ment too soon, it an­nounced the agree­ment with Reign­wood and Hori­zon. But the deal wasn’t to pass un­chal­lenged.

Twin Butte had once been a dar­ling of the sec­tor. Backed by in­dus­try vet­er­ans like Jim Saun­ders, David Fitz­patrick and Jim Brown, it had a mar­ket cap of al­most $900 mil­lion be­fore the first tremors of the down­turn. It was fre­quently praised for in­tro­duc­ing a div­i­dend to gar­ner in­ter­est from share­hold­ers – some­thing un­prece­dented for a com­pany of Twin Butte’s mod­est stature. Ju­niors don’t usu­ally raise cash through the public mar­kets; the long pay­off hori­zon and cap­i­tal­in­ten­sive projects aren’t suited for the haste of com­mon share­hold­ers. But Twin Butte had found a new way, and, to the de­light of share­hold­ers, it paid div­i­dends. But, just over a year later, stand­ing amid the wreck­age of the oil crash, its mar­ket cap had plunged to $16 mil­lion. Its fi­nal quar­terly re­port showed its share price had dropped by more than 600 per cent com­pared to the year prior.

Chief ex­ec­u­tive Rob Woll­man called the Reign­wood-Hori­zon ar­range­ment “the best al­ter­na­tive avail­able.” But there was a snag. In life, Twin Butte had made its name by charm­ing share­hold­ers; now, in death, it was do­ing the same, to the ire of the in­vestors who held a stake in the com­pany’s debt. The deal would see com­mon share­hold­ers get six cents per share while the deben­ture hold­ers, with their $85 mil­lion in con­vert­ible debt, would re­ceive 14 per cent of face value, re­sult­ing in $21 mil­lion go­ing to the share­hold­ers and just $12 mil­lion to the debt hold­ers.

Al­most im­me­di­ately, an­a­lysts ex­pected the deben­ture hold­ers to re­ject it – not only be­cause the deal would see debt hold­ers, in a higher se­cu­rity class, re­ceive less than the com­mon share­hold­ers, but be­cause it’d set a prece­dent that ig­nored the typ­i­cal hi­er­ar­chy of pay­ment. And the deal needed the sup­port of two-thirds of deben­ture hold­ers to pass.

Deben­ture hold­ers in­sisted that Twin Butte could come up with a bet­ter deal. Some called for a new auc­tion process to de­ter­mine the price of the com­pany’s as­sets, and said that since the price of oil had risen (Western Cana­dian Se­lect had in­creased by al­most $10 per bar­rel since the strate­gic re­view process), so too should the ask­ing price. Martin Hast­ings, who held about $250,000 in con­vert­ible deben­tures, wrote a let­ter to an­a­lysts that was later pub­lished in the Fi­nan­cial Post: “Given the pas­sage of time, the Reign­wood of­fer is now stale-dated,” he said, adding de­spair­ingly, “It ap­pears that [man­age­ment and board] will at­tempt to struc­ture a deal that fur­thers their own in­ter­ests at the ex­pense of the proper, pri­or­i­tized in­ter­ests of Twin Butte’s se­cu­rity hold­ers.”

Soon, a se­nior group of deben­ture hold­ers went rogue and formed the Ad Hoc Group to pro­pose a new agree­ment. On Au­gust 29, with Twin Butte star­ing down bank­ruptcy, the Ad Hoc Group held a meet­ing with Twin Butte share­hold­ers where it sub­mit­ted an al­ter­na­tive pro­posal, one that would put it on equal foot­ing with eq­uity hold­ers. The idea was to con­vert the debt to eq­uity at the six cents per share bid price, but it was re­jected. When it came time to vote on the ar­range­ment, 78 per cent of com­mon share­hold­ers were in favour. Just 32 per cent of deben­ture hold­ers were. Twin Butte sought pro­tec­tion un­der the Bank­ruptcy In­sol­vency Act, and its cred­i­tors de­manded the re­pay­ment of more than $200 mil­lion. The Ad Hoc Group pro­posed that Twin Butte seek pro­tec­tion from the Com­pa­nies’ Cred­i­tors Ar­range­ment Act in­stead; that, too, went un­heeded.

Twin Butte’s se­nior man­age­ment re­fused to com­ment for this story. On the con­di­tion of anonymity, Al­berta Ven­ture spoke to some­one in­volved with >

the Ad Hoc Group. “There were in­sti­tu­tional deben­ture hold­ers who said, ‘Lis­ten, un­der no cir­cum­stance can we al­low this to hap­pen,’ ” said the source, who couldn’t com­ment on why the Ad Hoc Group’s pro­posal was re­jected. “If we al­low this to hap­pen, then there’s prece­dent set for eq­uity hold­ers to get more than [deben­ture hold­ers] in liq­ui­da­tion, and we’re not do­ing that.”

What’s strik­ing is that the Reign­woodHori­zon deal was sim­i­lar to an­other that Mac­quarie Cap­i­tal Mar­kets, the firm hired by the Ad Hoc Group, had re­cently un­der­taken. The sale of Long Run Ex­plo­ration, in late 2015, was not so dif­fer­ent an ar­range­ment: a Chi­nese-owned com­pany, Si­noen­ergy Pa­cific, ac­quired Long Run, a Cal­gary-based en­ergy firm sim­i­lar in size to Twin Butte. After a fair­ness opin­ion spurred by con­cern from the deben­ture hold­ers, Mac­quarie helped Long Run reach an of­fer that was fair to both com­mon share­hold­ers and debt hold­ers, and the ar­range­ment was billed a “Christ­mas mir­a­cle.” The law firm that acted for Long Run, Bur­net Duck­worth & Palmer, was the same law firm act­ing the Reign­wood deal, so it pre­sum­ably un­der­stood the im­per­a­tive to reach an eq­ui­table agree­ment be­tween hold­ers of the two se­cu­rity classes. But in the case of Twin Butte, there was no such fair­ness opin­ion. In the ab­sence of a third way, the com­pany went bank­rupt.

“We were not pre­pared to come to a res­o­lu­tion that saw eq­uity hold­ers get more than the deben­ture hold­ers, and bank­ruptcy was the pre­ferred al­ter­na­tive to that al­ter­na­tive,” the source said. “We made that clear.” There’s a kind of po­etry to the col­lapse of Twin Butte En­ergy, in­so­far as one cause of its pop­u­lar­ity – ap­peal­ing to com­mon share­hold­ers – ul­ti­mately blinded it to por­tents of its down­fall. But there’s cer­tainly no po­etic justice, only a lot of cred­i­tors hop­ing to get some shred of their in­vest­ment back.

“If we al­low this to hap­pen, then there’s prece­dent set for eq­uity hold­ers to get more than [deben­ture hold­ers] in liq­ui­da­tion, and we’re not do­ing that.”

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