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
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.”