Orange eyes energy market
Industry ripe for activism, CEO says
Some of it is the weak gas markets. Some of it is self-inflicted DANIEL LEWIS, CEO OF ORANGE CAPITAL LLC
Daniel Lewis, aware of the image some Canadians may have of New York hedge fund managers, refused to pose for a photo with his arms crossed because it’s not the tough-guy impression he wants to leave.
“If you’re a New York hedge fund, people will make certain assumptions about what sort of person you are and how you conduct business,” Lewis, the managing partner and co-founder of OrangeCapitalLLC, said in an interview.
That doesn’t mean Orange Capital, with more than $1 billion in assets under management, shies away from a fight. Lewis has become one of the most-active investors in Canada this year, a market he says is ripe for share-boosting shakeups, especially in the energy and real estate industries.
“Anytime you are looking at a market that has fewer players and less research, there’s bound to be more inefficiencies,” said Lewis, who is pushing for a turnaround at Bellatrix Exploration, which has lost 34 per cent of its value since early May. Orange has amassed a 7.4 per cent stake in the Calgary-based oil explorer since July, according to data compiled by Bloomberg.
Lewis joins U.S. investor Carl Icahn at Talisman Energy Inc. in targeting Canadian energy companies, whose 21 per cent gain on the Standard & Poor’s/TSX Energy Index over the past five years has trailed the 65 per cent rise in the S&P 500 Energy Sector index.
Daniel Loeb’s Third Point has also built a stake at TransCanada Corp., the country’s second-largest pipeline operator, along with other U.S. hedge funds who are reviewing the company for possible breakup, according to two people familiar with the matter.
Troy Winsor, manager of Bellatrix investor relations, declined to comment on Orange’s stake.
TransCanada’s current corporate structure is the “right one” for the company, spokesman Shawn Howard said in a phone interview, reiterating a statement from last week and adding the pipeline operator doesn’t comment on its shareholders.
In the past year, Orange Capital has led campaigns in Canada at InnVest Real Estate Investment Trust, which counts Fairmont and Comfort Inn hotels in its portfolio, and has pushed for change at Partners REIT and Tuckamore Capital Manage- ment Inc. At Bellatrix, where Orange is now the biggest shareholder, Lewis said he’s pushing for board and management changes, and potentially a sell-off of assets.
“Some of it is the weak gas markets,” Lewis, 39, said. Natural gas traded on the New York Mercantile Exchange has averaged about $3.90 per million British thermal units over the past five years, after reaching almost $14 in 2008.
“Some of it is self-inflicted and particularly on the corporate-finance side.”
Missed output forecasts and the reduction of a share sale this year to $150 million from $250 million rattled investors, said Ken Li, a Calgarybased analyst at Paradigm Capital Inc. That concern was only elevated when the proceeds, which were meant for an acquisitions, weren’t utilized, he said.
Bellatrix fell 26 cents or 3.6 per cent to $6.87 in Toronto on Thursday. Lewis, a Buffalo, N.Y., native and the son of two school teachers, spent nine years in Citigroup Inc.’s special situations group prior to cofounding Orange Capital in 2005.
At Citigroup he played a role in virtually every major bankruptcy the bank was involved in, including WorldCom Inc., he said.
When Lewis was thinking of leaving the bank, his partner Russell Hoffman, nicknamed their plans to start a hedge fund “Project Orange” in reference to Lewis’ hair colour. It stuck when they launched with less than $100 million.
Lewis said his preferred method of investing is not to become an activist at all, pointing to his passive holdings in Amaya Gaming Group Inc., which ac
quired PokerStars for $4.9 billion in June, creating the largest publicly held gaming company in the world. Amaya is the best-performing stock on the S&P/TSX Composite index this year with a 326 per cent gain.
Sometimes he has to take a more active stance, Lewis said, adding he sees plenty of opportunity in Canada.
“The energy space has some real deep discounts at this stage,” he said. “Real estate, from time to time, has traded at a pretty interesting price as well. It’s really a value-driven approach.”
The hurdle that many hedge funds face in Calgary is that there aren’t a lot of easy fixes for some energy companies, Li said.
So-called junior companies have little trouble growing in the early stages of development, then eventually run into troubles when they grow in size and scale, he said.
“The thing with any activist investor coming into the Canadian space, especially a U.S. guy, is there needs to be an alternative,” he said. “Either an alternative management that is already there on the sidelines waiting or something in terms of an acquisition or transaction.”