THE LEXIN SAGA
Inside a shuttered energy firm
As Lexin Resources Ltd. fought to fend off bankruptcy in the face of anxious creditors last year, a company official said the Calgary-based junior oil and gas firm was paying its debts — unless it disputed the amounts owed.
But disputes were piling up for Lexin, with workers growing increasingly concerned the company’s tight grip on the purse strings was beginning to undermine safety at its operations.
One contractor that claimed it had not been fully paid for maintenance work at Lexin’s sour gas plant northeast of High River later escalated its litigation by seeking to force the company’s subsidiaries into bankruptcy.
Michael Smith, then a director of a Lexin subsidiary, attempted to ward off the bankruptcy application in a sworn affidavit filed last spring. He argued the companies “continue to carry on their business in the ordinary course and pay their debts as they become due, provided there is not a bona fide commercial dispute.”
According to workers inside the plant, however, business was far from ordinary.
A Postmedia investigation offers a glimpse into months of chaos at Lexin’s gas plant at Mazeppa and in its Calgary headquarters leading up to the Alberta Energy Regulator’s unprecedented move last week to force the company into receivership.
Interviews with five former Lexin workers, court records and other sources reveal concerns about worker safety and environmental hazards that allegedly went largely unheeded for months, sometimes longer. The findings raise questions about the level of oversight the company received from government agencies.
The former workers spoke on condition of anonymity because they are either seeking, or plan to seek, some form of financial compensation they say the company owes them, including outstanding vacation pay and severance. But they maintain their motivation for speaking out is to shine a light on the company’s actions, not retaliation.
“We’re appalled that the company could do what they’ve done and get away with it,” one source said.
Lexin largely blames its troubles on the energy regulator, which it says charges “overbearing” fees and takes “severe” steps to collect them. It said the regulator ignored attempts to find a resolution to health and safety concerns.
But the regulator said the fees and levies it has attempted to recoup from the company are no different than what it charges the rest of the industry.
After Smith’s affidavit was filed last May, the crowd of creditors demanding payment from Lexin and its affiliates only continued to grow.
Many suppliers stopped doing business with the company because they weren’t paid for their work, former workers said. At one point, garbage began to pile up at the Mazeppa sour gas plant because the company stopped paying its waste collector, the sources said.
Maintenance spending at the plant waned, forcing workers to shut down equipment that became unsafe to run, they said.
Lexin also ran afoul of the province’s energy watchdog for failing to comply with a series of orders, including demands to clean up spills that could send potentially toxic substances into a nearby creek.
The regulator ultimately shuttered the company last month by suspending its more than 1,600 licences, saying it had lost confidence in the company’s ability to operate safely. It was the energy watchdog’s largest ever suspension order.
The closure, roughly seven months after Lexin threatened to walk away from responding to emergencies at its plant and pipelines, raised questions over why the Alberta Energy Regulator waited so long to take action.
The regulator said it escalated enforcement against the company and had to give it time to respond. But a former worker said Lexin officials were preparing to be shut down months before the watchdog issued the closure order.
“They thought it was comical that we were still being allowed to operate,” the source said.
Enforcement action against Lexin didn’t end there.
Last week, less than a year after Smith said in his affidavit that Lexin firms were paying debts as they came due, a Court of Queen’s Bench judge approved the regulator’s bid to force the company into receivership. Its sour gas plant and 1,400 wells will be put up for sale under the supervision of a courtappointed receiver.
The regulator said a receiver is necessary to oversee an orderly approach to creditor claims against Lexin and transfer its assets to “responsible” parties. “This is not our first choice,” it said.
Most of Lexin’s assets, including sour gas wells near Calgary city limits, were acquired from Compton Petroleum Corp. for $33 million in 2012.
Compton, which went public in 1996, was once among Calgary’s largest intermediate oil and gas producers. It declined in size over the years due to asset sales intended to improve its financial standing and what analysts have called management missteps.
The company attempted to sell itself in 2008 but failed to find an acceptable offer, helping to send its stock tumbling from $12.80 a share to $2.60 in four months.
In 2006, the company had earmarked $526 million for capital spending. Six years later, at the time of its sale to MFC Industrial Ltd., it was spending just $14 million to $16 million.
MFC Industrial, then based in New York, at the time of the sale said it had a record of spinning value out of troubled assets.
The parent company, now called MFC Bancorp Ltd., later changed its focus to become a merchant bank. Around the same time, the ownership structure of the southern Alberta oil and gas properties it had acquired became complex and opaque.
In late 2015, MFC Bancorp sold a controlling “economic interest” in these assets, listed as having no net asset value, to an undisclosed buyer, according to financial records.
But MFC Bancorp — a publicly traded Vancouver company with commercial headquarters in Austria — retained all of Lexin’s shares in a “fiduciary or trustee capacity,” meaning it remains the controlling registered shareholder, court records and company statements show.
An early sign of trouble under the new regime came in October, 2015, before the asset sale. The ownership group had decided to stop paying annual rents to landowners with Lexin wells on their properties, according to an email sent by a company official to a farmer in June, 2016.
“You are not the only landowner to be missing a payment,” the email read. “The ownership group decided to stop paying surface lease rentals around October of last year.”
The payments are designed to compensate property owners for wells on their land, but for hundreds of landowners the cheques stopped arriving.
“They have an office in Hong Kong that they want me to direct you to, but I am not going to do that because that will not get you anywhere,” the Lexin employee wrote. The email recommended the farmer contact the Surface Rights Board, which recovers unpaid compensation for oil and gas wells on private property.
“You will get the money much quicker this way than going through the ownership group and their runaround that they suggest,” the employee wrote.
The brief note provided the farmer with no explanation for her new-found source of frustration, but she wasn’t alone.
Dozens of Albertans who own rights to underground minerals realized throughout 2016 that Lexin wasn’t paying them royalties on its production anymore. In some cases, the company continued to produce — and collect revenue — for months without paying them royalties, said David Speirs, a director of the Freehold Owners Association.
Lexin also stopped paying its share of mineral taxes for many of its wells, Speirs said. The Alberta government sent out 80 letters warning the mineral rights holders — not the company — that they’d lose their oil and gas rights unless they paid the taxes in full, said Speirs.
“This just points to glaring deficiencies in the government of Alberta’s handling of these entire matters,” he said.
“They coerced freeholders into paying taxes for a foreign company that shouldn’t have been operating here,” he added, referring to problems with Lexin’s operations identified by the energy regulator.
According to the Alberta government, the mineral rights holders own the resource — not the company — and chose to enter into private contracts with industry on their own. When taxes came due, the rights holders were on the hook, the government said, adding it has no involvement in the private deals.
Lexin’s deals with contractors over a maintenance project at the Mazeppa gas plant in the fall of 2015 sparked disputes that ended up in court. Young EnergyServe Inc., which specializes in tank and vessel cleaning, filed a lawsuit against Lexin subsidiaries claiming it was paid only $7,000 from a nearly $1.7-million bill.
Smith, then a director of a Lexin subsidiary at the centre of the lawsuit, disputed the claim, arguing Young EnergyServe and eight other contractors submitted invoices for work that far exceeded approved amounts, by as much as 70 per cent.
After nearly a year of litigation, Young EnergyServe was successful in forcing two Lexin subsidiaries — LR Processing Partnership and LR Processing Ltd. — into bankruptcy in November. But the companies filed an appeal less than a week later.