Oil pain fuels a dynasty feud
Calgary luminaries
Besides their economic implications, oil downturns come with an ugly personal side, fuelling conflict over how to spread, manage or offload the hurt. The latest feud involves two well-known oilpatch names: long-time oil entrepreneur John Wright and restless hedge fund manager Zachary George.
George’s FrontFour Capital Corp. is suing Lightstream Resources Ltd., a struggling light oil company where Wright is the president and CEO, for cutting George out of a private debt deal.
To add insult to injury, FrontFour — where George, the founder and manager, is the son of former Suncor Energy Inc. CEO Rick George — claims Lightstream timed the debt deal’s announcement to land just before the Calgary Stampede, when no one in Alberta would have been paying attention.
“The July 2 press release came as a total surprise to FrontFour, which had previously not been notified of the transaction,” the Greenwich, Conn.-based hedge fund said in a statement of claim filed July 9 at the Alberta Court of Queen’s Bench in Calgary.
“The company’s announcement of the proposed refinancing transaction shortly before the national Fourth of July holiday in the United States and the Calgary Stampede in Alberta demonstrates the company’s apparent calculated timing, the purpose of which was to attempt to execute the proposed refinancing transaction without considered attention or scrutiny from affected unsecured noteholders not party to the transaction.”
Lightstream and George did not respond to requests for comment Tuesday.
At issue is a debt swap with unnamed private parties that involved Lightstream trading US$465 million of its US$800 million in bonds for US$395 million in new notes, lowering its overall debt burden and interest rate.
The deal also provided Lightstream with US$200 million in new notes for cash. The mid-sized, Calgary-based producer focuses on light oil in the Bakken and Cardium resource plays in Saskatchewan and Alberta. RBC Capital Markets advised on the deal.
In a July 14 news release, Lightstream said the increased liquidity would provide “financial flexibility to help withstand the current low-price commodity environment and gives us optionality to accelerate our drilling program should current economic conditions improve.”
But the debt swap left out investors holding US$335 million in bonds — including US$31.7 million held by FrontFour, which are now subordinated to the new offering. FrontFour claims the deal breaches the bonds terms. The excluded bonds were downgraded by Moody’s Investors Service.
FrontFour acquired the bonds between February and March this year, when most still hoped oil prices would rebound quickly.
FrontFour claims it lost at least $4.5 million as a result of the deal and is seeking an injunction to keep it from going ahead, or to be included on the same terms.
“The proposed refinancing transaction would create a scenario in which unsecured noteholders not party to it will arbitrarily, oppressively and prejudicially see the value of their debt significantly downgraded, and their exposure to loss in an event of default greatly increased,” FrontFour said in the claim.
The younger George, 37, a co-founder and portfolio manager at the US$ 500million fund based in Connecticut, with an affiliate in Toronto, has been making a name for himself as an oilpatch raider.
In April, Front Four tried to strongarm Legacy Oil + Gas Inc. into giving it three seats on its board, after accumulating 6.8% of its shares.
In the end it was outmanoeuvred by Crescent Point Energy Corp., the voracious acquisitor run by Scott Saxberg that has been filling its boots with companies in distress. Crescent Point purchased Legacy in July for $1.53 billion, despite FrontFour’s objections.
Last year, Front Four lost a very public fight to nominate four directors at Calgarybased Renegade Petroleum Ltd., after accusing its board of fumbling “almost every single strategic decision put before them.” The tussle was supported by Rick George’s own Novo Investment Group.
FrontFour also holds more than 10 per cent of the shares of Rock Energy Inc.
Hedge funds like FrontFour have been very active in this downturn, which has already produced a long list of train wrecks and bankruptcies.
Yet the pain — or opportunity, for those hoping to profit from bargains — seems far from over, as shown by the share prices of names like Athabasca Oil Corp. and Penn West Petroleum Co. that are hovering barely above zero.
Will see the value of their debt downgraded and their exposure to loss increased