Perpetual Energy Inc. shares plunged as much as 20 per cent Tuesday after the trustee of an insolvent natural gas producer launched a lawsuit in an unprecedented bid to void a two-year-old asset sale on grounds that Perpetual and its chief executive officer knew the deal would sink the buyer.
Shares of Perpetual fetched 52 cents in midmorning trading on the Toronto Stock Exchange.
“While the claim may or may not have merit, it will likely consume company resources including management's time and legal fees,” Royal Bank of Canada analyst Shailender Randhawa said in a note.
The case raises questions about just how risky asset transactions can be and who is responsible when financially shaky companies are unable to fund the eventual cleanup of old wells, pipelines and other facilities.
Sequoia Resources Corp.'s bankruptcy trustee is seeking damages of $217-million as an alternative if it fails to convince a judge to annul the 2016 sale of Alberta gas wells to Sequoia. The natural gas producer, which was backed by Chinese investors, acquired about three-quarters of its gas wells from Perpetual for a “nominal” sum, but it took on liabilities related to the future cleanup of sapped wells that Perpetual pegged at $133.6-million. Sequoia filed for bankruptcy protection in early March.
PricewaterhouseCoopers, the trustee, names Perpetual, its subsidiaries and its CEO, Susan Riddell Rose, as defendants in the action, filed in a Calgary court last week. It alleges Ms. Riddell Rose failed to act in good faith when she engineered the sale of a subsidiary called Perpetual Energy Operating Corp. (PEOC), later renamed Sequoia.
According to the statement of claim, Ms. Riddell Rose knew Sequoia’s predecessor – PEOC – would be unable to fund the high liabilities associated with the assets and that the deal would render it insolvent. In addition, the suit claims that she would benefit personally from the deal as Perpetual got rid of the liabilities on its own books.
Last May, Ms. Riddell Rose touted the transaction with Sequoia as pivotal because it relieved Perpetual of major cleanup obligations and enabled the company to redeploy funds to more profitable assets. In an interview at the time, she said she saw no reason why the deal would be challenged and rejected the idea that Perpetual was dumping environmental liabilities.
“I completely disagree that there was any wrongdoing and I’m not concerned about a risk in that assessment when all of the facts are there,” she said at the time.
Perpetual said it believes it is being unfairly targeted and that the claim is without merit. In a statement, the company said it has hired advisers and plans to defend itself vigorously.
“In light of Sequoia’s bankruptcy, coupled with recent industry participant and government and regulatory initiatives relating to the Alberta orphan well fund, the claim appears to be an opportunistic and tactical attempt to pass Sequoia’s future asset retirement obligations relating to the shallow gas properties on to Perpetual and related parties,” the company said.
Ms. Riddell Rose has a 4.8-per-cent stake in Perpetual, according to Bloomberg. Perpetual Chairman Clayton Riddell, who is Ms. Riddell Rose’s father, owns 41.7 per cent of the company, which currently has a market capitalization of just less than $40-million. The claims have not been proven in court.
This is believed to be the first attempt by a bankruptcy trustee in Alberta to have a previous oil and gas transaction unwound. The action has the potential to introduce major new risks to the industry’s ability to buy and sell assets and could also deliver a severe blow to Perpetual.
Sequoia’s creditors include its former principals, other oil companies, suppliers and municipal governments. By far the biggest creditor is the Alberta Energy Regulator (AER), which is currently on the hook for $225-million to decommission Sequoia’s sites.
Sequoia, led by directors Wentao Yang and Hao Wang, had acquired 3,200 shallow gas wells, with the aim decommissioning them as they were depleted, using cash flow from the producing wells. However, gas prices tumbled and the company was unable to meet its obligations. The AER has come under criticism for signing off on some similar acquisitions, when the buyer did not meet the regulator’s requirements for financial wherewithal.
Indeed, Canadian Natural Resources Ltd., the country’s biggest oil and gas producer, has pushed the regulator to block some asset deals where liability risks are too high. Canadian Natural is listed among Sequoia’s creditors and is also the largest contributor to an industry-funded program to clean up so-called “orphan wells,” in which there is no longer a solvent operator.
However, the Perpetual deal was structured as a purchase of shares, which avoided closer scrutiny from the regulator.
Jeffrey Jones