MEG Energy CEO steps down, raising questions about direction of company

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Bill McCaffrey is stepping down as chief executive officer of MEG Energy Corp. after 19 years at the helm, raising questions about the direction of one of the last pure-play oil sands producers.

MEG’s boss and co-founder is departing after the company emerged from a major cost-cutting exercise to deal with the slump that took a heavy toll on the industry.

MEG says it has endured the worst of the downturn, and has a strategy in place to boost production, though its shares remain under pressure.

Despite Mr. McCaffrey’s lengthy tenure, MEG does not have a full-time successor ready for the job. It said director Harvey Doerr will step in as interim CEO while the company conducts a search.

That led some investors to speculate that MEG could be headed for a sale, though vice-president John Rogers said no would-be buyers had approached the company, which is known for its Christina Lake bitumen project south of Fort McMurray, Alta. Given the sector’s current struggles, a list of potential bidders is likely short.

“I can honestly say we’ve never been approached. Our view is we can actually add more value by implementing the strategy of taking us forward, even beyond 2020,” Mr. Rogers said. “The last thing, really, from an investor point of view, that they should want to happen is that event to take place because of the value creation that is available to the company.”

MEG, which stands for McCaffrey Energy Group, grew quickly in its first decade as oil prices climbed past US$100 a barrel. It dealt with the downturn by slashing capital spending and employing new recovery technology. It has also sold assets as a way to reduce its high debt. Earlier this year, it sold its interest in a regional pipeline for $1.6-billion, though leverage is still high at about $3-billion.

The stock remains out of favour amid concerns about its debt and overall prospects in an industry still dealing with delays in getting production to overseas markets that would offer better prices than those garnered in Canada and the United States. MEG shares fell about 0.3 per cent to $6.49 on the Toronto Stock Exchange on Monday. The stock has slumped 84 per cent from the summer of 2014, just as oil prices began to drop.

Oil sands deal-making has recently slowed to a halt. A host of foreign-owned companies have unloaded assets and recent buyers, such as Canadian Natural Resources Ltd. and Cenovus Energy Inc., are still digesting their purchases before considering new acquisitions, said Micahel Dunn, analyst at GMP FirstEnergy. Suncor Energy Inc. and Imperial Oil Ltd. round out the largest oil sands producer list, but he discount the odds of a deal.

The company also had a shift in its major investors, with Warburg Pincus, a backer since 2004, shedding about half its interest to give it a 5-per-cent stake, and Boston-based Highfields Capital Management LP. increasing its position to about 10 per cent. La Caisse de dépôt et placement du Québec is also a sizeable holder at 6.5 per cent as of Dec. 31.

“It does make you wonder what else is happening behind the scenes, said Laura Lau, senior portfolio manager at Brompton Funds. The private equity backers, a lot of them had been liquidating their positions. There could be something behind this as well. It feels rather disruptive."

The era of MEG’s initial public offering, in mid-2010, signaled a rebirth for Canada’s energy industry following the global financial crisis. Multiple producers and energy services companies went public in a short time span, including IPOs from Athabasca Oil Sands and Tourmaline Oil Corp. At $700-million, MEG’s stood out as one of the largest.

Its public offering was also structured in such a way that it provided riches to the executive team. The top five leaders had been collecting shares and stock options for years, and they had amassed immense value. The options that were worth the most, owned by Mr. McCaffrey and former chief financial officer Dale Hohm, could be exercised at $4.13 – and MEG went public at $35 per share.

At the end of 2010, the top five executives collectively held options worth $92-million.

MEG’s struggles were unusual as the company had a good asset and low costs. It was also already producing oil when it went public, which meant revenue was already coming in, and in 2012 the company’s debt was upgraded, in part because it had a favourable steam-oil ratio – a measure of how much it costs to get the oil out of the ground. For years, equity investors were happy to keep financing production growth.

But like so many resource companies before, and after, debt has been a problem for MEG. This burden weighed on the stock, and while the company kept funding expansion of its Christina Lake project, hoping that higher revenues would eventually help pay down the borrowed money, Mr. McCaffrey ran out of time to see this through before he retired.

Mr. McCaffrey will formally step down as CEO and director after the annual meeting on May 31, MEG said.