Connacher Oil's strategy shift leaves shareholders fuming

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Investor anger is flaring against a small Calgary oil and gas company that unveiled dramatic changes this week contrary to the wishes of some shareholders.

Shares in Connacher Oil and Gas Ltd. plunged after the heavily indebted company announced on Wednesday it was firing a raft of senior executives, abandoning a search for joint-venture partners and boosting its spending plans. The news was met with selling, with Connacher down as much as 20 per cent Wednesday.

Shares bounced back Thursday amid expectations that activist shareholders will begin to shake things up. Indeed, some believe the company has set itself up for an imminent confrontation with investors, who had hoped it would pursue the exact opposite strategy: pare spending, pay down debt and seek either new partners or a sale.

It is a "complete and radical change in strategy from what the street was expecting," said Eric Nuttall, who runs an energy fund for Sprott Asset Management.

Analysts, too, attacked the plans, with Scotia Capital releasing a piece reacting to Connacher's announcement entitled: "The Ok, the Bad and the Ugly."

For its part, Connacher says it needs to spend more to grow, and is predicting a 15-per-cent increase in 2012 oil output, and more in 2013. Company chief executive officer Richard Gusella said in an interview that the announcements this week are part of "catalytic changes in order to accelerate the realization of our growth and objectives."

Yet it's not entirely clear how the company will get there. An expansion of the $37-million spending planned for 2012 has yet to be approved by the Connacher board. The company has $112-million in cash, plus another $98-million on a credit line, but must pay back $100-million in convertible debentures in June.

Connacher is among the most heavily leveraged in the entire oil patch – some believe it sits in top spot, with debt exceeding cash flow by 7.5 times. Its shares, which crested at $4 in 2008, have traded in penny-stock territory since last August, which has sparked demand for change.

Among Connacher's shareholders is Toronto's West Face Capital, which has been unafraid to publicly brawl with companies and has urged a "comprehensive review of strategic alternatives," language often used to describe a corporate sale. Several other investors have sent letters calling for an "outright sale" of the company.

Late last year, some shareholders worked to find their own leader to replace Mr. Gusella. One shareholder warned that "there's very strong investor activism that's going to be coming in the next couple weeks."

Many of those involved with the company – as shareholders and otherwise – are hoping they can still change it. That has made them reluctant to anger Connacher by speaking out publicly.

But privately, they have criticized Mr. Gusella's personal commitment to the company's well-being over his own.

They point out that on his 70th birthday Mr. Gusella is eligible for a $2-million payout and 400,000 stock options – irrespective of company performance. The CEO is now 67.

Mr. Gusella responded: "I work seven 12's, and I don't get the second week off." His "business ethics" are "impeccable," he said.

As for the departed executives – who have left a substantial gap in the company's technical leadership – Mr. Gusella said he "terminated" them because "they didn't fit into my plans moving forward." The company's board, he said, supported the move.

But there is little doubt that the changes represent a substantial shakeup. One of those fired, Peter Sametz, was named president in mid-2010 as part of the company's succession plans. Now that role has fallen back to Mr. Gusella, who said "that succession plan is off the table."

He added: "I'm looking at Freedom 85 now. I'm not planning to retire any time soon at all."