Cation Capital targets Crescent Point’s ‘inability to compete’ in board battle
Cation Capital, a private investment firm, plans to nominate four directors at the upcoming annual meeting of Calgary-based Crescent Point Energy Corp., part of its plan to bring “focused leadership with a refreshed board” to the underperforming oil and gas company.
Cation is led by Sandy Edmonstone, a former Macquarie Capital Markets investment banker who, along with others, played a pivotal role in ensuring debenture holders of Twin Butte Energy received full value when that company entered receivership in 2016.
His firm made its intentions toward Crescent Point known Monday, a few days after it sent a letter to the company and after meeting with some directors.
“Crescent Point has great assets, high netbacks and realizes high prices, and, in our opinion, there is a unique opportunity to unlock shareholder value,” Edmonstone said in an interview Monday. “They are promoting a lot of value but are not capturing it,” he said, noting the stock trades at lower multiples relative to its peer group and to its net asset value. (The NAV is $24.44; the stock trades at around $9.50.)
And that huge discount, which translates into a high cost of capital and makes acquisitions difficult, has emerged relatively recently. “It used to have a low cost of capital, and trade at a high EBITDA multiple, but it has lost that,” said Edmonstone.
As a result, he said, Crescent Point has “an inability to compete,” adding there’s also “considerable shareholder dissatisfaction with the board.”
Cation has proposed four nominees, two of whom, Dallas Howe and Herbert Pinder, are experienced directors. The other two, Edmonstone and Tom Budd, are former investment bankers. Howe was the former chair of the Potash Corp. of Saskatchewan; Pinder is a director of Arc Resources while Budd was the rainmaker at GMP Securities until he retired in 2008. (Budd, Pinder and Edmonstone worked together in 2014 when an activist moved on Renegade Petroleum.)
If elected, the plan would be to assess operations, governance and management, while exploring debt reduction initiatives and determining if the dividend-plus-growth model is sustainable. “We would be pushing that agenda,” said Edmonstone.
Despite the credentials and experience of the four nominees, Crescent Point said Cation, “lacks credibility and is engaged in an ill conceived and self serving exercise.”
But the four nominees have skin in the game: they own 0.3 per cent of Crescent Point, more than twice the stake held by the company’s non-employee directors. According to the circular, the latter group owns 703,143 shares, of which the chairman Peter Bannister owns 568,750 (or more than 80 per cent.) Bannister has been a director since 2003 and chairman since 2005.
As for executive compensation, all of the company’s five named executive officers received 17 per cent more in 2017 than they did in 2016; meanwhile its total return was down by 46 per cent. “How does the board gets its mind around increasing NEO compensation with that type of share performance?” asked Edmonstone, when referring to the company’s “unwarranted and undeserved” plan to introduce an “essentially risk free” option plan for executives and senior management.
That plan, which requires shareholder approval, could see 13 million options granted. (Already 2.988 million options have been granted at $10.06. While $10.06 was the market price at the time of the grant, it’s in a range the shares haven’t traded at since it went public in 2001)
As for reaction, RBC in a note said while CPG activism has been talked about for years “this is one of the first public efforts we have seen; Cation is not currently a well know firm but we expect that a view to renew the board would be favorably received by investors.”