Company has experienced significant destruction of value even as the sector rebounds
Governance and compensation completely misaligned with shareholder interests
Company needs focused leadership with a refreshed Board committed to change
Cation’s independent nominees bring extensive leadership, strategic, capital markets and industry experience
CALGARY, Alberta–(BUSINESS WIRE)–Cation Capital Inc. (together with its affiliates and associates, “Cation Capital” or “Cation”), a private investment firm, today announced that on April 2, 2018 it delivered a letter to the Board of Directors (the “Board”) of Crescent Point Energy Corp (TSX/NYSE: CPG) (“Crescent Point” or “Company”), along with advance notice that it intends to nominate four highly qualified, independent candidates for election to the Board of Directors of Crescent Point Energy Corp. at the upcoming 2018 Annual General Meeting of Shareholders to be held on May 4, 2018. Shareholders of record as of March 22, 2018, are entitled to vote at this meeting.
Cation was compelled to take this action given the significant destruction of shareholder value and the abject failure of current leadership across all aspects of the company including, capital allocation, shareholder alignment and basic principles of good corporate governance. Cation has been in contact with a Special Committee of the Board of Directors to discuss these matters. Unfortunately, those discussions have failed to result in meaningful progress and as a result Cation has been required to publicize its efforts. Cation is prepared to continue discussions with a view to reaching a constructive solution that is in the best interests of the Company.
Sandy L. Edmonstone, President of Cation Capital, said, “We believe Crescent Point’s assets have tremendous long-term potential and the ability to create significant value for all shareholders. However, the current Board seems incapable of implementing a cohesive strategy to create value and has instead allowed irresponsible decisions such as over-spending its 2017 budget, increasing leverage, undertaking a significant unexpected equity financing, delaying dividend cuts and continuing excessive executive pay. All the while the Company’s share price has eroded substantially, its cost of capital has increased and the Company continues to lag its peers by virtually all relevant metrics.”
“The Company has had several years to fix investor concerns around management and corporate governance but has failed to do so. Shareholders have felt the brunt of the impact while executives are richly compensated. This pattern only gets worse, as recognized by recent media reports. Shareholders expect a Board and management team whose interests are aligned to be buying shares when a stock is hovering, over the course of the last year, near a 15 year low. Instead, the Company is asking shareholders to approve a grant of nearly 3 million options to management made in January, when the stock was only C$10.06 per share. With a corresponding exercise price, these options are essentially risk-free money – for management, at shareholders’ expense – that rewards insiders for decimating the share price.”
Mr. Edmonstone concluded, “The current Board needs to be held accountable for its decisions and changes need to be made to foster trust with shareholders and re-establish confidence in the Company. Our nominees have outstanding experience and are prepared to work with the rest of the Board, once elected, to bring forward our strategy that includes realignment initiatives aimed at improving capital allocation, reducing G&A, ensuring management compensation is performance-driven, and changing the culture at the company. We believe the opportunity at Crescent Point is unique, both in the amount of value that can be unlocked and how readily it can be achieved, and we look forward to engaging with all shareholders to share our view on how best to realize this potential.”
Cation Capital notes that the Crescent Point Board has presided over a company which has generated shareholder returns significantly below the overall market:
- Over the past five years the Board has led a company which has generated shareholder LOSSES amounting to approximately C$10.7 billion, among the worst in its peer group. As of April 6, 2018, the Company’s share price had declined by 76% and the dividend has seen a cumulative cut of 87%.
- Since January 1, 2015, WTI pricing has increased by 18% and the TSX Composite Index is up 3%. Over that same period, Crescent Point’s share price decreased by 67% while the TSX Energy Index has decreased by only 19%, evidencing that the issue is clearly specific to Crescent Point.
- All-in general and administrative costs remain among the highest in the Company’s peer group, despite dismal share price performance.
- The existing Board has overseen a strategy of spending Crescent Point’s capital on growing production without regard for shareholder return or leverage. This is demonstrated by higher debt/cash flow leverage than would have been historically acceptable to the Board. Further, the Company seemingly ignores the impact of debt in promoting its production per share growth: when accounting for debt, the Company’s compound annual growth rate for production is negative.
- Shareholders have lost confidence in the current leadership at Crescent Point for numerous reasons, including: executive compensation misaligned with shareholder returns, poorly targeted and ill-timed acquisitions, surprise equity offerings without regard for dilution and mixed messaging regarding dividend cuts.
- As a result, the Company has gone from enjoying a premium valuation to having one of the lowest valuations of all publicly traded oil producers in Canada. Ultimately, this impedes the Company from competing and providing shareholders with superior risk-adjusted returns.
Cation believes that a change in strategy – to one that refocuses the Company on its core competencies – is needed to unlock shareholder value, and a refreshed board is necessary to set and execute the new strategy.
Cation’s nominees for election to the Board will include:
- Dallas J. Howe. Mr. Howe is the former Chairman of the Board of Potash Corporation of Saskatchewan Inc. He also is a former director and Chair of the Compensation Committee of Viterra Inc., a Canadian agribusiness built on the foundation of Saskatchewan Wheat Pool Inc. and Agricore United. Mr. Howe has served on and chaired Corporate Governance and Nominating, Audit and Compensation committees in the private, public and not-for-profit sectors. Mr. Howe has been the recipient of many achievements including, in 2009 being made an ICD Fellow by the Institute of Corporate Directors. In his role as Chair of Potash Corporation Mr. Howe was instrumental in thwarting the hostile bid initiated by BHP Billiton. In his position at Viterra, Mr. Howe oversaw the acquisition of Viterra by Glencore International plc.
- Herbert C. Pinder. Mr. Pinder brings to the board significant board experience including corporate governance expertise. Mr. Pinder has served on more than 40 public, private, not-for-profit and crown boards with a focus on the energy sector. Mr. Pinder currently serves as a director of ARC Resources Ltd. where he is the Chair of the Policy and Board Governance Committee and is Chairman of the board of directors of Astra Oil Corp. Mr. Pinder also served as a director of Renegade Petroleum Ltd. from April 2013 to March 2014 during which time Renegade successfully repelled a leading energy activist fund in a proxy contest seeking to replace the entire board.
- Thomas A. Budd. Mr. Budd is the President of Focus Advisory Corp. and an independent businessman. Mr. Budd has extensive experience providing mergers, acquisitions and financial advice on a significant number of Canadian oil and gas transactions. Most recently, Mr. Budd served as President and Vice Chairman, Head of Investment Banking at GMP Corp. and Griffiths McBurney Canada Corp. from April 1996 until 2008. Mr. Budd also served as a director of Renegade Petroleum Ltd. from April 2013 to March 2014 and was the Chair of Renegade and a member of its special committee during a proxy contest in which Renegade successfully repelled a leading energy activist fund seeking to replace the entire board.
- Sandy L. Edmonstone. Mr. Edmonstone is the President of Cation Capital Inc. Mr. Edmonstone was previously Executive Director and Deputy Head of Global Oil & Gas within the Macquarie Group, where he oversaw global energy platform operations. Mr. Edmonstone has advised on a variety of merger and acquisitions, asset dispositions, restructurings and shareholder-value maximization processes. Mr. Edmonstone has been involved in mandates specifically focused on securityholder rights, ensuring securityholders receive maximum value for their investment. Recently, he led an investor initiative that resulted in approximately 500% additional consideration for securityholders than what the board had unanimously recommended. Mr. Edmonstone is also a graduate of the Institute of Corporate Directors’ Education Program, holding the ICD.D designation.
The full text of Cation’s letter to Crescent Point’s Board follows:
April 2, 2018
Board of Directors of Crescent Point Energy Corp.
suite 2000, 585 – 8th Avenue S.W.
Calgary, Alberta, T2P 1G1
Attention: Peter Bannister, Chairman
Dear Board Members,
The past few years have been extremely frustrating for shareholders of Crescent Point Energy Corp. (“Crescent Point” or the “Company”). Clearly, the strategy implemented to deal with the great oil crash of 2014 has been a failure, as evidenced by the Company’s shares trading at near ten-year lows, and there have been numerous missteps by the Company along the way. Criticism by shareholders over matters such as the delay in reducing the dividend, failure to adequately protect the Company’s balance sheet, poorly targeted and disappointing acquisitions, increased leverage and significant dilution via the $650 million surprise equity offering is fair and warranted. Despite all of this, shareholders have been patient and have provided the Company 18 months to restore the market’s confidence and re-establish Crescent Point’s cost of capital, but the Company has abjectly failed to produce acceptable results. In fact, the Company’s share price has continued lower.
As of today, the Company’s EV/2018E EBITDA multiple is near the bottom of all Canadian oil and gas producers and the value of Crescent Point shares have collapsed to a mere 45% of the new issue price of $19.30 in September 2016. These unacceptable results have occurred under the stewardship of the Board of Directors (the “Board”) and cannot be attributed in any meaningful way to the Canadian energy industry or commodity prices as all objective evidence suggests otherwise. During the same period, while the Company’s shares lost 55% of their value, the crude oil price index, the Company’s primarily produced commodity, has risen 37% and the TSX Energy Index has only decreased by 12%. The issue is clearly specific to Crescent Point and it appears that the Board has been unable to identify, yet alone cure, what the exact problems are.
Despite having a number of years to demonstrate progress towards improving the business, the Company continues to be plagued with deteriorating performance. Total capital expenditures for 2017 well exceeded the Company’s original guidance while actual average production was only 0.3% higher, all-in general and administrative costs including capitalized and share-based compensation costs are the highest in the Company’s peer group, proven plus probable finding and development costs have gone from $7.02/boe in 2016 to $21.64/boe in 2017, and operating costs have increased year over year. In addition, the Company has spent over $2.3 billion on acquisitions since 2015. Unfortunately, many of these investments have been misguided, poorly overseen, and, ultimately, some of these assets have been or are currently being divested. The per share growth figures promoted by the Company are misleading as they ignore the impact of the Company’s billions of dollars of debt in calculating its per share growth. If and when such debt is accounted for, per share growth is actually negative.
Notwithstanding poor corporate performance over recent years, remarkably executive compensation has ballooned, with an increase of 17% in total compensation since 2016. This has occurred while shareholders witnessed the value of their shares plunge 46% notwithstanding demonstrated shareholder dissatisfaction with matters related to executive compensation. The lack of alignment between executive compensation and shareholder returns is deeply troubling and emblematic of the overall lack of alignment of Crescent Point’s current leadership with its shareholders, with existing directors and officers owning just 0.6% of the common shares.
In spite of this, at the upcoming annual general meeting, the Company is seeking to further enrich its executive leadership by not only adopting a new equity compensation plan and ratifying grants made without shareholder approval (and, notably, made opportunistically with apparent urgency at share price lows). Additionally, the Company is increasing the number of shares eligible for issuance under the Company’s existing restricted share bonus plan. It is difficult to understand how it is appropriate to so richly reward a leadership team that has presided over the evisceration of shareholder value that has occurred at Crescent Point.
If nothing else, the results of the past three years should demonstrate to you that turning Crescent Point around will be extremely difficult. The status quo is not working. To have any chance of success, dramatically different thinking is required together with significant changes across all aspects of the business starting at the Board level. New leadership will have to develop and implement a plan to balance priorities between growth, return on capital and dividends. This will mean prioritizing and investing in certain parts of the business while at the same time slashing unnecessary costs, divesting unprofitable assets, rationalizing early stage exploration capital, and overhauling employee incentives and compensation programs to instill sound business behavior.
We are highly confident in the quality of Crescent Point’s asset base and depth of its drilling inventory. After extensive study and analysis, we believe the Company is severely undervalued and that there are readily available steps by which billions of dollars in value can be unlocked for shareholders. It is our belief there is a clear pathway to delivering material value to shareholders in a manner that strengthens the Company’s long-term prospects. While we regularly see companies trade at substantial discounts to the sum of their parts, we believe the opportunity at Crescent Point is unique, both in the amount of value that can be unlocked and how readily it can be achieved. As such, we are committed to taking the steps necessary to effect necessary change and realize the abundance of stranded value for the benefit of all shareholders.
Concurrently with the delivery of this letter, we are delivering a formal notice of our intent to nominate four directors at the Company’s upcoming annual general meeting in accordance with the Company’s Advance Notice By-Law. Our director nominees, Dallas J. Howe, Herbert C. Pinder, Thomas A. Budd and Sandy L. Edmonstone, hold, or exercise control or direction over, in the aggregate 1,478,772 common shares (representing 0.3% of the common shares, more than double the number of shares held by all of the existing independent directors) and have the expertise and commitment to realize on the value-enhancing changes required at Crescent Point.
If the Board is willing to embrace the need for significant change and pursue a strategy along the lines of what is discussed above, then we are hopeful we can work constructively together and make changes to the Board through a mutually agreeable resolution. This is clearly the desirable outcome.
In any case, the time for change at Crescent Point has come. In the absence of a mutually agreed resolution, on May 4, 2018 Crescent Point shareholders will have the choice between the status quo and the compelling vision and highly qualified candidates we offer.
Sandy L. Edmonstone
Cation Capital Inc.
Advisors and Counsel
Stikeman Elliott LLP is acting as Canadian legal counsel to Cation. D.F. King & Co has been engaged as proxy solicitation agent and Gagnier Communications has been engaged by Cation as communications consultant.
About Cation Capital Inc.
Cation Capital Inc., together with its affiliates and associates, is a private investment firm headquartered in Alberta, Canada. Cation invests in situations where it is able to influence operational, financial and strategic direction. Cation seeks value in companies that are experiencing financial or operational challenges, are in out of favour sectors or are otherwise in need of change to drive significant long-term value for stakeholders.
The information contained in this news release does not and is not meant to constitute a solicitation of a proxy within the meaning of applicable corporate and securities laws. Although Cation intends to nominate the proposed nominees for election at Crescent Point’s 2018 Annual General Meeting, Crescent Point shareholders are not being asked at this time to execute a proxy in favour of any matter, including the proposed nominees. In connection with Crescent Point’s 2018 Annual General Meeting, Cation may file a dissident information circular in due course in compliance with applicable corporate and securities laws.
D.F. King & Co
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