By Scott Jeffrey
When times are good, it’s easy to spend money, to go into debt, because the price of oil is always going to go up, you’ll always pay off your debt, and you’ll be forever growing your company, to the delight of your shareholders and the entire investment community.
However, when times are bad, as they have been for the past four years, a company with lots of debt and not enough cashflow to pay the interest, let alone pay down the principal, is cast in a less heroic light.
In simple accounting terms, which is about what I understand, your balance sheet is highly leveraged, because your income is far exceeded by your outgo.
That is when a company must take a hard look at itself, see its asset base for the bloated half-dead beast that is, and make some hard choices. This is also where the executive team start to earn its money, instead of blindly doing business as usual. In companies that have decided to fight to survive, instead of just taking a paycheque, their new favourite word has to be “de-leveraging.”
Two companies that have cast their hubris aside, and have decided to make the hard decisions which will give them a better chance of survival, are Pengrowth and Cenovus. I’m not recommending either of them as a buy, but it is possible to recognize that they understand that some assets must be sold to save the company. Former bad decisions need to be recognized, and an attempt made to reverse those decisions and return to stability, if not profitability.
Pengrowth’s Stampede parties used to be legendary, held at the house of former President Jim Kinnear, and it seemed as if the party would never end. In 2006, the stock reached a peak of $27.25, and then the unthinkable happened in the meltdowns of 2008 and 2013. Just last year the stock tanked at $0.66, and the writing was on the wall — sell something or drop out of sight.
Pengrowth leadership went to work, and in just under a year, the company made four deals, sold about $800 million in assets, and went a long way toward de-leveraging its balance sheet. These bold moves began to catch the attention of the investment community, and just recently Seymour Schulich increased his stake in the company from 19 to 24 per cent, which doubled the price of the stock.
Cenovus had different problem, in that it took on a massive chunk of debt to acquire ConocoPhillips’ $17.7 billion oilsands stake. The company floated a $3.6 billion bridge loan to help pay for the purchase, and it was killing them. The decision was then made to sell two properties for almost $1.5 billion, drastically reducing the company’s indebtedness. While not out of the bush yet, again this move was seen in a favourable light.
Cenovus’ leadership might have been criticized for its big buy, but they have at least made a move to bring the company back into favour with the investor. From a high of $39.64 in 2012 to a low of $8.89, the company has a way to go, but it at least seems to know the way.
As with Pengrowth, they can claim to be de-leveraging their balance sheet.
These two public entities are just a small sampling of the hundreds of companies in our industry who have acted prudently after taking many hits in the past decade. Most of them would admit that greed coupled with a boom mentality led to grief for their companies, but many have acted to curb that tendency, making some hard decisions, and the majority will survive.
Those that will not survive are those who have lost their way, who are simply playing out their string, taking big salaries while presiding over the demise of once favoured companies. There are many examples of this type as well, and once again the stockholder will be the one to suffer.
Of course, there is plenty of greed to go around. Nobody held a gun to our head when we bought stocks in companies that have gone, or will go bust. What the shareholder does have a right to expect though, is honest management making an honest effort to pull its respective companies out of the morass, regardless of where the blame lies.
We all make mistakes, but it is necessary to acknowledge the error, identify how to fix it, and employ best efforts to ensure the long-term viability of the affected company. No one can expect more. And please use the word “de-leveraging” more often. As awkward as it is, it is music to most investor’s ears.
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