Yedlin: Oilpatch is witnessing changing of the guard

Posted: Nov. 09, 2012

By Deborah Yedlin

Oilpatch is witnessing changing of the guard

To say it’s been a week of transitions in the oilpatch might be a bit of an understatement.

It all started with the announcement by OSUM Oil Corp. (OSUM stands for Oilsands Underground Mining for those who are curious) that it had recruited former Suncor CEO, Rick George to be the chair of its board of directors.

It is quite a coup for OSUM, a privately-held oilsands player that counts some big private-equity players among its shareholders.

The second bit of news was the sudden departure of four senior executives from Penn West on Tuesday. That’s not the sort of thing seen very often in the business world and thus sent one very clear message: that the company’s board of directors had run out of patience.

The last transitional announcement for the week was the stepping down of John Dielwart as chief executive of ARC Resources. Of the three bits of news, Dielwart’s departure was least surprising – he has led the company since 2002, weathering the royalty trust and royalty review fiascos about which he was very vocal and growing the company’s production. ARC was producing 7,600 barrels (today it’s 10,000 boe/d under 6: 1 conversion) of oil equivalent per day when it went public in 1996, to one whose production reached 89,511 boe/d in the third quarter.

Over the past 18 years, the company has posted an 18.5 per cent annual return – assuming dividends and distributions were reinvested – versus the 7.92 per cent annual return of the S&P/TSX over the same time period.

As Dielwart pointed out on Thursday, of the energy companies that were listed in 1996 and still trade today, none has outperformed ARC Resources.

What’s interesting is that all this comes at a time of uncertainty in the energy sector as a whole – in the context of soft commodity prices, regulatory approvals, the treatment of foreign direct investment and market access. In addition, boards and CEOs remain under tremendous pressure to show results – as share prices, for the most part, have languished.

As a private company, OSUM doesn’t have to worry about share price performance. At least, not for now.

The fact George has joined OSUM’s board, however, suggests this just might be in the cards for a number of reasons.

As OSUM CEO Steve Spence said this week, George is someone who knows how to build a company – and at some point that will likely mean a need for capital though nothing is contemplated in the near future.

“At some point it (going public) will be the right thing to do, but there aren’t any immediate plans,” said Spence earlier this week.

That the OSUM board was interested in George taking on the position of chairman, shows the commitment to growing the company and realizing the value of the more than 400 million barrels of proven and probable reserves.

For Spence, having George agree to join the company was like landing the dream prom date. And to the outside world, his addition adds tremendous experience and institutional knowledge to what is already a very strong board of directors.

If OSUM landed a steady hand for the tiller, Penn West appears to be in a bit of a different spot.

A leadership vacuum along the lines of what was just created is not the sort of situation any company wants to face, no matter how good the asset base may be. At issue, it seems, with respect to the decision made by the Penn West board is that patience had run out; it’s one thing to have good assets, but the resource needs to be developed in an efficient and cost-effective manner. One surmises this was not taking place to the board’s (or investor) satisfaction.

In recent months, turn-over at the top at many companies has been initiated by grumpy shareholders meeting with company directors and one wonders if that is what Penn West was also experiencing – or about to experience.

Among the four who were shown the door was executive vice-president and chief operating officer, Hilary Foulkes, seen as one of the key players in bringing the China Investment Corporation on board as a partner and investor back in 2010.

That deal was worth $2.6 billion and saw CIC injecting just over $1.2 billion into a joint venture in Penn West’s oilsands project in the Peace River area of the province.

While the board is still backing CEO Murray Nunns, the fact he continues to toggle between Calgary and Vancouver raises the question as to how much longer that arrangement will continue.

The least surprising news – though one that is yet another sign there is a changing of the guard taking place in the oilpatch – was the fixing of a departure date for Dielwart of January 1, 2013.

But it had been in the works for a while.

Speaking from the airport late Thursday, Dielwart said he had told the board two years ago he would be ready to retire in 2013 – but the succession planning process at that point had already been underway for five years.

“The darnedest thing about a well thought out succession planning process is that, at some point, you have to follow through,” he said.

And with a team firmly in place to support the incoming CEO, Myron Stadnyk – not to mention a ‘big’ birthday on the horizon – making the announcement now, while allowing for enough time for a formal transition through to May, made the most sense.

As to handing off leadership at a time of uncertainty for the energy sector, Diel-wart said there is no such thing as perfect timing.

“There is never a time in the industry when everything is rosy for an extended period of time. There’s always something to deal with.”

Some years more than others.

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