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Fabrice Taylor is a chartered financial analyst.
AIMCo’s supposed “bailout” of Precision Drilling PD.UN sure doesn’t look like one. It looks, walks and quacks like a good investment for the taxpayers and pensioners of Alberta. Other investors might want to pay heed. We’ll never know if this deal was a lifesaver but it makes Precision a better place to park some money.
The investment sticks in the craw of Precision’s rivals, some of whom are finding it hard to raise money for their own projects. They protest too much. They wouldn’t find it hard to get capital on the terms Precision was forced to issue on. They probably wouldn’t want to, either. This is no sweetheart deal.
Let’s start with the units. AIMCo paid $3 apiece for 35,000 of them (and is entitled to buy more at that price). They’re trading for more than $5 now. The stock closed yesterday at $5.23, up 71 cents or nearly 16 per cent. The day before they were down 40 cents.
How many deals, even private placements, are announced with the stock so deeply in the money?
Not convinced? Look at the warrants. Even they’re in the money, striking as they do at $3.55. It’s true that the deal was negotiated when the stock was trading closer to those levels, but more power to the folks at AIMCo for pouncing. Big institutions usually move with the urgency of a three-toed sloth, but nimbleness is rewarded: AIMCo got in near what might prove to be the bottom.
Precision’s newest investor also earns 10 per cent on a loan. It’s unsecured, but AIMCo effectively bolstered its security with the new equity and by herding the banks onside.
The deal didn’t originate, as suggested or otherwise implied, in the august hallways of the Alberta Legislature. It in fact goes back a few years, a few provinces eastward, when Leo de Bever and Brian Gibson worked at the Ontario Teachers’ Pension Plan. (Mr. de Bever runs AIMCo and Mr. Gibson is head of public equities.) They got to know Precision Drilling as investors then, and students of market history will recall that Teachers butted heads with management over egregious compensation it wanted to give itself when Precision converted to an income trust. Mr. Gibson knows the company well and this was his deal, not a banker’s, not a lobbyist’s and not an elected official’s.
The truth is that Precision paid dearly for this money. But that’s not to say it’s a terrible outcome for existing shareholders either. They get to buy some units at the same price as AIMCo, but more importantly, the company’s balance sheet is nicely beefed up.
Strengthening the balance sheet is, in fact, why AIMCo made the decision to invest. Mr. de Bever told me that he and his team think Precision is operationally top-drawer with good assets and customers. The problem was management got into a financial bind and needed some help, which it got – but at a price.
With the financial thorns out of the way, management can concentrate on what it does best, running rigs. And investors can breathe easier knowing that Precision can weather the downturn in energy prices with more resilience.
Mr. de Bever added that while he and his team don’t pretend to know when the cycle will turn, turn it will because once the credit crunch and economic bleeding stop, a couple of billion people around the world will start clamouring for commodities again. Precision will be there to enjoy higher energy prices.
One sign that the investment manager might be looking is precisely the rig count, which is at its lowest level since 1999. Given the fact that it takes more wells to produce the same amount of natural gas and oil, and given the steep decline rates in producing wells, it’s clear that at some point choking off drilling chokes off demand. Prices will rebound (although there’s a big debate as to how much where gas is concerned). Oil and gas service stocks, as the accompanying chart shows, tend to give investors a lot of head fakes. Precision units might sell off, and could conceivable fall below where AIMCo bought them. But that doesn’t make this a nice deal for Precision. In the long term, it looks like a solid deal for all investors.
(Thursday, April 23, 2009 on page B2)