Article re: AGW-cdnx Argonauts Group below. Name to become Cequel Energy when it becomes TSE listed.
Page URL: nationalpost.com
February 22, 2002
Argonauts seen as patch's next upstart
Ex-Cypress execs: When production is minimal, backers tout management
Paul Haavardsrud
Financial Post
Safe bets in the oilpatch are always hard to find, but these days picking a good horse has become even tougher, as the ranks of quality names has thinned considerably following the flurry of takeovers last year.
While there's no such thing as a sure thing, veteran handicappers think they have a winner in Argonauts Group Ltd., a junior oil and gas play on the Canadian Venture Exchange that has until recently toiled in relative obscurity.
But the quiet days ended last month, when the former management team at Cypress Energy Inc. took the reins. The stock (AGW/CDNX) soared 84% to $2.37 on the announcement, as investors bet the Cypress team would repeat its success with Argonauts.
"They are in my opinion the only triple 'A' management team in the public market, that's why you see it trading at these levels," said Ian Thomson, an analyst at Wolverton Securities Ltd. in Calgary.
Started in 1996 with a market capitalization of $6-million, Cypress sold itself to Prime West Energy Trust last March for more than $800-million.
Led by president and chief executive Don Archibald, the team got off to a fast start. Within two weeks of taking over at Argonauts, the firm cut a deal to buy Chain Energy Corp. for $30-million and raised $17-million through a share issue.
The stock has continued to climb, closing yesterday at $3.50, fuelled by rumours Argonauts was looking to make another buy.
While several junior names have been making the rounds, Thunder Energy Inc., a gas-weighted junior producer whose shares have been beaten down by low gas prices and a relatively large amount of debt, has been the focus of speculation.
Before falling back in the last two sessions, Thunder's shares (THY/TSE) had surged 24% this month on heavy trading volume.
While links between the two companies bolstered the rumour mill -- Doug Dafoe, Thunder's president and chief executive, was on the board of directors at Cypress and is part of the new slate of directors at Argonauts. But Mr. Archibald was quick to quash the speculation.
"I've heard the rumour, but there isn't any truth to it," he said. "There is nothing in process."
Still, Wolverton's Mr. Thomson believes a union between Thunder and Argonauts makes a lot of sense for several reasons, beyond the obvious link with Mr. Dafoe.
Thunder's $71-million of debt is cramping its capital expenditure plans, he said. Argonauts is smaller on a production basis but it has a clean balance sheet and, more important, access to capital.
Institutional investors comfortable with the Cypress management team were keen to get in on the $17-million bought deal Argonauts did last month, oversubscribing the financing by up to three times, he said.
"If you take that for what it's worth, they could raise $50-million in the market right now," said Mr. Thomson. "It gives them a balance sheet they can really go to bat with."
Having driven the stock price nearly 50% higher in the past month, investors clearly believe the old Cypress team won't drag its feet, granting the firm a lofty valuation relative to its production.
At Cypress, Mr. Archibald and the management team, which has moved to Argonauts nearly intact, had a track record of making about one acquisition a year.
Doing another deal before closing the Chain buy might be aggressive even for the old Cypress team, noted Alan Knowles, an analyst at Haywood Securities Inc. in Calgary, who initiated coverage on Argonauts on Wednesday with a "buy" rating and a 12-month share price target of $5.
While familiar with the Argonaut and Chain assets -- given that the companies' properties are by Cypress's old stomping grounds near Edmonton -- Mr. Knowles believes the firm will need a consolidation period, but was quick to add, " I don't think it will be very long."
He expects the company will be able to increase production to 4,100 barrels of oil equivalent a day, from its current level of 3,100 boe/d, through drilling and property buys. Growth from another corporate acquisition would come on top of those projections and would move Argonauts toward the ranks of intermediate producers in a hurry.
For his part, Mr. Archibald plans to follow the model established at Cypress: a combination of drilling, property buys and acquisitions. "We continue to look at stuff, no question, but I think there's a certain element of cautiousness that enters into it. You don't want to do too much too soon. We could handle another acquisition, but I don't think people should get carried away either."
Along with applying for a TSE listing, Mr. Archibald said the company will change its name to Cequel Energy Inc., as a nod to their roots at Cypress. "We're hoping this sequel is as good as The Empire Strikes Back, which we liked, and not the Mummy Returns, which, um, we didn't."
So are investors. |
