IN THE NEWS / A Farm Boy In The Oilpatch (Sunoma Energy Corp.)
Saturday, September 19, 1998
Financual Post
Rick MacDermott finds the basic values he learned on the land work with oil and gas takeovers too
By CLAUDIA CATTANEO
Calgary Bureau Chief The Financial Post
For a corporate raider with two successful hostile takeovers under his belt, Rick MacDermott is surprisingly demure, his personality softened by a down-to-earth view of the world that he attributes to his farming roots.
"I take a very practical approach to business," he says.
At 41, the former grain farmer from Saskatchewan is now the president and chief executive officer of closely held Sunoma Energy Corp., a growing, mid-sized oil and gas company backed by U.S. investors.
"And I truly suggest to my staff that they take a very simple, focused approach. There is no point in making things more complicated than they are."
He was in good spirits last week after the conquest, for $385 million in cash (including assuming $163 million in debt) of natural gas producer Barrington Petroleum Ltd.
The campaign lasted a head-spinning 23 days from Aug. 11 to Sept. 4 - making it possibly the fastest hostile takeover in Canadian history.
Then again, MacDermott is getting practised at this sort of thing. In January, he took over Orbit Oil & Gas Ltd. for about $100 million, also using an unsolicited bid strategy.
Sunoma's success has opened the gates to more hostile attempts in the industry, analysts say.
On Tuesday, for example, Alberta Energy Co. launched a hostile takeover bid for Amber Energy Inc. for $750 million in cash, including the assumption of $304 million of net debt.
The chance of winning a hostile battle is higher because finding a white knight has become more difficult. Many oil and gas companies have weak balance sheets and share prices because of the continuing oil price slump, says Kevin Brown, managing director of ARC Financial Corp. in Calgary.
MacDermott made his first serious attempt to break into the oil business in 1991, through Cormac Resources Ltd., a private company he owned.
He initially ran it with the help of his wife Karen from the basement of their house in Coleville, Sask. The firm took interests in producing wells owned by others. At the time, he was also working on the family farm.
But MacDermott was also an experienced oil well-site operator, having worked as a roughneck for various oil companies since his teenage years.
"I had an idea and I had a dream," he says. "I had a dream that some day I would be sitting out here and looking out the window and looking over at the mountains and run an oil company.
"And here we are," he says, contemplating the crisp morning view of the Rockies from his Calgary office.
He wasn't concerned about his lack of higher education, money, connections, or management experience.
Like oil executives, farmers must quickly master the ability to handle risk, he says. Their success, like that in the oil industry, often depends on the most unpredictable of variables - the weather.
MacDermott moved to Calgary four years ago to run the operations department of Independent Energy Inc., which took over Cormac Resources. Independent, in turn, was taken over by Stampeder Exploration Ltd. MacDermott was one of Independent's largest shareholders.
Determined to be his own boss, MacDermott approached a large number of prospective partners to find what he calls patient capital. He wanted to start a private oil and gas company that would be willing to ride the industry's cycles without interference from the market's short-term views.
Through acquaintances, he linked up with Susan McArthur, a corporate finance professional based in Toronto. She connected him to Fort Worth, Tex.-based Natural Gas Partners, which manages a US$600 million portfolio of energy investments in North American oil and gas companies.
Under his leadership, Sunoma, started in 1996, has become a mid-sized producer of oil and natural gas with 560,000 hectares of undeveloped land and production of about 20,000 to 25,000 barrels of oil equivalent a day.
Sunoma's initial growth was spurred by the takeovers of juniors Sunalta Energy Inc. and Paloma Petroleum Ltd.
Then last November, when oil prices began to collapse because of growing supplies and weakening demand in Asia, Sunoma moved to take over Orbit, a mid-sized oil producer, whose largest shareholder, with 22%, was oilpatch legend Robert Lamond.
MacDermott says he was unaware at the time of Lamond's stature in the business, nor of his reputation as a tough negotiator.
Orbit was picked after an evaluation of 10 to 15 companies considered compatible with Sunoma.
"I needed something that had a good cash stream, and Orbit fit that," he recalls. It also provided opportunities to overlap in some areas and didn't come with lots of probable reserves, which Sunoma didn't need because of its already large inventory.
With advice from investment bankers Naveen Dargan and Graham Weir at Goepel McDermid Inc., MacDermott set out to do a friendly deal. He switched to a hostile bid after an initial overture through Dargan was rebuffed.
Tom Budd, managing partner with Griffiths McBurney & Partners in Calgary and Lamond's investment banker, says Sunoma should have tried harder to negotiate a friendly takeover.
Even now, the industry is hurting so badly anyone should be able to work out a friendly solution, he says. "If you have the cash to mount a hostile, go and make a friendly approach - there is a good chance you can make a deal."
The strategy tends to be avoided because of its limited chance of success, its propensity to degenerate into public mudslinging and because it's seen as less gentlemanly than friendly deals.
Figures compiled by Sarah Clayton, research manager at Sayer Securities Ltd. in Calgary, show that 11 of the 25 hostile takeover attempts in the oilpatch since 1994 have been successful.
In 1994, three were tried and none were successful; in 1995, 10 were attempted and five were successful; in 1996, three were attempted, all were successful; in 1997, six were attempted, one was successful; and so far in 1998, three were attempted, and two (both Sunoma's) were successful. One -AEC/Amber - is pending.
Orbit beat the bushes for a white knight, while publicly discrediting Sunoma's offer. Behind the scenes, tempers flared at Sunoma's headquarters, but in the end, Orbit gave up the search and accepted a modestly sweetened offer.
MacDermott says he had no intention of increasing his bid, but agreed to do it because of Lamond's large interest in the company.
He says he'd rather walk away from a battle than increase his offer price, as is common in hostile situations.
"We put the best price forward, and if it wins the day, that's fine."
Rick Roberge, chairman of Price Waterhouse Coopers' energy group, says he can't remember a hostile takeover in which the first bid won. "Usually you put up your first number, but you leave yourself room so that at the end of the day you pump it a bit."
By April, Sunoma was back on the prowl, running the numbers on several companies. Barrington, a natural gas producer in Alberta and Saskatchewan, stood out.
Its stock was depressed by its significant exposure to heavy oil. The market was also doubtful about management's ability to survive the weak commodity cycle.
Again, through his advisers, MacDermott attempted a friendly deal but was turned down in a meeting with Barrington's president and chief executive officer, Brian Gore. Again, there was a difference in views about the company's value.
MacDermott felt timing - one of three elements of a successful takeover campaign - was on his side. Stock markets were wavering around the world, leading to the major crash at the beginning of August.
The other two key elements of a hostile attempt are valuation and strategy, says an investment banker who asked not to be named.
The valuation has to be high enough it has a good chance of being accepted by shareholders.
As for strategy, it helps being backed by an experienced team.
"A hostile bid is a chess game," says the investment banker. "If we do this, what kind of moves can they make? You have to anticipate what they are going to do next, to see the next couple of moves."
MacDermott's strategy with Barrington was flawless, say industry observers.
At one point, he threatened to pull his bid, making investors nervous that Barrington's stock would crash if no one else came forward to buy the company, particularly because its second-quarter results released during the bid period were worse than expected.
The deal was sealed on Sept. 3 in MacDermott's office, when Gore came calling and asked him to look after his staff.
Sunoma has offered Barrington's people employment until the end of the year.
Then, MacDermott says, he'll court those, who, like him, yearn to be in control their destinies, are willing to be patient, are entrepreneurial - and, of course, have strong stomachs.
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