AIMCO SNAFUCKE is setting itself to be the ultimate SNAFU. For those of you who don’t know what a SNAFU is you can Google its meaning. The word was in popular usage in the seventies but dates back to WWII. However to give you some idea of what a SNAFU is, get this.
CKE has been put up for sale AKA “a Strategic Review Process” The Special Committee appointed to supervise this process comprises the three independent directors. Jill T. Angevine (Chair), Robert J. Herdman and Robert J. Iverach. Two of them are Chartered Accountants and is an Attorney. None of them has any of the qualifications normally associated with executives in the oil and gas industry - like geologist or engineer. None of them ever seem to have ever held a hands-on executive position in the industry. As to their financial interest in the outcome, the Chair, Ms Angevine, has purchased with her own money just 36,743 shares (current value approximately $2,100) while Messrs Herdman and Iverach have invested in just 14,568 and 46,211 shares respectively. These Directors have course over the course of their tenure approved the grant to themselves of 553,800 options each (As a reward for what I don't know). However most of these are so under water they could hardly play any meaningful role in an immediate sale - that is unless they are to be transferred to the new purchasing entity. Then these Directors and CKE management could really hit the jackpot. A pay day none of the ordinary investors who have actually paid for their shares will ever get to enjoy.
I don’t know about you but this does not give me much confidence in the process. Who you may now be wondering should be taking responsibility for this situation. Time to meet AIMco.
AIMCo is what the Brits would call a QUANGO. A quasi non-government organization. Quangos, which are neither private or public, are usually set up to manage harmless non-profit making entities like hospitals, parks and parking garages. An award of board membership is often a patronage perk dispensed to the ruling party faithful. AIMco was established in 2008 by the Alberta Government primarily to manage the pension and other funds associated with the government. Today it manages about $100 billion of their behalf. One of those investments was Chinook Energy which AIMco launched in 2010. The shares were placed at between $3.00 to $3.25 and the company was listed on the TSX. AIMco retained 37.1% of the shares - a stake which it still has.
If you ever get to wondering whether it is better to invest in government-controlled or private sector controlled entity, then take a look at the fate of Chinook compared to Peyto by way of example. Let’s say you had purchased Peyto in 2010 at $13.50 a share. At its current price of $3.50 you would be looking at a loss of $10.00. But that loss is almost completely covered by the dividends you would have received in the interim. Contrast that with Chinook where your investment of $3.00 is now worth just 6c plus the approximate 10c capital distribution with the issuance of the Craft shares. Go right through all the energy stocks with an equivalent initial capitalization and I think you would find few to rival this disaster.
AIMco original investment of approximately $250 million is now worth about $5 million. When one has $100 billion under management CKE must now be simply a nuisance. Presumably, some individual has been given the responsibility for the file. Given the embarrassment this share must be, and public servants being what they are, I feel sure that whoever has the job, is keeping a low profile - a very low profile. He (or she) probably can’t wait to get it off his (or her) desk and into the archives. A case of better out of sight and out of mind and tough luck to the ordinary shareholders who were foolish enough to invest in this woofer in the first place. Add this to my reasons for my lack of confidence in the “Strategic Review” process. There is no dominant shareholder out there to protect the interests of the ordinary shareholder.
Chinook’s original investments and operations were split between Tunisia and Central Alberta. Quite why AIMco, an Alberta government-controlled entity, decided there was a need to invest the pension funds under its care in Tunisia is a mystery to me. Its seem AIMco also had second thoughts on the wisdom of this and Tunisian assets were sold in 2014. This was followed in 2015 and 2016 with the divestiture of its Alberta assets - most of these being swapped out for shares in other operators.
Everyone can make mistakes and the Canadian energy patch has not always been kind to investors over the years. So let’s just focus on the last 3 years of operations and see if AIMco has learnt anything from its stewardship of Chinook for the last 20.
With the present directors and management at the helm, Chinook was reborn in December 2016 as a junior gas company focussed on Canada’s hottest energy play - the Montney in British Columbia. A presentation published Q3 2017 showed projections for steady growth in production from this area - from 4,332 boe/d end 2017 to 13,953 by end of 2019. It had $4.3 million cash in the bank. To cap it all, the new Chinook was not only debt-free, it was aiming to stay that way! It seemed all to be too good to be true - and it was. What was the result? As of September 30, 2019 CKE was no longer in compliance with the financial covenants of its credit facility. It was in debt to the tune of $7 million and its production was just 2,256 boe/d.
Now let’s compare these results with the results of Chinooks three neighbours in the Brierly / Umbach area of Montney. Each has had to play more or less the hand. Each has seen its production effected by the same egress restraints, pipeline and processing failures that CKE has had to endure. Each of these companies has seen its profitability affected by low Station 2 prices. Despite all this, each of these companies has, over the same period, managed to grow its production and preserve a positive operating netback. The only exception is CKE.
| | Storm Resources | Saguaro Resources | Black Swan | Chinook |
| | | | | |
| Production Q4 2016 BOE/D | 13,320 | 12,000 | 14,692 | 3,030 |
| Netback Q4 2016 | 12.93 | 9.80 | 13.63 | 5.21 |
| Production Q3 2019 BOE/D | 18,596 | 17,242 | 23,514* | 2,256 |
| Netback Q3 2019 | 6.84 | 10.96 | 4.43* | (3.65) |
*Q2
By my estimates (and according to CKE own 2017 presentation) CKE should by now be pumping approximately 9,000 Boe/d from its existing Brierly / Umbach wells. Instead, the maximum output that has been achieved has been approximately 4,000 - less than half its potential. This failure to maximize production efficiencies I would suggest is the core reason for the poor financials. Read the CKE management reports and you would come to the conclusion that their failure to maximize production was beyond their control. In telling their sorry tale each quarter one is given a sense of frustration at their of helplessness. It seems that in every quarter if it was not a pipeline failure here then it was plant failure there. CKE neighbours all seemed quite cheerful in contrast - generally taking these catastrophes in their stride.
That said there is one issue which did not get much mention in these CKE reports over the last few years (despite my requests). In has been probably one of the most important issues facing Montney since 2017. Since then, every one of CKE neighbours, and all the listed Montney producers, have regularly updated their investors on this important issue in their quarterly reports. But not CKE.
The reason for this may be that this issue is one that is very much under the control of management. No external blame game can be played here. CKE neighbours were able to grow production despite the external plant and pipeline failures. However, they took some important management decisions which CKE did not. It may be the failure of CKE Board and management to follow the strategic decisions taken by their neighbours that could largely be to blame for CKE performance since 2017. CKE may well be where it is today not so much because it was a victim of bad luck - but because it was a victim of bad management. That could be the reason it is trading so cheaply even though the underlying assets are so attractive.
Of this I will write more in my next post. It might throw some light on the reason why a company which has by my estimate a realistic break-up value of over $1.00 is trading for 6 cents and could be sold for a song - unless ordinary shareholders wake up and do something about it.
AIMco was responsible for the birth of CKE. AIMco is not some bucket shop operating in a boiler room basement. It is an Alberta goverment owned entity and it is expected to conduct itself with integrity and fairness. It is time for AIMco to face up to its responsibility for ensuring that at the end of the day the liquidation of CKE is effected to the maximum benefit of all the ordinary shareholders. Not just a chosen clique. They cannot and must not be allowed to shirk from this responsibility.
To achieve this they must first make a fully transparent disclosure of all CKE assets and their potential realizable value - disclosing this information openly to both shareholders and potential purchasers alike. Does any ordinary investor, for example, know the number of operating wells (active or inactive) that CKE has and what the potential output of those wells is? Does AIMco even know? You could be surprised.
Secondly one would expect the sale process to be handled by people who have the expertise to ensure that CKE has been properly exposed to the market and have the skills to negotiate and decide outcome that best serves all the ordinary shareholders. Personally, I have no confidence that the current Board will be able to properly supervise this process. A competent outsider needs to be appointed. AIMco must take charge. Its their baby.
If you are an ordinary shareholder and share my concerns, there is only one thing that can be done to ensure that we, the ordinary shareholders, are going to be treated fairly. Write to AIMco requesting they take proper responsibility for this mess and advising them that they will be held to account of they don’t. They should not be allowed to simply sell the ordinary shareholders down the river without even a murmur of protest.
You can write or e-mail them expressing your concerns - or just send them a copy of this post. The more people who do the more chance they will start paying more attention to this. Who knows who manages the CKE file but here are some addresses one can try. The head of communications is Denes Nemeth - denes.nemeth@aimco.alberta.ca - or if you are on Linked In you have several more choices. One is Peter Pontikes is Executive Vice President Public Entities.