Hedge fund renews assault on Compton

Date: Tuesday, January 29, 2008
Author: John Partridge, Globe & Mail

Compton Petroleum Corp. is under renewed assault from its largest shareholder, which is now dismissing the Calgary gas producer's latest business plan as “ill-conceived” and reiterating an earlier demand that it put itself up for sale in order to maximize value for investors.

In a letter sent Tuesday to Compton – and filed with securities regulators – Centennial Energy Partners LLC managing member Peter Seldin said the New York hedge fund “completely” disagrees with the plan, unveiled Jan. 23, in which the energy company said its board believes “the most appropriate strategy to create value for all shareholders is . . . to continue to invest in the large growth potential of its asset base.”

The plan calls for capital spending of about $1.6-billion between 2008 and 2010, which amounts to about $400-million more than Compton's current stock market capitalization of $1.19-billion.

“Your plan is an ill-conceived program that is highly dependent on commodity prices and external funding,” Mr. Seldin said in the letter addressed to Compton chairman Mel Belich and chief executive officer Ernie Sapieha. “This is the type of planning that has earned Compton its valuation discount in the first place.”

The plan, Mr. Seldin argues, “does not and cannot address Compton's fundamental structural problem: the company does not have the cash flow or access to capital on a non-dilutive basis to maximize the value of its asset base.”

As a result, he said later in the 21/2-page letter, “Compton needs to put all of its cards on the table, and those cards need to be face up.

“You need to put the company up for sale now.”

He also warned that Centennial is prepared to mount a proxy war to get its way by nominating its own slate of directors for Compton and calling for a special shareholders meeting.

Reached by telephone in Calgary, Compton investor relations manager Lorna Klose said the company's board of directors “is considering the letter and filing from Centennial and will respond as appropriate.”

Until the board completes its review of what the hedge fund has to say, she added, Compton's position “is as stated in our 2008 business plan.”

Centennial says it currently owns more than 25.5 million shares of Compton, in which it began investing 10 years ago, and that this makes it the Calgary company's largest shareholder.

The hedge fund first went public with its grievances about Compton in mid-December. It demanded in a letter at the time that the company consider “strategic alternatives” in order to close the “discount” it argues has developed between its share price and the underlying value of its assets.

Mr. Seldin contends in the most recent letter that even taking the most optimistic forecasts by analysts, Compton might generate $800-million in cash flow in the 2008-10 period, leaving a funding gap of $800-million in its $1.6-billion capital plan.

“To close this gap, you will need to sell significant assets – first, non-core assets and, then, some of your growth assets – and also issue a large number of new shares,” he said. “As a result, your shareholders are unlikely to enjoy Compton's growth on a per-share basis. The company might get bigger, but Compton's shares are unlikely to be much more valuable.”

Compton, he continued, is an “opportunity-rich company” whose “very impressive asset base is not worth its net asset value per share in the hands of this management team, under these financial constraints, and in the current corporate structure.”

Compton's shares were up 11 cents or 1.2 per cent to $9.30 on the Toronto Stock Exchange in early afternoon trading.

That is up from a 52-week low of $7.40 it hit Nov. 12, but still well below the 52-week high of $13.19 it reached last May.

Analysts speculated after Centennial's first attack last month that state-owned Abu Dhabi National Energy Co., also known as Taqa, might be interested in buying Compton, continuing a string of Canadian gas acquisitions it launched last summer.