CALGARY, Alberta--(BUSINESS WIRE)--Cation Capital Inc. (together with its affiliates and associates, “Cation Capital” or “Cation”), a private investment firm and shareholder of Crescent Point Energy Corp (TSX/NYSE: CPG) (“Crescent Point”), today sent a letter to fellow shareholders of Crescent Point outlining its concerns with the current state of governance, strategy and operations of the Company.
Full text of the letter follows:
July 25, 2018
Dear Fellow Shareholders,
As you know, Cation Capital Inc., together with its affiliates and associates (collectively “Cation”) is a significant shareholder of Crescent Point Energy Corp. ("Crescent Point" or the "Company") and recently increased its ownership position in the Company. We write to you today to express our acute concerns with the ongoing governance and operations of Crescent Point, the lack of transparency regarding its process to find the most qualified CEO and the board’s stall tactics to delay meeting with Cation until it has made irreversible decisions, thereby rendering shareholder input extraneous.
For background, Cation formally reached out to the Chairman of Crescent Point, Peter Bannister, on July 16, 2018, requesting that the Chair make himself available for an in-person meeting prior to the July 25, 2018, board of directors meeting to discuss potential strategies for improving the Company and its share price, including, among other things, appropriate board composition, CEO replacement, strategic alternatives and communicating plans in respect of the foregoing to the market. After market on July 18, 2018, Cation received a response from the Chair seeking to defer the proposed meeting until after the upcoming board meeting.
In an effort to remain constructive and collaborative, Cation suggested it would accept the Chair’s requested timing on the reasonable conditions that no material decisions regarding the CEO position or other staffing and strategy decisions be made at the upcoming board meeting; and that the Chair propose firm times (that are mutually agreeable) to meet with Cation to discuss the matters highlighted in Cation’s previous correspondence. Cation has not received a response to that communication and has, as a result, determined to update all shareholders, the rightful owners of Crescent Point.
It is imperative that fellow shareholders remember Crescent Point’s main thesis in rebuking Cation’s attempt to enhance Crescent Point’s board composition. At the time, the current board, led by Chairman Peter Bannister, stated that it had the right plan and that the current board was therefore best suited to lead the Company. It has been over three months since the board started selling this story and today, more than ever, it is evident that Crescent Point never had a “plan”, let alone even a basic strategy for dealing with CEO succession. For written evidence of this shareholders can look to the Company’s June 19, 2018, press release where it briefly discusses a “revised business strategy” and indicates “Crescent Point’s revised strategy will be communicated subsequent to a formal portfolio review, which is currently underway”. For those who have been watching closely, it should come as no surprise that the “revised business strategy” borrows heavily from Cation’s 12-18 month proposal for unlocking value at Crescent Point.
If the board had a plan, why is a “revised business strategy” needed? Why isn’t the board implementing the plan that it campaigned on to be re-elected? Why does the Chairman of Crescent Point, who has held his position since 2004, after all this time require “a formal portfolio review”? How does he and the board not know the assets of the Company and how best it should move forward to unlock the billions of unrealized value? These are all questions we would have preferred to ask privately but were denied the opportunity.
While we were cautiously optimistic at first about the much-needed management changes that were initiated in the aftermath of our campaign and the annual general meeting on May 4, 2018, (and evidently in response to the numerous failings we had identified), further progress at the Company has stalled and its share price continues to languish. In fact, Crescent Point’s share price is now lower than it was in the immediate wake of the AGM and materially below the weighted average share price during the proxy battle, which provided shareholders hope for maximizing value. The Company has since reverted back to the pre-proxy contest era, as its share price frequently underperforms its peers, commodity prices and indices. The market is speaking loud and clear and the board needs to listen – the existing changes are insufficient half-measures; significantly more is required.
What has obviously gone unaddressed is the abject failure of the board to reconstitute itself with individuals with the experience and vision needed to realize on the immense value of the Company’s assets. Despite the shockingly low level of support expressed by shareholders at the AGM for incumbent directors Bannister, Amirault, Jackson and Romanzin, and the Company’s subsequent and repeated private promises to various large shareholders that change is coming, nothing has been done to address what is clearly an inept board. It is apparent the board is trying to absolve itself from responsibility for the value erosion at Crescent Point by hiding behind the terminations of Mr. Saxberg, Mr. Smith and Mrs. MacDonald. It wasn’t that long ago the board’s compensation committee raised compensation for named executive officers by ~17%. Somehow, on the back of this, the board justifies these terminations and subsequent severance packages. How is this reconciled? Who is accountable for such actions?
Very early in our communications, Crescent Point went to great lengths to discuss the character and actions required of individuals who sit on boards of TSX 60 companies. By its own criteria, we would like to understand the board’s actions and process for replacing Mr. Saxberg. It was announced that Mr. Bryksa was appointed as interim President, CEO and director, but since that time, there has been minimal information available about the process being adopted to find the best available candidate to fill this very important role. Not often, if ever, does a TSX 60 issuer appoint an interim President & CEO without engaging a professional search firm to embark on a fulsome process to permanently fill the role. In fact, two peers that Crescent Point’s compensation committee prides itself on using, Cenovus Energy Inc. and Encana Corporation, both replaced their CEOs successfully with external candidates identified through a very public process.
Our understanding is that the same search firm used for those searches has been retained by the Company with an undisclosed scope of services. Surely if given the same mandate the search firm would produce similar results as their track record suggests nothing less. If the board has not provided the same scope of services as its peers, to find the best qualified CEO, then shareholders deserve to understand why this is not occurring. Further, the Company’s “revised business strategy is reprioritizing key value drivers including continuing improvement of the balance sheet, disciplined capital allocation and cost reductions”. Clearly if Crescent Point’s plan has changed and reprioritizing is required, is it fair to assume that the skillset required for the reprioritized value drivers does NOT exist within the Company and that an external CEO candidate that has demonstrated success with these value drivers is needed to lead the Company through the transition? Does the board really believe the culture under its previous regime will yield a candidate with demonstrated expertise superior to all external candidates?
As for a succession plan we have searched Crescent Point’s public documents and cannot find any disclosure about specific succession planning, including any mention of Mr. Bryksa being Mr. Saxberg’s successor. The fact the board originally labelled Mr. Bryksa as “interim” indicates either that there was no succession plan or that Mr. Bryksa does not have the full confidence of the board, yet oddly for an interim leader, he was also appointed to the board, which could be a deterrent to having the best qualified CEO candidates surface. To be clear, we are concerned that the Company has disclosed so few details of the apparent CEO search, that interim CEO Bryksa was mentored for the last twelve years by the just-terminated CEO and that the board is not taking full advantage of the opportunity to find a replacement that will be fully endorsed by the market. Given the current valuation of Crescent Point it appears the interim President & CEO has not inspired the confidence of shareholders. All shareholders have paid dearly in terms of share price erosion and the hefty severance packages paid to recently terminated executives. It is imperative the board gets this right the first time.
With the second quarter results upon us we also want to ensure shareholders separate what happened as part of the previous management regime versus what Crescent Point has done under the “revised business strategy”.
(i) secured two asset sales totaling $280 million in the Williston Basin which will reduce debt at quarter’s end; and
(ii) planned a less capital intensive second quarter due to spring break up (which occurs historically year over year) which should result in free cash flow and the further reduction of debt.
The “revised business strategy” led by Chairman Peter Bannister has played no role in these debt reduction initiatives. The Chairman and his appointees can, however, take credit for the following:
(i) terminating the President & CEO, thereby exposing the lack of a succession plan and providing little transparency about the scope of the CEO search;
(ii) shortly after being re-elected, the board is now changing the plan that was campaigned on to a “revised business strategy” that contains little to no details;
(iii) after a 14 year tenure as Chairman, Mr. Bannister is implementing a formal portfolio review;
(iv) terminating the employment of the Chief Operating Officer, Neil Smith and Senior Vice President, Corporate and Business Development, Tamara Macdonald and without announcement in the June 19, 2018, press release promoting Mark Eade to Senior Vice President, General Counsel and Corporate Secretary and Brad Borgarrd to Senior Vice President, Corporate Planning and Investor Relations (interesting promotions given both individuals were instrumental with the previous regime, are long dated and responsible for corporate planning and communicating with shareholders);
(v) eliminating all diversity amongst the senior management team which is now all white men;
(vi) producing new 2018 guidance that reduces exit production estimates by more than the amount of assets disposed with NO reduction in capital expenditures;
(vii) neglecting to provide any timeline on when the details of the “revised business strategy” will be disclosed;
(viii) ignoring shareholder concerns regarding executive compensation and not adopting a plan more aligned with full cycle economics and corporate and shareholder returns; and most importantly,
(ix) abjectly failing in reconstituting the board with individuals with the experience and vision needed to realize on the immense value of the Company’s assets.
We sincerely hope the board provides full and complete disclosure of the full economic value of the severance and vesting packages that terminated executives received or have been offered. On an accrual basis, the amount expensed for termination costs may be less than actually received and the perception could be the board negotiated lower severances than what were owed. If in fact the board took a firm stand and negotiated lower severances shareholders should properly acknowledge its efforts and Cation would be the first to do so.
We are long-term investors determined to unlock the stranded value within Crescent Point and have expressed to many of you our commitment to stay engaged and hold our board accountable. In short, we are not going anywhere. Our preference is and always has been to engage with the board collaboratively, however, the board has not appreciated nor embraced this approach. We have many constructive suggestions that our board could benefit from prior to locking into a “revised business strategy”, the details of which are unknown, perhaps even to this board. We in particular would like to share with the board our insights on potential CEO and board candidates that have national and multinational experience with energy majors that have written the book on the capital allocation and total return on capital employed processes, appropriate board composition, strategic alternatives and timing of communicating plans in respect of the foregoing to the market. We hope to eventually engage in a productive discussion with our board to assist it in ensuring it unlocks the significant value it portrayed in the Company’s 2017 year-end disclosure.
Sandy L. Edmonstone
Cation Capital Inc.
About Cation Capital Inc.
Cation Capital Inc., together with its affiliates and associates, is a private investment firm headquartered in Alberta, Canada. Cation invests in situations where it is able to influence operational, financial and strategic direction. Cation seeks value in companies that are experiencing financial or operational challenges, are in out of favour sectors or are otherwise in need of change to drive significant long-term value for stakeholders.