Natural gas plays in Alberta have generated much buzz.
New York-based Orange Capital is set to begin a public push for a revamp at Bellatrix Exploration Ltd., the latest in a series of campaigns led by activist shareholders looking to Canada for underperforming companies they can press for change.
Orange, which has been buying Bellatrix shares, is expected to shortly file with the Securities & Exchange Commission to say its stake is bigger than 5 per cent, and that it plans to ask for changes at the Calgary-based natural gas producer, said a person familiar with the situation. The company, with a market capitalization of $1.5-billion (U.S.), trades at a discount to many of its peers. The hedge fund wants Bellatrix to hire a financial adviser to look for strategic alternatives, as well asking the company to look at a sale or initial public offering of some of the so-called midstream assets it owns, such as pipelines and gas plants. Orange is also seeking renewal of the board, better communications with investors and a plan for future outlays of capital.
The filing is unlikely to be a surprise to Bellatrix, as Orange has contacted the company and has been apprised that the hedge fund would be going public with its concerns via the SEC document, the person said.
Bellatrix is just the latest in what is becoming an increasingly long list of companies in Canada that have caught the eye of activists. Companies here were the targets of 6 per cent of all publicly known activist campaigns globally last year, according to Activist Insight. Considering the country accounted for about 3.4 per cent of the world's stocks by market capitalization, Canadian companies are getting serious attention.
Orange has been among the busiest activists in Canada in recent months, taking on companies such as Newalta Corp. and InnVest Real Estate Investment Trust. In both of those, Orange got results in the form of new directors. Orange also recently invested in Tuckamore Capital Management Inc., helping management in its bid to settle a proxy fight there and gaining a seat on Tuckamore's board. Orange did not have as much luck with Partners REIT, where it withdrew its nominees for the board and failed in its attempt to use a novel bid for part of the company to win votes.
Orange and its founder, Daniel Lewis, appear to like Canada for the same reasons that so many activists do. The country has a friendly activist environment, where it is easy to call shareholder meetings and push for change. Canadian disclosure rules also allow shareholders to build up bigger stakes than in the U.S. before being required to go public – enabling potentially bigger gains. (In this case, however, Bellatrix is listed in New York as well as in Toronto, hence Orange's disclosure to the SEC of its 5 per cent stake.) The fact that Canada is a popular place for activism has also helped to create a specialized group of lawyers and other service providers that can help investors wage campaigns for change. All of that helps to keep the country front and centre when activists are looking around the world for places to put money to work. As long as Canada keeps its shareholder friendly policies, there's no reason to expect investors like Mr. Lewis to stop coming back.
At Bellatrix, the issue is the company's valuation. The company is popular with analysts as a value play – 15 of 16 tracked by Bloomberg rate it a buy – because it controls promising natural gas fields and trades at a discount to its peers. The issue is how to close that gap.
The gains could be significant if Mr. Lewis's proposed changes can help push Bellatrix's valuation up. Depending on the metric, Bellatrix trades at something like 20 per cent to 50 per cent below other companies that do the same thing. At 5 per cent ownership, Orange now has a stake worth at least $75-million based on Bellatrix's closing price Monday. The stock jumped about 5 per cent on Monday, with trading much busier than usual.
Analysts point to a number of factors behind the discount, including the fact that Bellatrix has a big expansion program underway that increases risk, and that it has cut production guidance too often. A messy share sale earlier this year, when Bellatrix had to cut the size and the price after investors balked, also led to what analysts at Canadian Imperial Bank of Commerce called "shaken investor confidence."
On the other hand, analysts at AltaCorp have made the company a "top pick," citing its asset base, balance sheet and "management's top tier execution."
So far, it does not appear that Orange plans a full-on proxy fight, the person said. At this stage, for example, Orange is not expected to ask for a shareholders' meeting or to nominate new directors, though certainly such demands could come if Bellatrix doesn't respond to the initial campaign.