This past year got off to a brutal start, with oil prices crashing into the $20s during the first quarter. That plunge forced oil company executives to take several decisive actions to ensure their survival. That said, some of their rivals made moves that seemed to make things worse -- or they did not make any moves at all, which put their companies on the brink of financial disaster. These moves, in my opinion, rank among the dumbest in 2016.
What. A. Year.
For Kelcy Warren, the founder and CEO of energy infrastructure giant Energy Transfer Equity (ET), 2017 probably cannot come soon enough, considering the drama his company went through this year. It all started innocently enough when his company unveiled a bold plan in late 2015 to take advantage of the oil market downturn and expand its empire. The key to that strategy was a bid to acquire rival Williams Companies (WMB 1.33%) in a transaction that would create one of the largest energy franchises in North America. To get Williams to accept the bid, Energy Transfer Equity agreed to the request for a cash-and-stock merger instead of the all-stock deal it initially sought.
The addition of that cash component turned into a disaster for both companies. When oil prices plunged earlier this year, the market grew gravely concerned that the $6 billion of incremental debt Energy Transfer needed to fund that outlay would be its undoing. That's when things got bizarre. In March, the company announced that it had replaced then-CFO Jaimie Welch with the CFO of its namesake MLP Energy Transfer Partners (ETP), which sent the values of all companies involved in the deal spiraling lower. Shortly after that, the market learned that Welch had been actively working to unravel the transaction that he helped put together because the debt required for the cash payout would lead to "mutually assured destruction."
Meanwhile, the deal drama only grew worse and resulted in lawsuits and countersuits. Not only did Welch sue Energy Transfer for breach of contract, but Williams sued Energy Transfer and Kelcy Warren because they went ahead with a private offering of convertible shares that Williams opposed. Eventually, the entire mess came to a bitter end in the courtroom after a judge let Energy Transfer walk away from the deal because of a tax issue. While Warren won this battle, his reputation took a big hit.
Unfortunately, that wasn't the end of Kelcy Warren's problems. His pipeline MLP has been constructing an oil pipeline stretching from North Dakota to Illinois. The project is nearly complete and has just one section left, which has proven to be problematic, to say the least. Protesters rallied against the part of the pipeline's route that would take it underneath a lake close to a Native American reservation. Those protests have gained national attention, which led to an additional review of the permit the company needs to complete the pipeline. One of Warren's missteps has been his vocal disapproval of the process and the protesters, which has added some fuel to the controversy. That said, while he might be losing in the court of public opinion, his aim is to win in federal court -- or simply wait things out until the new administration takes over early next year.
Kelcy Warren built Energy Transfer Equity into an industry behemoth through a string of bold mergers and expansion projects. However, that boldness came back to bite him in 2016 as it led to some rather controversial moves, which cost him some reputation points and took investors on a nauseating ride.
Holding out hope is not a viable strategy
This past year has been quite the opposite for Pengrowth Energy (NYSE: PGH). Instead of a dizzying array of news flow, the Canadian oil producer has not done all that much in 2016, with CEO Derek Evans seemingly taking a wait-and-see approach. That said, the lack of movement is increasingly becoming an issue because the company has done nothing but take baby steps when it has an enormous problem to address.
Pengrowth Energy's problems are really two-fold. Most pressing is the fact that it has more than $500 million in debt maturing next year, which the company cannot refinance given current market conditions because it has too much debt on its balance sheet. In fact, because of its outsized leverage, the company is on pace to fall out of compliance with its financial covenants by the middle of next year unless commodity prices vastly improve. However, instead of making a bold move to address these situations before they get out of control, such as through a major asset sale, the company seems content to sit back and see what happens.
That is not to say it has done nothing. Pengrowth Energy did cut costs deeply so it can generate excess cash flow and chip away at its debt. That said, it needs to do something big before the middle of next year, or else it might breach its financial covenants, which could force it to declare bankruptcy.
What's noteworthy about Pengrowth's situation is that fellow Canadian oil producer Penn West Petroleum (NYSE: PWE) was in a similar position earlier this year. However, instead of holding out hope that banks would ease its nearly breached financial covenants, or that oil prices would rise, Penn West Petroleum CEO Dave Roberts sprung into action. He led the company in completing a slew of asset sales, including parting with two core positions, which obliterated its debt problem. Because of that, Penn West now has among the lowest leverage rates in its peer group, which gives it the financial flexibility to restart its growth engine. Those moves allowed Roberts to recently step down after he accomplished his goal of turning Penn West around. Meanwhile, Evans is still trying to decide the best course of action to get Pengrowth back on solid ground.
It's not easy being a CEO. Not only is every move scrutinized by the media, but bad moves can lead to disasters for the company and all those tied to its fate. While both Kelcy Warren and Derek Evans have avoided a ruinous fate for their companies in 2016, I'm sure both men would have made different moves this year if they'd known then what they know now.