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Business Person of the Year 2007: James Kinnear, Pengrowth Energy Trust

In James Kinnear’s memory, the origins of Canadian energy trusts are indelibly entwined with the flavours of steaming noodles and rice, served in a Chinese restaurant in downtown Montreal

On one side of the table sat Marcel Tremblay, an ambitious young financial analyst who nursed radical schemes for shaking up the securities industry. Across from him sat Kinnear, taking mental notes, chewing on Tremblay’s visionary insights, tossing his own thoughts into the mix.

“We’d have lunch and talk about his ideas. Marcel was really the pioneer of the whole energy trust sector. It was his drive and determination that got this sector off the ground in the first place,” reflects Kinnear, the president, CEO and chairman of Pengrowth Energy Trust and Alberta’s 2007 Business Person of the Year.

In 1986, long years after those historic bull sessions, Tremblay defied a chorus of pessimistic warnings to create a unique, high-yield investment vehicle known as Enerplus Resources Fund, Canada’s first royalty trust. Kinnear observed the process with care before following his friend’s lead within two years. During the intervening two decades, Kinnear has added numerous managerial wrinkles to the original model, building Pengrowth into one of North America’s largest energy trusts, with a diversified, blue-chip asset base, an enterprise value approaching $6 billion and a market capitalization of $4.6 billion. Since Kinnear began flogging Pengrowth’s initial public offering of $12.5 million in Calgary restaurants and boardrooms (sales were so sluggish his underwriters eventually gave up and bought the balance of the issue themselves), he’s done more than place his indelible stamp on an important trust which has distributed more than $3 billion in unitholder payouts during its lifetime.

And in many respects, 2007 stands in bold relief as a watershed year. With the 60-year-old Kinnear directing traffic, Pengrowth asserted itself as one of the more muscular sluggers on the national scene. Average daily production took a great leap forward, rising from 63,000 barrels of oil equivalent to 98,000, more than doubling the numbers recorded back in 2001. Higher production was a direct result of near-frenetic wheeling and dealing the previous year, capped by a $1-billion purchase of assets from ConocoPhillips which helped nudge Pengrowth into the top five producers among royalty trusts.

“We completed almost $3 billion in transactions as we headed into 2007. I believe we’re now up to 50 acquisitions in the last 10 years, making us by far the largest property acquisitor in our sector,” says the CEO.

Kinnear has earned the admiration of his peers by means of an irresistibly unpretentious and grounded style, strengthening his reputation as one of the most effective networkers on the street. A tireless traveller as well as an artful asset shopper, Kinnear tends to leave his leadership team in charge of day-to-day operations while he concentrates on creating value via deal-spotting and relationship-building. Considered a wizard at polishing diamonds in the rough, he’ll zero in on a faded gas or oil property, scoop it up at a fire-sale price and, often as not, restore it to a reasonable facsimile of its former worth and status. Once that’s achieved, he’ll occasionally flip the revived resource, a process which he smilingly describes as buying wholesale and selling retail.
“I think it reflects shrewdness on Kinnear’s part,” remarks Gordon Tait, analyst for BMO Nesbitt Burns. “His strategy of buying assets at the bottom of the cycle has added a lot of value to the trust.” (His judicious eye for bargains may have played a role when Kinnear stepped forward to claim 20-year naming rights to the Pengrowth Saddledome in 2000, when the fortunes of hockey’s Calgary Flames were riding lower than a Tiny Mite’s skate blade. Reported cut-rate price: $1 million a year.)

“Most of our acquisitions and business deals arise from relationships that Jim has created,” adds longtime associate Chuck Selby, Pengrowth’s vice-president and corporate secretary.

“These aren’t just typical bid packages that arrive via agents…. We’ll have an inside track which has come to Jim through his business associations,” Selby adds. “He has an uncanny ability to work with people. Jim is perhaps the best relationship person I’ve ever met.”

Kinnear has also emerged as an aggressive philanthropist, this year joining with his wife, Bridgette, and the Friends of Pengrowth to donate $10 million for construction of the Kinnear Centre for Creativity and Innovation, centrepiece for a multimillion-dollar revitalization project at the Banff Centre. “It’s not just about the building. It’s more about getting involved with the Centre, creating opportunities to identify and develop talent within this country,” explains Kinnear, who sits on the centre’s board of governors. His high regard for the institution has a practical basis. Since 2000, Pengrowth has sent 45 employees to 125 leadership programs at the Banff Centre at a cost of half a million dollars.

Among his other charitable initiatives: the Pengrowth Rockyview Invitational, an annual golf fundraiser which has generated more than $5 million for the Rockyview General Hospital through 15 years; the Canadian Open, which Kinnear, a 10-handicap, has pledged to return to its former glory as the sole northern stop on the U.S. professional tour; the Mazankowski Alberta Heart Institute in Edmonton; the Calgary-based Glassco Foundation for children’s issues, and innumerable others.

Twenty-five years ago, shortly after he arrived in Calgary from Montreal, Kinnear wasn’t particularly concerned about which noble cause to support. He was worried about making his office rent payment.

Born in Toronto, Kinnear had graduated from the University of Toronto in the early 1970s before embarking on a securities career in Montreal. After qualifying as a Certified Financial Analyst (CFA) in 1979, he moved to Calgary just as the late-’70s energy spurt was reaching a crescendo. He carved himself a niche writing research reports for customers in the securities industry. Then, suddenly, circumstances lowered the boom on a roaring city which had barely slept since the petroleum industry revved itself into overdrive during the 1970s. It all ground to an abrupt halt in the early ’80s. Calgary old-timers continue to blame the reviled federal taxation scheme known as the National Energy Program but 18% to 20% mortgage rates didn’t help.

Instead of double martinis, energy execs started drinking Pepto-Bismol at lunchtime. In Kinnear’s phrase, “You could shoot a cannon down the streets of Calgary.” All was silent, except for the groan of fully laden moving trucks pulling away from abandoned suburban homes whose shell-shocked owners could no longer manage payments.

Kinnear sat in his office and counted clients. They dwindled from three to two to one to none. He felt like a prospector watching gold dust turn to ashes. To keep going, he sold his Mount Royal house and rented from the new owner. Soon, Kinnear incorporated a new company known as Pengrowth Management, with the simplest of possible goals: “Just to survive,” Kinnear says with a shrug.

But his business plan proved sound as a dollar. Before long, major teacher and police department pension funds (hence the Pengrowth brand) were retaining his little team to purchase low-cost, cash-bearing oil and gas assets on their behalf. It was complex, time-consuming work but it certainly sharpened Kinnear’s eye for value. “We started buying these oil-gas fields on our own account and bought some for our pension plans, including one $14-million transaction for a consortium of eight of them,” he recalls.

After Pengrowth went public with its income trust in early 1989, quarterly and eventually monthly cash yields on similar properties were made available to retail investors too, while corporate operators sailed along practically tax-free. Like Tremblay and Enerplus, Kinnear and Pengrowth were among the forerunners of an investment trend which reached its zenith in the autumn of 2006, when federal Finance Minister Jim Flaherty finally slammed the door. You’d think Kinnear’s lucrative little world would be crashing in around him about now. Not so. But we’re getting ahead of the story.

Back in 1989, Pengrowth Energy Trust based its IPO on the purchase of an interest in a northern Alberta natural-gas field known as Dunvegan Gas Unit No. 1, a cash cow which still anchors Pengrowth’s sizable gas portfolio. It was a solid asset and Kinnear’s new baby seemed well on its way – until natural gas prices landed in the dumpster during the early 1990s. “There’s a lot to be said for experience, for having been through a few of these up and down cycles,” says Kinnear, who hadn’t seen anything yet.

In 1993, depressed gas prices sent Pengrowth unit prices into a tailspin, from $10 to less than $5. In response, Kinnear’s bloodied sales force hit the street once again, in the attempt to raise money to finance a new rights offering to purchase the fund’s first interest in an oil property. “At least we’ll be diversified,” Kinnear told his anxious colleagues, as they met the sales challenge of their lives.

“We wore out a lot of shoe leather. Toughest $3.8 million we ever raised,” Kinnear sighs. “People had watched our units decrease in value and most of them wondered whether they were sending good money after bad. We had to convince them we were taking action to improve their position, which we eventually did.”

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