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Orange Capital takes a run at Bellatrix

A New York hedge fund has set its sights on one of the energy sector's most undervalued names. Now, the fun starts

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at

Aug 20, 2014

by Max Fawcett

Shares of Bellatrix Exploration (TSE:BXE) got a double-digit bump yesterday after news broke that Orange Capital, a New York-based hedge fund, had taken a substantial position in the company. Orange has traditionally focused on service and midstream companies, and in the last year has taken material interests in both Newalta and Tuckamore Capital, a Toronto-based firm that owns ClearStream Energy Services. And while Bellatrix is a producer, the Globe and Mail’s Boyd Erman writes that Orange’s interests may revolve around its non-producing assets. “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 reason Orange targeted Bellatrix is the same one that drives most activist investors: a discrepancy in the company’s valuation that it believes it can correct. “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,” Erman writes. “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.”

AltaCorp Capital’s Jeremy McCrea is one of those 15 analysts who likes Bellatrix, and he thinks that even with yesterday’s pop it’s still got a long way to run. He has a $14 target on its shares, an implied return of 60 per cent based on yesterday’s closing price, and notes that investors getting in today will have the roughly the same cost base as Orange Capital’s, which sits at $8.88. “With management executing three JV’s last year and now providing individual well paybacks that are within six to 12 months, economics still stand to be top tier in the basin,” McCrea writes. “We believe the historical share price return of Bellatrix over the past few years may limit Orange’s ability to make all the recommendations but in any event, it does acknowledge Bellatrix’s attractive valuation at current levels and will perhaps cause management to have a second look at operations.”

Meanwhile, there’s no need for a second look at operations at Painted Pony Petroleum (TSE:PPY). Its shares are flying this week on the heels of an announcement that the company signed a 15-year strategic alliance with AltaGas (TSE:ALA) that will see the letter build a gas processing facility that the former will supply.  In addition, AltaGas also acquired 4.2 million shares of PPY in a private placement at $12 per share, raising $50 million in capital for Painted Pony and providing it with a major vote of confidence. As a result, Canaccord bumped up its price target on PPY shares to $22 this morning.


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