Merging may be the best option for junior oil and gas companies during a commodity rout
Volterra considers a move from its old playbook
by Robbie Jeffrey
Bradford Goetz made his name in the oil and gas sector by dividing and conquering – he bought up prized assets and merged with likeminded junior exploration and production companies. It was a great time to be in the merger business. From the early 1990s and through to the highest peaks of the oil boom, Goetz dramatically increased the value of his primary business, Siena Energy, by decorating Siena’s balance sheet with high-quality assets that once belonged to another company.
– Trent Baker, 32 Degrees
Fast forward to the present price-constrained environment, and though he’s at the helm of an entirely different company with an entirely different strategy, Goetz, like other CEOs of flailing juniors, is considering a move from his old playbook. His most recent company, Volterra Oil and Gas, was formed as the latest in a string of companies that Goetz bought only to turn around to some semblance of profitability and sell them off again. But after selling some of its non-core assets in mid-2015, Goetz still needed to take out a production loan for Volterra for $7.8 million by the end of the year. Nothing unusual there – until Volterra broke the capital covenant on the loan and wrote down a major loss. It wasn’t a great way to go into negotiations with Volterra’s bank and ask for new terms. Now, as he renegotiates, Goetz needs to look at how to increase shareholder value for his company.
Shareholder value is all about how the needs of tomorrow correspond to the needs further down the road. Trent Baker, vice-president and partner at the Calgary private equity firm 32 Degrees, says balancing the short-term and long-term objectives is paramount in looking at strategic alternatives. “In most cases, people right now are managing short-term crisis situations where they need to generate short-term liquidity, but in a way that preserves long-term value,” he says. In a downturn like this one, companies don’t want to sell their assets – they’d rather be buying. But it’s hard to do that while maintaining liquidity, especially for a junior company like Volterra, the kind that banks are trying to reduce their exposure to.
Volterra does have some assets that larger companies would be excited to buy, but Baker says selling your crown jewel is the last thing you want to do. “In most cases, doing that means just kicking the can farther down the road, because if you’re selling the only assets a buyer will want, and the only assets that will drive long-term value in the company, you don’t really have anything left, and it’s just a matter of time before you go out of business,” he says.
So what’s left? Baker says the best option might be a good old merger. It makes the most sense for private equity firms, who can look at their portfolio to find common ground in ownership of assets. “Mergers give you a higher likelihood of being able to accomplish a transaction,” Baker says. “The basic premise of a merger is to add more volume. So if you can take two juniors with operating cash flow of $10 million and turn that into $20 million in operating cash flow, all of a sudden you can build a more meaningful capital budget which allows you to do more synergistic things. You get more capital efficiency when you have a larger capital budget.”
Essentially, when Goetz is looking to the future of Volterra, he’d be wise to look to his own past for an answer.