Grant Fagerheim says he had so little idea of just what a CEO does when he first became one himself in 2000 – that, despite working on an executive MBA from Queen’s University five years earlier. You’d think they’d teach that. Admittedly, Fagerheim didn’t finish the MBA: As the father of two young boys it was tough, even with his wife Penny working as an interior designer, to manage both school and provide for the family.
Yet somehow, Fagerheim, 56, a serial CEO of a string of oil companies who now helms another one he founded – Whitecap Resources – became, as one energy analyst put it, “a wily veteran of the oil patch.”
It wasn’t what the Estevan, Saskatchewan, native set out for. He was aiming for an NHL hockey player career. Playing pro in the New York Islander’s farm system in the early ’80s, he was nearly there when he blew a knee and his dream bounced off the goal post. Still, he envisioned a backup career in professional sports: “I still had a dream of ultimately pursuing a master’s in sports administration and working in professional sports management,” he says. “But I started in the energy business and loved it. And that’s where I stayed.”
Fagerheim, a five-foot-eleven left-winger, found himself a rarity among his pro-hockey teammates; as laser-focused as they all were on the game, he had it bored into his brain that education was equally important.
“I had the luxury of a father that told me to get a post-secondary education,” Fagerheim says of his father, a carpenter who immigrated to Canada from Norway. Fagerheim graduated from the University of Calgary with degrees in education and business. His first gig in the oil patch was an entry-level job with Calgary’s Dome Petroleum, which put him in a land development training program.
Since 2000, when he had his first stint as a CEO (with Ketch Energy), Fagerheim has built, helmed and flipped a handful of junior oil companies in Alberta. If dad-inspired hard work is one pillar of his success, the other may be that, like a good sponge, Fagerheim is particularly absorbent: He closely watches the people around him.
Many of those people have been the cognoscenti of the western Canadian oil patch. Turns out Fagerheim’s not only smarter than your average sponge, but he’s also proving smarter than many of his oil patch colleagues, who never quite prepared themselves for the plunge in oil prices that is killing off some juniors. Not that he would say so. He may be straight talking – “animated and energetic,” says energy analyst Cody Kwong – but he’s no braggadocio. He wedges in praise about others at Whitecap in practically every other sentence he utters.
Dave Mombourquette, his vice-president of business development, has teamed with him for decades and hunts for and analyzes potential acquisitions for Whitecap. Then there’s Thanh C. Kang, his chief financial officer and guardian of the balance sheet – a relatively debt-free balance sheet that’s been like a lollipop for energy analysts who still see a bright future for Whitecap and its stock despite oil prices.
“I think we can all learn from others,” says Fagerheim, looking back on his oil career stats. “I just watched individuals to see how they got ahead.” He especially watched the most diligent workers, the people “with high moral conduct that were honest and fair.” He gravitated to those who pushed and towed others along with them on the entrepreneurial road.
Ship captains best prove their mettle in stormy weather. Captains of the oil industry prove it in times like these when commodity prices sink. When Alberta Venture spoke to Fagerheim about Whitecap – his latest, and, he swears, the last company he will build from the ground up – it had been a year since oil prices hit choppy waters. On June 20, 2014, West Texas Intermediate (WTI) crude was US$107 a barrel. It was US$59.40 when Fagerheim shared morsels of his Whitecap philosophy.
In an environment like that, oil companies can go down. Yet a few sail on and pick up, often cheaply, the barely surviving competitors through mergers and acquisitions. Calgary-headquartered Whitecap is mainly a light-oil company. It started with production of 850 barrels per day (bbl/d) in September 2009 and now pumps out about 38,351 barrels of oil per day equivalent (boe/d). Its prime assets are in the Viking light oil play in west-central Saskatchewan and the Cardium formation in Alberta’s Pembina and Garrington areas. Whitecap now has a market cap of $3.93 billion.
With Whitecap, Fagerheim and his team built a company that has so far deftly maneuvered its way through oil’s slump. Whitecap’s strategy of hedging future oil sales, its knack for deal-making, for debt management and some other fundamental strategies have enabled it to pounce on distressed companies and assets, and not just hang in there, but grow.
“I would say the business model these guys put together is built to thrive in these times,” says Kwong, director of institutional research at FirstEnergy Capital. Though it started as a pure-growth, private company (it was taken public in 2010), Fagerheim restructured Whitecap in January 2013 as a moderate-growth, dividend-paying company designed to give shareholders a steady total return in the 10 per cent neighbourhood.
Whitecap would not be like his previous companies like Ketch Resources and Cadence Energy, built for rapid growth and then, ultimately, disposed of through a profitable sale to the highest bidder. But why not? That model worked.
“The whole sector has changed,” says Jeremy McCrea, managing director at AltaCorp Capital. These days, he says, it takes a minimum $100 million in capital to drill even the lowest cost new resource plays, something that would have taken a fraction of that amount five or six years ago. “The patch has changed in a big, big way. It’s much more difficult to start a junior company and flip it and start again. I think Grant has realized that. As a result, he’s taken the opposite approach and now says he will be a consolidator of junior companies and will take advantage of the volatility in these markets”
One key element for Whitecap is something the oil industry calls the decline rate. By nature, all active wells decline in production rates annually. But new wells, especially fracked wells, can decline 50 per cent or more in their first 12 to 24 months, then settle in with an annual decline of about 10 per cent. So a three-year-old well that pumped out 100 barrels of oil per day would, on average, pump out 90 barrels a day in the fourth year unless significantly more dollars were spent to add more wells and increase production.
Whitecap focuses on acquiring oil reserves with a greater concentration of older wells – wells whose decline rate would be in the more modest 10 per cent or less range. The low decline rates mean less capital is required to maintain or modestly grow production levels. And that means a more stable cash flow to help pay investors a sustainable dividend (6.25 cents per share, which yielded 5.69 per cent when Whitecap stock traded at $13.18 at the time of writing).
Hedging – the process of selling future oil production within a fixed price range – is another key tool Whitecap employs. Whitecap is not unique in the oil industry in hedging production, but this year, about 46 per cent of its production is hedged at $90 per barrel, one of the best figures in the business.
“We are not trying to beat the market,” Fagerheim says. “The purpose we use hedging for is truly to mitigate price volatility. By mitigating price volatility what we are trying to do is have a predictable level of cash flow in order that we can spend capital and pay a consistent and sustainable dividend.”
So far so good. Whitecap’s dividend increased in May 2014 and has been stable since; unlike a growing cadre of other oil companies, ranging in size from intermediates such as Lightstream Resources to majors such as Canadian Oil Sands, that have reduced their dividends.
Fagerheim knows at some point, if oil prices plummet further, he may have to hedge at those low prices and that, down the road, should oil rebound, he might be selling Whitecap oil at a discount to market. “But that’s OK,” he says. “We aren’t losing sleep on it because we are managing that price volatility.”
You can’t argue with results. Over the past three years, Whitecap has managed revenue growth of 103.27 per cent annually. The industry average is 25.44 per cent. And the company’s low-debt balance sheet has meant, well, some shopping.
In March 2014, Whitecap paid $855 million for Imperial Oil light oil assets in western Alberta and northeastern B.C. The deal, McCrae says, is a good example of Whitecap’s fox-like ability to nail down acquisitions cheaper than rival bidders. “A key to their success is these incredible acquisitions they have been able to put together,” McCrea says. “A lot of the times there were superior bids out for these assets they acquired. But just given different solutions and out-of-the-box thinking, they have been able to get these assets typically for cheaper than a lot of the market would have.”
For instance, Whitecap managed to get the oil and gas reserves Imperial put up for sale because it was the only company also willing to bid on the accompanying infrastructure – well batteries, pipelines and the like – Imperial wanted to unload at the same time. Soon after the deal, Whitecap completed a pre-arranged sale of that infrastructure to Keyera for $113 million. With returns from that, McCrae says, Whitecap “ended up getting the [Imperial] assets for a much cheaper price than what some of the other guys had bid for the asset.”
Last March, Whitecap struck again, buying privately owned Beaumont Energy for $587 million, a surprisingly rich price considering the state of oil, says McCrae, who describes Fagerheim as a “former hockey player taking his stickhandling ability into the corporate world.” The deals he’s put together have made Whitecap a premium player that can attract investors to its stock and has made it easier for it to issue new equity if it needs more for acquisitions or capital programs.
But Whitecap may not be shopping for a while now. The business development group is always assessing opportunities, and there are more assets Fagerheim likes in Western Canada, but, “This is a time to ensure that we digest,” he says. Whitecap was drilling its Beaumont assets soon after it bought them and that integration has gone “smoothly,” he says.
Meantime, Fagerheim wouldn’t mind terribly if oil prices stayed low a bit longer. “I have some plans.” Though, he adds, “We are not going to be cavalier and say this [oil price environment] isn’t difficult. It is difficult and it is very challenging. But if we can remain disciplined with our approach and be good stewards of capital, we think that ultimately we are going to come back to a normal, functioning market sometime within the next 12- to 18-month period of time,” he says. “In the meantime, make sure you have a good balance sheet, good returns on the capital you are investing at this time, and then maybe more opportunities present themselves.”