The Facts Support the Need for Change at Eagle
- 95% decline since 2010 when CEO Richard Clark, a lawyer, founded Eagle.
- 70% decline since October 1, 2015, while the S&P/TSX Energy Index is up by 15% in the same time period.
- 24% decline on March 14, 2017, which is the day after Eagle announced its new plan, suspension of its dividend and the US$61.5 million term loan at LIBOR+8% (approximately 9.2% currently)
- The current board of directors and management have overseen the consistent and dramatic destruction of shareholder value since 2010.
- Directors and officers own only 2.1% of Eagle.
- The new plan announced March 13, 2017 is a high-risk plan that appears to be designed to justify excessive overhead costs including management salaries. Management is not focused on the best interests of shareholders.
- On March 17, 2017, the only brokerage firm still covering Eagle wrote about management's lack of alignment with shareholder interests.
Overhead Costs Including Salaries are Unsustainably High
Eagle’s general & administrative (G&A) expenses per boe are ridiculous when contrasted to those of comparable public companies. Eagle’s excessive costs are largely due to a bloated corporate structure and high salaries.
Eagle’s G&A unit costs are 3 times the average of the other 6 companies. Note that this is cash costs only. Officers’ & directors’ entitlement to Restricted Share Units and Restricted Share Rights is equivalent to over 4% of the equity value of the entire business. This would translate to an additional $0.92/boe using the year-end closing price of Eagle’s shares. The only brokerage firm still covering Eagle wrote that they struggle with EGLs cost structure.
Eagle’s New Plan is a High-Risk Plan
Eagle has pivoted from a low growth, sustainable dividend model and is superbly positioned to realize near-term capital appreciation, and sustainable production growth, with significant positive torque to oil price increases.
-Eagle’s Website (May 5, 2017)
- We disagree with the above statement from Eagle’s website:
- No company with debt levels as high as Eagle “is superbly positioned”. Eagle’s debt is three times its market capitalization, and interest rates on that debt are nearly double those of a conventional bank facility.
- We believe that with Eagle’s current trajectory there is little prospect for “capital appreciation” or “sustainable production growth”. The Company has been abandoned by the investment community. Two brokerage firms discontinued coverage in recent months. Eagle’s cost structure is not sustainable – too much asset value is being spent on G&A costs and interest expenses.
- The current board and management, with little at risk themselves, have wagered heavily on the presumption of a successful drilling program and an improvement in commodity prices, ignoring the risks imposed on shareholders.
- The risks to shareholders are very real. We fear that the board of Eagle underestimates these risks. In fact, two of the board members (Messrs. Fitzpatrick and Steckley) served on the final board of directors of Twin Butte Energy Ltd., which went into receivership in late 2016. As well, Mr. Fitzpatrick was a director of Lone Pine Resources Inc. when it commenced proceedings under the Companies’ Creditors Arrangement Act (“CCAA”) and ancillary proceedings under Chapter 15 of the United States Bankruptcy
The new term loan with White Oak Capital Advisors has resulted in debt that is one-third higher than at the end of 2016. It makes a bad situation worse. The Company simply has too much debt.
Source: 2012-2016 Financial Statements
The new term loan is priced at 3-month LIBOR+8%. Annual interest expenses, which have been rising since 2012, are now going to double. The loan is fully secured and includes very strict financial covenants. This represents an unacceptable level of financial risk for shareholders.
The term loan agreement also includes make-whole and repayment provisions. These costs are likely material, but difficult to estimate, as many of the terms have been redacted from the loan agreement filed on SEDAR.
Disturbingly, Eagle was already forced to amend the loan agreement only one month after its inception. Requiring an amendment so soon after initiation does not provide confidence that Eagle fully understood the terms of the loan, and is also evidence that covenants are likely to be an ongoing issue.