Letter to Shareholders
Dear Fellow Shareholders,
We believe Crescent Point Energy Corp. (“Crescent Point” or the “Company”) has tremendous long-term potential and the ability to create significant value for all shareholders. However, like our fellow shareholders, we at Cation Capital Inc. (“Cation”) are disappointed and frustrated by the disastrous performance of Crescent Point and the precipitous erosion of shareholder value.
Crescent Point’s share price has fallen drastically. The stock, once a market darling, now lags its peer group in virtually all relevant metrics and the incumbent members of the Company’s board of directors (the “Board”) are either unable or unwilling to address the very serious issue confronting the Company.
If you invested $100 at the beginning of 2015, your investment is now worth…
The returns are worse if you have been a shareholder since 2013, all the while management has been exceptionally well-compensated.
We believe Crescent Point’s dismal underperformance cannot be blamed on external factors, as the Company is prone to do, but rather on flawed strategy, poor execution, and ultimately failed governance by the Board. Subsequent to Crescent Point’s surprise $650 million equity offering in September 2016 at $19.30 per share, the Company’s shares have lost 52% of their value, while relevant indices and other metrics have shown growth or substantially smaller losses. The issue is clearly specific to Crescent Point and it appears that the Board has been unable to identify, let alone cure, what the exact problems are.
Simply stated, BILLIONS in shareholder value has been destroyed
We believe the opportunity at Crescent Point is unique, both in the amount of value that can be unlocked and how readily it can be achieved. In an effort to unlock that value for shareholders, Cation has nominated four highly experienced and independent industry candidates – Dallas J. Howe, Herbert C. Pinder, Thomas A. Budd and Sandy L. Edmonstone - for election to the ten person Board at the Company’s upcoming annual general meeting, to be held on May 4, 2018.
We have attempted to share our views and analyses with the special committee established by the Board to deal with our proposal, with whom we would prefer to work collaboratively. Despite our good faith efforts to address our concerns outside of the public sphere, we continue to receive no meaningful sign of collaborative engagement or that the Company intends to address its numerous strategic and governance challenges, let alone an external signal that the Company’s negative trajectory has changed. Put simply, Crescent Point believes that its current strategy is working! When the Company finally begrudgingly met with us, all that they were prepared to offer is that they would consider ONE of our nominees for a Board seat.
That will not do. Despite a rotation of six new directors since 2014 (with a seventh nominated this year) the Board has proven completely ineffective at addressing any of the numerous issues facing Crescent Point. The addition of one or two new directors will not suffice. Crescent Point’s high board turnover coupled with its rigid adherence to a failed strategy confirms what the street has known all along – that Crescent Point is for all purposes controlled by and for a select group of individuals. It is noteworthy that it is essentially this same group – united by business interests outside of their service to Crescent Point – that comprises the special committee of “independent” directors that has rebuffed our attempts to effect necessary change at Crescent Point. Crescent Point needs new leadership at the Board level involving those with the expertise, vision and courage to stand in the face of the entrenchment and cronyism that prevail today. A confident, independent voice is needed.
Our nominees, whose compelling biographies are provided below, are uniquely suited to this task and in preparation for this campaign have invested substantial amounts of their own money to ensure alignment with the all but forgotten shareholders of Crescent Point. As of the date of the circular accompanying this letter, our nominees hold more than double the amount of common shares held by all of the incumbent non-employee directors.
Cation’s Nominees Bring Experience and a Commitment to Restoring Shareholder Value
Cation’s nominees to the Board are:
- Dallas J. Howe. Mr. Howe is the former Chair of the Board of Potash Corporation of Saskatchewan Inc. He also is a former director and Chair of the Compensation Committee of Viterra Inc., a Canadian agribusiness built on the foundation of Saskatchewan Wheat Pool Inc. and Agricore United. Mr. Howe has served on and chaired Corporate Governance and Nominating, Audit and Compensation committees in the private, public and not-for-profit sectors. Mr. Howe has been the recipient of many achievements including, in 2009, being made an ICD Fellow by the Institute of Corporate Directors. In his role as Chair of Potash Corporation, Mr. Howe was instrumental in thwarting the hostile bid initiated by BHP Billiton. In his position at Viterra, Mr. Howe oversaw the acquisition of Viterra by Glencore International plc.
- Herbert C. Pinder. Mr. Pinder brings to the board significant board experience, including corporate governance expertise. Mr. Pinder has served on more than 40 public, private, not-for-profit and crown boards with a focus on the energy sector. Mr. Pinder currently serves as a director of ARC Resources Ltd. where he is the Chair of the Policy and Board Governance Committee and is Chair of the board of directors of Astra Oil Corp. Mr. Pinder also served as a director of Renegade Petroleum Ltd. from April 2013 to March 2014 during which time Renegade successfully repelled a leading energy activist fund in a proxy contest seeking to replace the entire board.
- Thomas A. Budd. Mr. Budd is the President of Focus Advisory Corp. and an independent businessman. Mr. Budd has extensive experience providing mergers, acquisitions and financial advice on a significant number of Canadian oil and gas transactions. Most recently, Mr. Budd served as President and Vice Chairman, Head of Investment Banking at GMP Corp. and Griffiths McBurney Canada Corp. from April 1996 until 2008. Mr. Budd also served as a director of Renegade Petroleum Ltd. from April 2013 to March 2014 and was the Chair of Renegade and a member of its special committee during a proxy contest in which Renegade successfully repelled a leading energy activist fund seeking to replace the entire board.
- Sandy L. Edmonstone. Mr. Edmonstone is the President of Cation Capital Inc. Mr. Edmonstone was previously Executive Director and Deputy Head of Global Oil & Gas within the Macquarie Group, where he oversaw global energy platform operations. Mr. Edmonstone has advised on a variety of mergers and acquisitions, asset dispositions, restructurings and shareholder-value maximization processes. Mr. Edmonstone has been involved in mandates specifically focused on securityholder rights, ensuring securityholders receive maximum value for their investment. Recently, he led an investor initiative that resulted in approximately 500% additional consideration for securityholders than what the board had unanimously recommended. Mr. Edmonstone is also a graduate of the Institute of Corporate Directors’ Education Program, holding the ICD.D designation.
In addition to a wealth of experience comprised of high profile board work, contested corporate transactions and in-depth public markets governance experience, Cation’s nominees possess:
- Enhanced equity ownership through the direct purchase of Crescent Point shares
- Deep knowledge and experience in the energy and commodities business
- Extensive capital markets expertise required to restore market confidence and optimize capital deployment
- Demonstrated shareholder value maximization experience
Once elected, Cation’s nominees are committed to working with the other directors to implement a plan to review leadership, restore value and change the culture at Crescent Point.
The shareholders of Crescent Point should not and cannot continue to accept these results, especially from a company with such tremendous assets and potential. Rather, based on study and analysis, we believe Crescent Point has multiple opportunities to drive significant shareholder value by:
Shareholders need new directors with the experience, alignment and commitment to guide the Company to a new, sustainable, value-creating strategy
We ask that you vote the BLUE PROXY or BLUE VIF in support of our nominees, who are committed to working with the Board and management to address the Company’s strategy and governance failures and help it fulfill its potential for all shareholders.
In order to be used at the Meeting, your BLUE form of proxy or BLUE VIF must be submitted in accordance with the instructions provided prior to 5:00 p.m. (Calgary time) on Tuesday, May 1, 2018.
The Time For Change Is Now
Crescent Point’s Underperformance and Shareholder Value Destruction
Since January 1, 2015, an investment in Crescent Point has generated a total return of (-55%), significantly below the total returns of the sector (-19%, TSX Energy Index) and the overall market (+3%, TSX Composite). During the same period, an index of the Company’s primarily produced commodity has risen by 18%. It is clear that the Company’s underperformance cannot be blamed on the sector or commodity headwinds.
During this period of shareholder value destruction, the Company has made repeated changes to its Board, with the board seeing six (with a seventh nominated this year) new directors cherry-picked by management over the period beginning in March 2014. Yet, there is no sign that this has stemmed the decline. If anything, shareholder value destruction has accelerated. Since 2017, Crescent Point’s share price has declined 50%, versus the sector -17%, the market -1% and WTI +15% and underperforming by a greater margin than in the prior three years.
Clearly, the current Board has failed shareholders
One key driver of shareholder value destruction has been the Company’s declining dividend, which has been reduced by 87% over the past four years. A timely reduction of the dividend that preserved shareholder value would have been appropriate and prudent (and in line with the approach adopted by companies in Crescent Point’s peer group). However, the Company instead elected to delay the dividend reductions relative to its peers, adopting a “too little, too late” approach that both deprived the Company of necessary cash on hand and eroded shareholder value.
Crescent Point suffers from a significantly discounted valuation, both relative to its peers and relative to the valuation premium it once enjoyed. Relative to its peers, Crescent Point has the lowest financial valuation metrics despite its assets having the highest exposure to light oil. In order to compete with its peers, it must generate greater returns on capital.
Crescent Point’s shareholders cannot continue to endure further value destruction under the current Board.
A Failure of Strategy and Governance
Despite having a number of years to improve the business, the Company continues to be plagued with deteriorating performance. Total capital expenditures for 2017 well exceeded the Company’s original guidance while actual average annual production increased only slightly and exit guidance remained flat. All-in general and administrative costs including capitalized and share-based compensation costs are among the highest in the Company’s peer group. Proven plus probable finding and development costs including changes in future development capital have gone from $7.02/barrel of oil equivalent (“boe”) in 2016 to $21.64/boe in 2017, and operating costs have increased year over year. The Company’s key performance indicators are overwhelmingly negative and continue to deteriorate.
While the current Board may point to the Company’s advertised per share growth measures, it appears that such calculations ignore the impact of debt on a per share basis.
The reality is Crescent Point has ignored the impact of its billions of dollars of debt in calculating its per share growth and, if it were to account for such debt, per share growth would be negative. The Board’s focus on growth has come at the cost of operating efficiencies of the business and material share price erosion.
The Board and management’s strategy has been to spend capital to grow production without regard for shareholder return or debt, which has ballooned. This is demonstrated by higher debt/cash flow leverage than would have been historically acceptable to the Board.
Notwithstanding poor corporate performance over recent years, remarkably executive compensation has spiked, with an increase of 17% in total compensation for 2017 year over year. This has occurred while shareholders have suffered a ~48% plunge in the value of their shares over the same period. To add insult to injury, shareholders have repeatedly demonstrated their dissatisfaction with matters related to executive compensation without seeing any results, including in the 2016 proxy cycle where Crescent Point received a “no” vote on its say on pay resolution with a dismal 31% of votes cast in support of the Company's approach to executive compensation.
This complete disconnect between executive compensation and shareholder returns is deeply troubling and further illustrated by the fact that the Company’s current directors and officers own just 0.6% of the issued and outstanding shares. In contrast, our nominees own an aggregate of 0.3% of the issued and outstanding shares, which is more than double the amount of shares held by all of the incumbent non-employee directors.
Yet it would seem the Company intends to go a step further and actually reward management for destroying shareholder value. With the Company’s shares hovering, over the course of the last year, near a 15-year low, we shareholders would expect a Board and management team whose interests are aligned with shareholders to be buying shares. Instead, at the upcoming annual general meeting, the Company is seeking to further enrich its executive leadership team by adopting a new equity compensation plan and ratifying grants of nearly 3 million options made without shareholder approval but with apparent urgency, when the shares were reaching lows earlier this year. With a correspondingly depressed exercise price, these options are essentially risk-free money – for management, at shareholders’ expense – that rewards insiders for having decimated the share price.
As if that weren’t enough, the Company is also asking shareholders to approve an increase in the number of shares eligible for issuance under the Company’s existing restricted share bonus plan. It is outrageous to so richly reward a leadership team that has presided over the evisceration of shareholder value that has befallen Crescent Point.
Crescent Point’s current strategy and governance structures, as overseen by the current Board, are failing the Company and its shareholders
STRATEGY FOR VALUE CREATION
We believe the opportunity at Crescent Point is unique, both in the amount of value that can be unlocked and how readily it can be achieved. Cation believes a new strategy needs to be implemented at Crescent Point to create shareholder value over the next 18 months, focused on maximizing shareholder value through both near and long-term initiatives for which the proposed Board members would seek to build consensus with the remaining Board members and management.
|1. Elect Highly Qualified and Fully Independent New Board Members||
|2. Undertake a Fulsome Value Maximization Strategy||The reconstituted Board would undertake a 12 to 18 month fulsome evaluation of the Company’s entire operations, governance and management with a view to identifying near-term opportunities for gain while ensuring the long-term sustainability of the business|
|3. Realign the Business||
Our nominees are intent on realizing immediate value for all stakeholders and eradicating the bureaucratic bloat and inefficiencies currently plaguing Crescent Point. Specific measures that may be pursued include:
|4. Redeploy the Efficiencies and Synergies into Ensuring the Sustainability of Crescent Point||
Once the Company realizes the benefit of enhanced cash flows from its realignment initiatives and reduced cost of capital, it will be able to reward shareholders through any, all or a combination of:
|5. Dividend||Initially maintain the existing dividend and review the dividend policy regularly based on the value maximization and realignment efforts outlined above and the cash flow performance of the Company|
The objective of the recommended plan is to strengthen Crescent Point for the benefit of ALL shareholders:
- Maximize share price
- Ensure the long-term sustainability of the business
- Restore the market’s confidence in Crescent Point
- Re-establish a competitive cost of capital
Crescent Point has Strong Assets and Opportunities to Unlock Shareholder Value
In making our case for change we are motivated by the once pre-eminent stature of Crescent Point among its peers. Four years ago, on the strength of its best-in-class assets and top-quartile operating netbacks, Crescent Point commanded a premium valuation to its peer group mean, compared to its significant discount today. Crescent Point has one of the lowest 2018E EV/EBITDA multiples of all relevant oil producers in Canada. Clearly the premium valuation multiple has been lost.
Whether the current Board has been unable, unwilling or unmotivated to pursue them, we firmly believe that the Company has multiple opportunities to recover this enormous shareholder value gap. Given the Company’s failing strategy and governance, this is a very significant opportunity. According to Crescent Point’s calculations as at March 1, 2018, the Company’s share price is currently trading at only 37.5% of its calculated net asset value per share of $24.44. Put another way, approximately $8.4 billion of value is not being reflected in the entity value of the Company.
Crescent Point Publicly Stated Net Asset Valuation as of December 31, 2017
To regain the Company’s valuation premium and drive shareholder value, our nominees are committed to working with the rest of the Board and management to pursue our five point strategy for value creation.
The Time for Change is Now
Crescent Point’s shareholders cannot continue to support a strategy and management team – or the Board that oversees them – while shareholder value is destroyed and their investment erodes. Despite numerous “refreshes” by the Company, the current Board has proven itself unable to correct the Company’s negative trajectory.
We are confident that with the election of our four independent nominees, the renewed Board can redirect the Company and work to deliver near and long-term value creation for the benefit of all shareholders.
As shareholders consider our request to vote in favour of our nominees, they should ask themselves the simple question:
“Am I happy with the performance of my investment or is it time for a change?”
Your support is extremely important. Vote only your BLUE PROXY or BLUE VIF today.
For questions or assistance, please contact Cation’s strategic shareholder advisor and proxy solicitor, D.F. King, at 1-800-835-0437 toll-free in North America, or 1-201-806-7301 outside of North America (collect calls accepted), or by e-mail at firstname.lastname@example.org.
(Signed) “Sandy L. Edmonstone”
Sandy L. Edmonstone
Cation Capital Inc.