Follow the Money- if you can

Updated 13 May 2020 and 4 August 2020

In this post, I return to the receivership of Trident Exploration and the various “legal  fictions” used including: Trident Limited Partnership, Trident Exploration (Alberta) Corp., Trident Exploration (Aurora) Limited Partnership I,  Trident Exploration (2006) Limited Partnership I, and Fenergy Corp. Trident was a debtor to two provincial agencies: ATB Financial (ATB) and Alberta Investment Management Corporation (AIMCo).

The Creditors

Trident was placed into receivership in May of 2019 and  attracted considerable attention because of the large number of unproductive wells and its vast reclamation obligations. The 177 page affidavit of Yvette Kennedy, Chief Administrative Officer of the Town of Stettler initiated the receivership process.  AIMCo and ATB did not apply for the receivership but the Orphan Well Association applied to the Court to ensure that Trident’s assets first be used to satisfy environmental obligations before creditors were repaid.

Trident’s list of creditors is a “who’s who” of Alberta companies. 

First and foremost creditors were –

ATB  Financial                                 $5.65 million

AIMCo                                               $60 million 

Origami Capital Partners LLC     $5,164,000  

The above sums are relatively small amounts to the latter two firms, but large numbers for most Albertans. Other notables “stiffed” by Trident were

Bearspaw Petroleum                  $53,695  

Cenovus                                        $26.97

CNRL                                             $37,277    

County of Barrhead                   $804,872

County of Stettler                      $958,883

Ember Resources*                     $322,464

* investee of the the Alberta Growth Mandate (AGM)

Government of Alberta          $55,989  

Kneehill County                        $1,273,734

Minister of Finance, GOA         $5,500

Osler, Hoskin & Harcourt LLP  $204,452

Provincial Treasurer                 $49,560

Red Deer County                       $986,078

Starland County                        $2,962,608

Sturgeon County                       $98,596

Woodlands County                  $1,115,949.

Other creditors listed included: Bellatrix Petroleum (in bankruptcy,  Bell Canada, CNRL, and CGI.  (Another informative document presented to the Court is the Service List.  The list demonstrates the competence or otherwise of Accounts payables departments of various firms in the province.

But the great tragedy is not the deep-pocketed CNRLs, Oslers, ATBs, or AIMCos, who can absorb these losses, but the smaller, unsecured creditors. These individuals or companies entered arrangements, in good faith, to provide goods and services, for an agreed upon price, which was not honoured. Examples include Zedi Canada ($262,229), Woodhill Instrumentation Ltd. ($37,752) and Tom and Nancy Schuurman ($9,481). For a perspective from landowners who have not been paid go to Polluter Pay Federation.

In hindsight, County Treasurers could have been more vigilant, especially from the moment oil prices fell in 2014-15.  Still, should county treasurers have been expected to understand how the Liability Management Ratings (LMR) system of the Alberta Energy Regulator (AER) worked? This was a regulatory system supposed to ensure that companies would be able to fulfill regulatory obligations to clean up wells.

More sophisticated organizations, such as ATB and AIMCo, had access to legal, credit, financial, and analytical databases that might have assisted in connecting the dots  beginning to flash red in 2016.  In 2016, conventional wisdom regarding oil prices suggested patience and forbearance.  By 2017 though, it should have become evident to strategic thinkers, those “paid the big bucks” at ATB and AIMCo, that financial markets, environmental liabilities, and climate concerns were posing real constraints on fossil fuel financing and development.

A plausible explanation for AIMCo’s decision to allocate an inordinate portion of the Heritage Fund’s Alberta Growth Mandate assets (and corollary pension fund pooled money) to Alberta oil and gas, was a wager on oil prices rising. AIMCo was not alone as firms like Sequoia Resources Corp. bought assets from Perpetual Energy to benefit from the expected, or hoped for, oil price rebound. By late 2017 there was some hope that oil prices would recover, but this proved to be very short- term. 

AIMCo though continued to invest in previously supported firms like Razor, Journey Energy and Ikkuma Resources (now Pieradae) as well as some new oil companies including Wolf Midstream and Enerflex. These transactions seemed to carry on without much scrutiny.  Another contextual factor may be the “home bias” of investment firms (AIMCo) who supposedly understand local businesses (Alberta energy companies) better and can identify “winners” from the “losers.”

However, with the Supreme Court of Canada Redwater decision in January 2019 favouring the AER  creditors, notably ATB and AIMCo, now had to determine what to do with moribund credits like Trident. The Supreme Court’s decision effectively sterilized the ability of creditors to put energy companies, in breach of their loan covenants, into receivership. Why? Because the secured creditor must pay the Receiver and would likely not get anything in return. given the bankrupt company’s  environmental liabilities. What to do?

Agreements for Purchase of Assets

In the case of Trident, PWC LIT, the Receiver, recently submitted a number of agreements for purchase of assets (APAs) to the Court of Queen’s Bench.  These APAs come from several, largely unknown, corporations.

The Bidders

The Receiver’s report, is dated 31 March 2020, which happens to correspond to the fiscal year end of ATB, AIMCo, and the Government of Alberta. The bidders are

• Apogee Petroleum Inc.,
• Barrel Oil Corp.,
• Just Freehold Energy Corp., or jfEnergy, (formally Freehold Energy Corp, a private Canadian energy company),
• Stikine Resources Ltd (formerly a B.C. gold mining company),
• Kensington Royalty Corp., and
• Century Petroleum Corp.

Below the nature of the bidders’ operations based on their web presence is explored:

Apogee’s website is under construction. Further web searches revealed the company has a legal registered office in Calgary, the company is active, and was incorporated on 28 June 2017. The company has 18 employees and revenue of $3 million.   

There is a little more information about Barrell Oil which describes itself as is an “upstream oil and gas exploration and production company operating in the Western Canadian Sedimentary Basin.”  Its website, providing information about its management and board, states:

Barrell Oil is committed to a strong Health, Safety and Environmental Management System (HSE MS) that protects its workers, Prime Contractors, supervisors, contractors, suppliers, self‐employed persons, temporary staffing agencies, visitors and the public (our stakeholders), the natural environment and its property from incidents.

Other web references for Barrell include Linked In profiles on some of its leaders.

jfEnergy, is a private Canadian energy company focused on integrating natural gas production and electrical power generation. Its website stresses its:

“Unparalleled access to “local” development opportunity…   Freehold mineral owners prefer to work with jfEnergy to develop their resources…in a just and mutually respectful manner.”  

The company, founded in 2006, boasts five employees and has revenue of $2 million.

Stikine Energy Corp. is a Vancouver-based firm which explores for silica resources and processes frac sand. The company was formed in 2000 and was formerly known as Stikine Gold Corporation with assets of under $5 million.

Century Petroleum Corp. is a firm whose shares were trading on 4 May for $0.0006 a share. The volume of trading of this “Over-the-Counter” U.S. listed stock was 2400 shares which could be bought for $1.44. According to MarketWatch.com:

“Century Petroleum Corp. engages in oil and gas acquisition, exploration, exploitation, and production. The company was founded on December 13, 2004 and is headquartered in Las Vegas, NV.”

The final bidder was Kensington Royalty Corp. whose only web hit is in an Alberta government publication: “Accepted Offer for Crown Petroleum and Natural Gas Rights offered on 19 June 2019.”  Kensington was the successful 50 % bidder (along with Stikine Resources Ltd.)  paying $1,280 for 256 acres or $5 a hectare. At this auction of mineral rights, per hectare prices ranged from $2.50 to $331 per hectare.

It is evident that neither these corporations nor their officers and directors are flagships of Alberta’s  oil and gas exploration sector. What prices might they offer for Trident’s rights? 

Auction Process

In its Third Report to the Court, the Receiver noted that:

the Confidential Supplement to the Third Report contains commercially sensitive information and the dissemination of that information could materially prejudice Trident’s interest, including its ability to remarket the remaining oil and gas properties, in the event that one or more of the transactions under the APAs do not close.

All the purchase and sale agreements redact the purchase price which identifies three categories of purchase price: 1) petroleum and natural gas rights; 2) tangibles, BLANK less BLANK; and 3) miscellaneous interests which are defined in APAs to include another six sub-categories.

Opinion

Without detailed delving into the legal niceties of these APAs, several conclusions might be drawn.

First, the cost of receivers and consulting law firms, relative to the value of the estate of the bankrupt company, is very high. In the Third Report, at the very last page of the 602-page report, the financials of the receivership are presented. Highlights include:

Cash receipts                                 $4,687,821

Of which:            

Equipment & Property Sales      $3,011,212

Cash Disbursements                  $2,993,522

Of which:

Receiver’s fees                            ($687,999)

Receiver’s Counsel Fees            ($260,000)

Ongoing Software Costs            ($326,161)

Insurance                                      ($560,000)

Other General and Admin.        ($666,144)

Sales Advisor Fees                       ($152,000)

Other Contractors                        ($117,919)

Thus, of the $3.7 million in disbursements, most of the opeating revenue was consumed by services. Only $1,006,070 was spent on “Shut in and Operational” costs.  Little wonder we have an orphan well problem.

Second, how financially capable are these bidders, their individual managers, and directors? Would you, as a Regulator, looking at this transaction, be confident, these orphans will be reclaimed?

The only reason I can think of there is any economic motivation is: how tempting might be to benefit from Ottawa’s (not Alberta’s) $1 billion grant to create jobs and reclaim thousands of wells. Will it be a bonanza for unemployed workers or a means to oversee and dip into money flowing for reclamation and unemployed workers?

Third, a seller must always ensure there is no collusion between the parties bidding for similar types of economic interests.  This can be done via redactions so each party does not know what the other parties paid. Assuming no successful bidder discusses purchase price to other purchasers (a big assumption),  this method ensures integrity of the sales process.

But does the public or the media know whether the receivership process is fair? Ultimately, the Receiver must report his receipts when reporting to the Court. With that information, each of the bidders will be able to determine the average price and realize whether they bid too much or too little. Should the public be entitled to know the results of individual bids? This type of reporting does give the Regulator (AER) and public more information about the “batting percentage” of bidders and whether there are “lucky” bidders. Such information serves to ensure the bidding process is kosher.

Finally, what does this process mean to secured creditors such as ATB and AIMCo, owed approximately $67 million (not counting accrued interest)? How can ATB and AIMCo, two major provincial agencies be certain that the Receiver is getting every cent of value from the estate of Trident?

Still, it is vital that the Orphan Well Association, as plaintiff and first beneficiary of the proceeds of the estate, collect all the moneys possible so that the environmental obligations of Trident are addressed.

In the end, it appears that the public treasury, primarily the provincial government, including municipal governments, have been stiffed.  Is our existing legal system structured to hold accountable the individuals, not the corporate fictions, for the transgressions of the law?

Comments welcome.

Note to Readers: PWC LIT Manager Susan Shabluk was contacted on Thursday 7 May 2020 to respond to questions. No response had been received before publication.