Western Oil feels shareholder heat

A Toronto money manager is calling on Western Oil Sands Inc. to consider putting the company up for sale, the latest episode of increasing activism among disgruntled shareholders.

"As a meaningful shareholder, we are officially requesting that management and the board of directors hire an adviser to seek alternatives to maximize shareholder value, and announce this to the public," stated a letter sent to the company by Salida Capital Corp., a Toronto-based investor.

The letter, dated Sept. 20, commended management for building the company but raised several issues, including rapidly rising costs to expand the Athabasca Oil Sands Project, of which Western owns a 20-per-cent stake and is majority owned and operated by Shell Canada Ltd.

The letter also questioned why Western plans to invest $45-million (U.S.) to explore for oil and natural gas in Iraq, a controversial decision announced in late May.

"We believe the challenge of regaining shareholder confidence may be insurmountable," Salida said.

The push by shareholders is part of a growing trend in recent years as investors at various companies loudly debate the strategies pursued by management. Salida was part of a group several years ago that encouraged Penn West Petroleum to consider a conversion to an income trust as its production growth stalled. Penn West eventually converted to a trust in 2005 and its units are up 170 per cent in the past three years.

While stock of Western has struggled, falling 5 per cent in the past year, other oil sands assets are garnering eye-popping premiums. Royal Dutch Shell PLC has spent more than $500-million (Canadian) this year just to acquire exploration and development rights for fringe territory in the Fort McMurray region of Alberta. Royal Dutch's Canadian arm, Shell Canada, spent $2.4-billion in May to buy BlackRock Ventures Inc., a junior oil sands producer. Total SA of France last year spent $1.7-billion for Deer Creek Energy Ltd., which owned undeveloped leases.

Salida stated that the "timing of an auction process could not be better," given interest from national oil companies in the oil sands. Several state-owned firms from China have made investments, a state-owned company from India has expressed interest publicly this year and Korea National Oil Corp. paid $270-million (U.S.) for undeveloped leases owned by Newmont Mining Corp. in July.

Rumours of shareholder activism among Western investors emerged in late August, helping drive stock of the firm about 20 per cent higher from what was almost its lowest point in more than a year -- despite far higher oil prices. Salida argues that the stock should be faring far better than it is, given its prime position in the oil sands.

Stock of Western fell 22 cents (Canadian) to $28.68 on the Toronto Stock Exchange yesterday. The company's market capitalization is about $4.7-billion.

The Salida letter proposed four options, led by a sale of the entire company. The second option is sale of its oil sands stake and a spinout of the Iraq asset. The third is an income trust conversion of the oil sands stake and a spinout of Iraq and Western's undeveloped oil sands leases. The fourth suggestion is a combination of any of the proposals to increase the firm's value.

The letter noted that various reports from financial analysts suggest a sale could occur at prices between $38 and $47 a share.

The three-page letter asked Western managers and directors to respond in written form quickly and also questioned why company founder and chairman Guy Turcotte sold 300,000 shares of his holdings at $26.60 apiece on Aug. 24 -- raising about $8-million -- when the company's own corporate presentation claims the firm's "conservative" pretax net asset value is $39.56 a share.

Mr. Turcotte still holds 5.35 million shares, according to insider trading filings, making him Western's third-largest investor.

The letter also asked about a market rumour that a large oil company made a bid for Western of more than $40 a share, but was turned down.

"If this is in fact true, then this should have been disclosed to shareholders," the Salida letter stated.

The letter concluded by stating Western executives have a duty to maximize the firm's value: "We firmly believe if other shareholders were canvassed, the majority of Western's shareholder base would support this course of action. We would like a written response to our letter as soon as possible."

Western did not return calls yesterday.