Hank Swartout ought to be a hero for what he's done for shareholders at Precision Drilling. He built a $7-billion company from nothing and made a lot of people wealthier in the process.
What a shame, then, that his era might end with accusations of insider greed.
Precision, Canada's largest oil driller, is in the midst of a huge restructuring. It has already closed the sale of its international drilling and energy services divisions; in 12 days, shareholders will vote on turning what's left into a trust.
The deal should be an easy sell, but there's an ugly side to it: The trust conversion stands to stuff tens of millions of dollars into the pockets of Precision insiders.
Remember the conversion of Penn West Petroleum this spring, which threw the Ontario Teachers Pension Plan into fits of exasperation? Precision's deal looks similar. Maybe worse. Don't rule out the possibility of a court challenge.
As with Penn West, the key issue is stock options and how they can be used by insiders to grab some extra loot as the old company becomes a new trust. Precision has spread options around liberally, and its top people have made good use of them. Mr. Swartout, for example, cashed in $10-million worth last year and $4-million the year before.
And as the stock price has jumped 41 per cent this year, the value of those options has gone up along with it. At the beginning of September, Precision insiders -- primarily directors and management -- held 5.5 million options with a theoretical value of $165-million.
But slightly more than half of those options, worth more than $90-million, had not vested; that is, they could not be exercised. They have been given, but they haven't been earned.
The trust conversion takes care of that. If shareholders approve the deal at the Calgary meeting Oct. 31, all options will vest automatically. Precision employees will be able to take their cash out if they want. Or, they can swap their stock options for trust options -- with a twist.
Precision, remember, is doing more here than becoming an income trust. It has sold major chunks of its business (at what looks like a very nice price) and intends to distribute the proceeds -- $850-million in cash and $1.8-billion in Weatherford International stock -- to shareholders by way of a special dividend.
Once that's done, of course, Precision's market value will fall. That doesn't bother shareholders, since the money will be in their accounts instead of the company's. It might, however, annoy option holders, who aren't entitled to receive dividends. Some might argue they didn't take the same risk as stock holders to build the divisions that Precision has just sold. In fact, they didn't take any risk at all. Why should they share in the rewards?
But share they will, in a backhanded sort of way. Here's how it works. Let's say a Precision employee has options with a strike price of $25. He can give them up for new options with a lower strike price. The "adjustment" compensates for the asset sales. Not a bad deal.
"It's a matter of fairness," says Precision vice-president Robert German, the company's chief accounting officer, and that is certainly one way to look at it. If the company didn't offer these sweeteners, maybe it would have morale problems. Maybe the new trust would struggle to keep its best people if it denied them the chance at a hefty mid-career bonus.
But that seems unlikely, given that the board has already dealt with the problem. The new Precision trust may offer up to four different bonus schemes, according to regulatory filings. Few details are given, but the prime beneficiaries, one assumes, will be many of the same executives who stand to get the options windfall. In effect, they'll be able walk out of the office with large cheques on Friday and return Monday morning to the same job and a new pay scheme. Pray that you will some day be so lucky.
Who pays for all this? Shareholders do, either directly, through the transfer of company cash to management, or indirectly, through dilution. Teachers, which claims ownership of about $25-million in Precision stock, has written to Mr. Swartout raising its objections, says Robert Bertram, the pension fund's executive vice-president of investments. But it hasn't decided on its next move.
As for the trust conversion, there's little doubt it will happen. All that remains is to see whether Precision's reputation is damaged on the way.
© The Globe and Mail
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