FrontFour Said to Seek Legacy Oil CEO Ouster, Potential Sale

FrontFour Capital Group, the largest shareholder in Legacy Oil + Gas Inc., is pushing for a new chief executive officer and potentially the break up or outright sale of the Calgary-based producer, people familiar with the matter said.

The activist investor is questioning CEO Trent Yanko’s inability to execute on the company’s current strategic review, said the people, who asked not to be identified because the talks are confidential. FrontFour announced last week it would be nominating three members to the company’s board.

Legacy has hired bankers to sell off certain assets in recent months as low oil prices meet a rising debt load, according to people familiar with that process. It has yet to find a buyer for the assets, said the people, who asked not to be named because the negotiations are private. Legacy said in a statement Monday it had formed a special committee to engage Greenwich, Connecticut-based FrontFour.

Legacy CEO Yanko didn’t immediately respond to phone and e-mail messages seeking comment. The company had about C$850 million ($695 million) in total debt as of the fourth quarter of 2014 and has a market capitalization of C$532 million, according to data compiled by Bloomberg.

Legacy, which has an annual general meeting scheduled for May 26, is focused on developing mostly oil-producing properties in southeast Saskatchewan and southwest Alberta. The company forecasts average output this year will be the equivalent of 23,300 barrels of a oil a day. Its stock has dropped 69 percent from a year ago as crude prices fell by half.

Trading Value

“I suspect FrontFour is seeing the valuation of Legacy versus the group and is building its position on that relative valuation discount,” said Chris Feltin, an analyst at Macquarie Group Ltd. in Calgary who rates the company the equivalent of a hold.

Legacy’s stock is trading at 5.9 times enterprise value relative to its debt-adjusted cash flow, compared with the average of about 9 times for its peers, Feltin said.

“The stock has come under pressure as oil prices have weakened because it’s carrying a fair amount of debt, but I think there’s a broad view that the company’s assets are actually quite good,” Feltin said.

The company’s debt is poised to average 5.3 times its cash flow in 2015, compared with about 1.9 times for the average mid-sized Canadian oil and gas producer, according to estimates from Macquarie. The company also has come under criticism from investors for its higher-than-average production decline rates, Feltin said.

Debt Covenants

The company can remain within debt covenants if U.S. oil prices average $52 a barrel or higher throughout 2015, Legacy said in a March 25 statement.

“A restructuring would make the most sense in terms of selling assets,” Feltin said. The company’s Midale asset in southeast Saskatchewan -- an early-stage, light-oil producing region -- has shown good drilling results and is the most attractive to sell, Feltin said. It could attract bids from companies active in the area such as Crescent Point Energy Corp. or private-equity firms and pension plans, Feltin said.

A corporate sale of Legacy would be challenged by the company’s high debt, Feltin said.

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