Centennial Takes On Canadian Oil Co.

Jan 30 2008 | 12:04pm ET

A New York-based hedge fund has delivered an ominous message to a Canadian oil company: You’re better off in someone else’s hands.

In a letter to Compton Petroleum Corp. management, Centennial Energy Partners said nothing the company can do would have the same value to shareholders as a sale.

 Centennial managing member Peter Seldin said there is a C$800 million funding gap between the cost of Compton’s expansion plan and its potential cash flow.

“To close this gap, you will need to sell significant assets—first, non-core assets and, then, some of your growth assets—and also issue a large number of new shares,” Seldin wrote. “As a result, your shareholders are unlikely to enjoy Compton’s growth on a per-share basis. The company might get bigger, but Compton’s shares are unlikely to be much more valuable.”

In case they missed his point, Seldin offered the following conclusion: “You need to put the company up for sale now.”

Centennial, Compton’s largest shareholder with a roughly 20% stake, has invested in the Calgary-based company for a decade. It began agitating for changes publicly last month.

Compton last week unveiled a C$1.6 billion capital spending plan “to continue to invest in the large growth potential of its asset base,” it said.

Centennial, of course, “completely” disagrees with that strategy.

“Your plan is an ill-conceived program that is highly dependent on commodity prices and external fund,” Seldin wrote. “This is the type of planning that has earned Compton its valuation discount in the first place.”

As for the planners, Seldin said his firm would seek their jobs if Compton doesn’t listen. He warned that Centennial was prepared to nominate a slate of director candidates and launch a proxy battle.

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