Peyto Exploration’s Darren Gee puts the drill bit to work
Alberta Oil C-Suite Energy Executive Awards
Darren Gee is that rarest of all things: a homegrown Calgarian in a city of newcomers. Rarer still, he stands at the helm of a gas-weighted company that, in a year marked by terrible gas prices that had most of its peers “dead in the water,” is an analyst darling. When Peyto’s third-quarter results came in, many were singing the company’s praises: Peyto was an “outstanding sector overperformer”; “the envy of the industry.”
Gee takes the praise in stride. “Yeah, we’ve come out the other side of all this and we look like heroes – look at what they’ve done this year in light of where gas prices have gone – but the analysts didn’t always love us,” he says.
Peyto’s come under fire for, among other things, “putting all of its eggs in one basket” and for investing too much of its capital in facilities. “But those were all conscious choices, part of the long-term strategy,” says Gee. The strategy paid off in spades. Peyto not only posted enviable results last year while competitors floundered, but successfully completed the first major acquisition in the company’s 13-year history, taking out junior producer Open Range Energy Corp. for $114 million.
Peyto’s pursuit of Open Range is as emblematic of Gee’s leadership as Gee’s character is of Peyto’s culture. He got lured over to Peyto by founder Don Gray in 2001, after earning his stripes first at Petro-Canada, then Anderson Explorations, where he got mentored by oil patch legend J.C. Anderson, and finally at Renaissance Energy, until its takeover by Husky Energy Inc. Peyto, then consisting essentially of Gray and six other people, appealed to Gee more than being a cog in the wheel at Husky. But what really appealed was the Peyto story.
“It was about going to the field, putting the drill bit to work and seeing if you could make more money,” Gee says. As the company grew, Gee says, “We’ve never lost that vision. We’re spending the shareholders’ money – so everything we do, we ask, what is the most effective way to generate money for our shareholders?”
That attitude had Peyto converting to a trust when that structure was popular in the patch. As Gee says, “It was the more advantageous structure for our shareholders; of course we did it.” The conversion back to a corporation was a similar no-brainer. The trust structure no longer held the tax break, and the adoption of multi-frack wells in Alberta’s Deep Basin meant that the best way to make the shareholders’ cash work for them was to redirect it from dividends into capital investments.
Investments at key times into infrastructure and operations are an integral part of the Peyto story as well: the resulting low operating costs are a critical part of its competitive advantage. And as Gee points out, that’s no accident. It’s one of a series of conscious choices the company has made – and stuck to – as others faltered or moved on to the next promised “big thing.”
“We were always looking over our shoulder for someone to copy us,” Gee says, not least because the corporate strategy does “an incredible job of building shareholder value.”
They waited. And waited. Until finally, Open Range did. “They made no bones about it – they were trying to do what Peyto did,” says Gee. “We watched their evolution very carefully.” Time and cost worked against Open Range. It cost them three times as much to drill each well as it did Peyto a decade earlier. That meant when gas prices went from low to lower in the early part of the year, Open Range stumbled. And, despite its attempt to first do a deal with Cequence Energy Ltd., Peyto elegantly took it out.
For Gee, this first acquisition in the company’s history is not a new chapter. “We’ve looked at acquisitions before and we’ve added parcels of land here or there, but it is very rarely that we find an acquisition where the returns are sufficient to compete with what we can do organically,” he says.
The acquisition, and Peyto’s overall performance, makes it an attractive target. But Gee doesn’t think he’ll be negotiating a takeout anytime soon. He’s not complacent. Peyto’s management controls roughly five per cent of its shares. “No way could we ourselves block a bid for the company,” Gee says. But he thinks odds are good shareholders will stick with Peyto, even if a buyer waves a 40 per cent premium at them.
“The companies getting taken out these days, it’s just not conceivable that with their cash flow they can get their share price to [the offered price] organically,” Gee says. Peyto is a different story. “We have a very clear path with our cash flow and with the growth of our asset base to substantially grow our share price,” Gee says.
- Graduated from University of Alberta
- Negotiated the 2012 acquisition of Open Range Energy Corp.
- Joined Peyto in 2001 as vice-president, engineering
- Took over as CEO of Peyto from founder Don Gray January 1, 2007
On the Peyto team: I have to give a lot of credit to my team here. When the gas prices went down and most guys were huddling in corners trying to survive, they just carried on. They didn’t waver from our strategy.
On the road ahead: From where we are sitting today, 2013 looks like it will be a great year. Not a stellar year, we don’t have commodity prices that are outlandish, but we have strong enough natural gas prices and good enough oil prices that we should see the stronger companies do well in 2013.
On the difference between being a CEO versus a VP: When I was negotiating with Don Gray about taking over the position, and we were talking compensation and holidays and all that, Don said, it doesn’t matter how many days of vacation you end up with, because as CEO you will never not be thinking about Peyto.