How Clay Riddell built Paramount Resources into a petroleum powerhouse
"There never was a grand plan," says Paramount Resources Ltd. chairman and CEO Clay Riddell
Clay Riddell loves rocks. And therein lies the secret to his success with them, the reason this Manitoba-born geologist has become one of the most successful oilmen Alberta has ever seen.
When you love rocks as Clay Riddell loves them (he amassed his first collection at age four), you add to your scientific training and field experience an inimitable intuition for their potential. The kind of intuition that lets you take a modest investment in a pile of rocks in the 1970s, and parlay it into a family of companies the market cap of which exceeds $6 billion in 2013.
But that’s not how Riddell will put it himself. As Paramount Resources Ltd. celebrates its 35th anniversary in 2013, the company’s 76-year-old founder, chairman and CEO is almost unbecomingly modest and reticent. He’s pleased at what he’s accomplished (how can he not be?), but reluctant to either extol his accomplishment or take credit for any particular vision, strategy or gift.
“There never was a grand plan,” Clay Riddell says. “When I started Paramount, I had only modest experience of running a couple of very tiny public companies prior to it, and our first issue was $5 million of stock. I had no visions of creating a company that grew to this.”
Nor, he says, had he a grand plan of building a family succession story, which is what Paramount has become. His son, Jim Riddell, now fills the roles of president and chief operating officer at Paramount and CEO and director at spinoff Trilogy Energy Corp. (Clay chairs its board) as well as executive chairman of the board of spin-off MGM Energy Corp. (Clay’s the official chairman) and executive chairman of the privately owned (and Riddell-controlled) Cavalier Energy Inc. (Clay’s a director). Meanwhile, Clay’s daughter, Sue Riddell-Rose, helms Perpetual Energy Inc., formerly Paramount Energy Trust, as president and CEO (Clay, of course, chairs its board).
Considering how tight this family of rock hounds is – Sue and Jim are both geologists – Clay’s claim that there never was a succession plan sounds almost disingenuous. But the 40-something kids seem to buy it. “I fully believe that if we weren’t capable of doing the job, he would have found somebody else to do it,” Jim says.
But we’re getting ahead of the story. Before he started handing the business off to his kids – who will hopefully build on his petroleum empire – the family patriarch had to build it up. It was not easy. “We had more setbacks than just the normal cycles of the business,” Clay says. “Our group of companies had more setbacks and interference than most others.” Never mind the economic and logistical challenges in the 1980s when the company was young. The 1990s weren’t easy either. That’s when the company built the last two National Energy Board-regulated gas pipelines into the Northwest Territories.
Its pipeline wrangles continue. The Mackenzie Gas Project, the pipeline that was critical to the long-term success of Paramount’s Northern-focused spin off, MGM Energy, isn’t within even a glimpse of the finish line. (“It will get built,” Riddell-Rose insists. “It’s just a matter of whether anyone sitting here at this table will still be alive.”)
The 2000s, when Paramount, and its new leaders, were hitting their stride, provided some hard times too. That’s when Paramount had to wrestle with Alberta’s Energy and Utilities Board for nearly a decade over its gas-over-bitumen extraction in the Surmont region of northern Alberta. And that’s when Riddell-Rose came into her own as a leader and spokesperson for the company and the industry, stepping into the spotlight her father actively eschewed to articulate the company’s position and agenda. It was good training for the role she would have to play in late 2006, when, with the ink barely dry on the creation of Paramount Energy Trust, she found herself fighting not just for the future of her company, but, in her role as co-chair of the Canadian Association of Energy Trusts, for the entire trust sector after the federal government suddenly decided to change the income tax rules so that income trusts holding Canadian assets would have to start paying corporate tax on pre-dividend earnings, just like a corporation.
It was a baptism by fire no one would claim to enjoy. But Riddell-Rose clearly owned and accepted being thrust into the spotlight much more than her father, arguably Calgary’s shyest billionaire, who keeps everything from his ownership in the Calgary Flames to his considerable philanthropic contributions as quiet as possible, ever did.
She is also more comfortable in the spotlight than her brother Jim, who would love to fly as below-the-radar of media and public scrutiny as his father has generally managed to. Be it from nature, nurture or a combination of the two, Jim shares an awful lot with his dad, including doing what needs to be done as unobtrusively as possible. He believes he’s learned “from the best oilman in Canada, the best explorer that I know of, who knows the geology and the oil business the best.” It’s hard to press him to identify how he plans to chart his own individual path – what it is that he might do with Paramount as he takes more and more of the leadership role. “I don’t know that I can pick things and say I do them differently,” he says. “Every day you come to work you try to make the best decisions for whatever problems you have in front of you. And whatever opportunities you have in front of you, if there isn’t a right answer, you either don’t make the decision or you guess. And that’s all I do, and I think that’s what he’s always done.”
Such talk from Paramount’s heir apparent might not sooth any worries shareholders have that Jim Riddell will be as successful steering the ship as his father has. But John Williams, president and CEO of Trilogy Energy, a company chasing tight gas and shale gas in Alberta’s red hot Duvernay play, thinks the family resemblance in leadership and vision is the real deal. “They are very similar,” Williams says. “They are both very smart, very knowledgeable and very intuitive. They share knowledge, both with each other, and with others. But they are different in terms of their management styles.”
Part of the difference has to do with age and experience. “Clay is this kind of wise old owl,” Williams says. “He just sits there and listens, and asks the questions. He wants to know if you understand what you’re doing. And he either trusts what you do or say or he doesn’t.”
Jim Riddell, Williams says, “is more engaged in the conversation with you.” Jim asks questions. The process of engaging with him is much more interactive. And there’s a touch of humility. He’s “still a kid,” Williams says. “He’s still learning.”
But then, Clay thinks he’s still learning too. If you read between the lines of what he says and what he thinks is the secret to the success of Paramount, and its eventual legacy to its non-related shareholders, it’s really that he rarely took anything for granted. And he still doesn’t.
“I think the way we grew Paramount, and with the succession, none of it was textbook,” Clay says. “I don’t think anybody would suggest you grow a company this way. I just didn’t know any better.” Some of what he did worked accordingly to plan (“I was worried it wouldn’t, so often I wouldn’t tell anyone what the plan was,” he confesses). Some of it failed.
The failures, suggests Riddell-Rose, gave the company and the family the opportunity to persevere, re-evaluate, learn and adapt. Through most of the 35 years of Paramount’s history, Clay steered the ship, and his children watched. “There never was any teaching,” Clay says. Riddell-Rose agrees. “It’s true. We were lucky we had good observation skills.”
And the biggest thing they learned is that it’s good to have options. “The one thing dad always did was build tons of optionality into our business,” Riddell-Rose says. When Paramount’s ventures have stumbled, it was when “we’ve structured ourselves in a way where we’ve eliminated some of that optionality,” she says.
MGM Energy’s struggle to create value from its Northern oil and gas assets for shareholders, she suggests, is a case in point. It initially hitched its horse to natural gas and the Mackenzie Gas Project. Then the shale gale hit, North American prices sunk into a prolonged funk and the company suffered (MGM Energy has since shifted strategies and is chasing another Northern Star – the Canol shale oil play in the N.W.T’s central Mackenzie Valley.) When there have been options, flexibility and the ability to deploy capital and focus this way or that depending on the vagaries of the market, Paramount has prospered.
It’s a great strategy, right? Like Clay’s love of rocks and geology – the love that makes him make consistently smart bets on the next big thing – the love of optionality and its business consequences also stems from something more basic. As Riddell-Rose puts it to him: “You’re interested in a lot of different things.” The father nods. Eggs in different baskets. Or, more appropriately, rocks in different areas.
Companies in the oil patch often struggle with the decision of whether to stick to one thing they know well – oil sands, tight oil, liquids-rich natural gas – or diversify and give themselves options. Clay Riddell and his kin have chosen the latter path.
But is it the right one? Analysts like Adam Gill at CIBC World Markets Inc. dig the strategy. “The market is very positive over what Paramount has done over the last few years,” Gill says. It likes Paramount’s asset base, and its “potential in multiple horizons.” It’s excited over the company’s plans to build out infrastructure and ramp up production growth. Right now, Gill says the balance between its “diverse holding of assets” and its “focus,” particularly in its Kaybob business unit, pleases the market. The spin-out strategy, which created Trilogy, MGM, Perpetual and most recently Cavalier Energy Inc. – a subsidiary with in situ oil sands leases in Alberta’s Grand Rapids formation – is currently in favor, Gill says, “because the company has something material to work on to add volumes, but has not deprived itself of long-term opportunities, particularly in the oil sands.” Meanwhile, in the third quarter of 2012, Paramount was pumping out an average of 20,000 barrels of oil equivalent per day.
His diverse interests notwithstanding, there is one thing that Clay Riddell is most emphatically not interested in. And that’s diluting the family interest in the Paramount companies. “We are very conscious about dilution of the holdings,” Clay says. “The biggest dilution is when we did the first issue, and I sold 40 per cent of the company for $5 million.”
Paramount and its public spin offs are, effectively, family-controlled public companies, a phenomenon of the Canadian capital markets with a lot of critics. But Clay is unapologetic. “Anybody that’s invested beside us has done incredibly well,” he says. Jim jumps in, “He’s never created any dual share structures or ever extended his influence beyond his ownership influence. I don’t think anybody can ever say he’s done more than just try and grow things for all of the shareholders and make the right decisions.”
The big question for Paramount’s other shareholders is will the “kids” make just as many right decisions and steer the company as competently as Clay has? The answer seems to be that they already are. On paper, Clay is still chairman and CEO of most of the sandbox, but he says Sue and Jim have been calling more and more of the shots. “Over time, Paramount is being run more and more by Jim and Sue,” he says. “It just happened gradually. Paramount was, compared to today, very small when they started making decisions and venturing opinions on how it should move forward.” What happens now at Paramount, he says, comes from Jim and Sue: “They come and tell me how it’s going to be, and they ask, ‘Do you think it’s OK?’”
But when will they stop asking Clay if it’s OK? And how might the course they chart for Paramount and its cadre of spinoffs be different from how their father operated? Jim thinks he can’t do better and can’t see how he’s different. But Riddell-Rose charts a more independent path. “Jim and Dad both have this incredible knack to see the full spectrum of our business and I think I have to rely a little bit more on my team for some things,” she says. There is another, potentially important divergence. Her dad has always had a penchant for leverage.
“I don’t wait until I have enough money to spend. I go to the bank and borrow and borrow lots. Debt is your friend as long as you’re right,” Clay says. Riddell-Rose shudders. “Having lived through a world of hurt the last few years with not enough optionality, I’m diminishing my debt right now, at Perpetual anyway,” she says.
Which is good news for Perpetual, and good news for Paramount. Learning from an oil patch legend is great training for the heirs and the shareholders they work for. But doing everything the way Clay Riddell did it just because that’s how he did it? That is the path to stagnation, not growth.