INVESTMENT COMMUNITY PERSPECTIVE

“It Happens” (Forrest Gump)

It happens: your entire industry goes through a massive downdraft and all peer stocks falter in the market. The oil and gas industry has just experienced a major downturn, driven by lower oil prices. Mining stocks a couple of years ago fell out of favour, and it was the financial stocks in 2008-2009 that got pummelled, due to the financial crisis, which took lots of companies down. For reasons often unforeseen, there are major corrections from time to time. What do you do? Should you play turtle, or pound the pavement?

You Are Not Alone

The first thing to remember is that you are not alone, so the pounding is not personal. All your peers are feeling the same pain, as are all of your shareholders. You will need to keep a calm head; do not panic. This is a circumstance beyond your control, everyone is reacting. But you can make a difference.

Assessment

What you need to do is find out why the industry is down – what are the key drivers of this big change. This means looking deeper than just the obvious. For example, the initial response to the fall in market value of oil and gas stocks is that the price of oil collapsed. But do not stop at the simple headline. For oil, modern drilling and completion techniques helped create a swell in the supply of crude that eventually overpowered demand. And demand for oil weakened on the back of slower global economic growth (still headwinds from the financial crisis), and greater environmental concerns tapering demand in first world countries coupled with efficiency gains in consumption. Understanding the reasons behind the simple answers will help identify what the market’s new key concerns are likely to be.

Your World has Changed

It is likely that whatever your presentation’s focus in the past, it will change in the near future. Whereas oil and gas producers used to pound the table on growth, growth, growth, investors will be less focused on growth and far more focused on survival, sustainability and financial strength. With the price of oil half of what it was, what is your company going to do to adapt? For financial institutions in 2008-2009 the questions were where was the organization most exposed, what was done about it, and how well was the company capitalized.

Adapt to your new Environment

Your company will need to adapt to changes. For financial institutions, this meant reassessing risks, revaluing investments and raising capital to shore up performance. For oil and gas companies, this has meant reducing costs, reassessing opportunities and reducing budgets and dividends to ensure sustainability.

Do Not Play Turtle, but Until the New Message is Developed, be Cautious

Throughout the adaption process, which can take time, IR must not play turtle and hide in its shell; rather, talk to investors, gather concerns, relay them to senior management and calm investors as much as possible. Indicate that management is aware of the issues and working diligently to developing its plan. Do not get ahead of management. The IRO’S communications to management will be critical in highlighting investor concerns. Keep notes and send regular memos/summaries to key executives; be a part of the solution by serving as their conduit to the market.

Get Out and Tell the New Story, and Do Not Sugar Coat Reality

Once the plan is in place and your new presentation is ready, it is time to get out and market. Ensure your presentation is on point, reflects the new realities and addresses investor concerns. Failure in any of these key areas could cause your company harm. Market perception matters, so if you do not address investors’ key concerns, they may not give you the support you need. In a down market, investors are most likely to shift to companies they believe understand the issues and have the right plan.

Getting out to tell your new story will involve time from senior management. (Key investors will want to hear from top executives, not the IRO…sorry.) This likely means you will have to maximize the limited time of key management by ensuring that meetings are well orchestrated and highly focused (both in terms of content presented and including the most important investors). Get a list of top investors and ensure you meet with them one-on-one or via a conference call. Maximize your time and exposure.

Be Timely

You do not need to be first out the gate, but you sure cannot be last. Be as timely as possible.

Most Important, Your Company Must Deliver (The Iceberg Analogy)

Presentations and commentaries are like the tip of the iceberg (10%). This is what people see and hear first, and the market will make judgements. But ultimately the company will be judged on performance; it is the 90% of the iceberg under water that makes it float. In the new world order, it is imperative that the company deliver; otherwise, initial enthusiasm can quickly wane.

Often a Litmus Test

We all believe that our companies are wonderful when things are going well, but when the market turns and the industry is hurt, investors soon find out who is prepared and who can adapt. Warren Buffet was quoted as saying, “When the tide goes out you can tell who’s been skinny dipping.” Help your company be one of the ‘winners’ by always being prepared and helping to plot out changes when ‘it’ happens.

Dirk Lever is Managing Director, Institutional Equity Research, AltaCorp Capital Inc.