O'Hara Administration Co., S.A.

June 15, 2015 12:56 ET

Five Key Questions for Pacific Rubiales Board and Management to Address on Investor Call

Fellow Minority Shareholders Urged to Vote AGAINST the Proposed Arrangement

PUNTA PACIFICA, PANAMA--(Marketwired - June 15, 2015) - O'Hara Administration Co., S.A. ("O'Hara") and its joint actors holding 62,639,710 common shares ("Common Shares") of Pacific Rubiales Energy Corp. ("Pacific Rubiales" or the "Company"), representing approximately 19.82% of the issued and outstanding Common Shares, are opposed to the arrangement whereby ALFA and Harbour are proposing to acquire all of the issued and outstanding Common Shares of Pacific Rubiales for C$6.50 per share (the "Proposed Arrangement").

Ahead of Pacific Rubiales' investor and analyst call, our concerned shareholder group has provided the following key questions for the Company's Board and Management team to address on the call. O'Hara notes that the details regarding the investor call do not contain information regarding the ability of investors and analysts to ask questions, but respectfully urge Pacific Rubiales leadership to seize the opportunity to address these critical shareholder questions:

1. Why has Pacific Rubiales omitted key data points regarding the Proposed Arrangement, while promoting a price that management believes is too low?

The offer of C$6.50 per share is 73% less than the 52 week high of Pacific Rubiales Common Shares of C$23.86. Pacific Rubiales' shareholder base is comprised of sophisticated market participants who understand the nature of the energy market and the Common Shares continue to trade below the offer price, suggesting that the Street doesn't believe shareholders will support the Proposed Arrangement.

In fact, Jose Francisco Arata, President and Executive Director of Pacific Rubiales appears to believe that the Company is worth more than the offer price. On the Company's Q4 2014 Earnings call on March 18, 2015 - when oil prices were significantly lower - Mr. Arata stated the following:

"… the total net asset value for the company with this combination of assets and contingent resources, we are talking of US$7.37, which represents C$9.22 per share. So it's important to understand this value under this current price environment. Of course, if this price environment change[s], then we have to adjust this value."

2. Why is Pacific Rubiales providing warnings regarding what could happen if the offer fails, that are inconsistent with what management really believes regarding the Company's prospects?

Pacific Rubiales' circular and related disclosure attempt to highlight the downside of not supporting the Proposed Arrangement, but CEO Ronald F. Pantin appears to believe that the Company is well positioned for the future. On the Guidance/Update call on December 4, 2014 Mr. Pantin stated the following:

"…the Company is very well positioned in this low-price scenario. We are a low-cost producer, and we continue reducing our costs…We also have improved our balance sheet. We have no corporate short-term debt. That's very important."

On May 14, 2015 - after the Company had entered into negotiations with the prospective buyers - the Company announced the following:

"…[Pacific Rubiales] Reports Record Net Production, Sale Volumes and Lower Cash Operating Costs."

Mr. Pantin added:

"You will see in the first quarter results that the Company has significantly reduced G&A and cash operating costs. While these reductions do not fully offset the dramatic drop in oil prices in the first quarter of 2015, they do assure the Company's profitability through the remainder of 2015 and beyond, within expected oil price scenarios."

In addition to improving its operating costs, Pacific Rubiales disclosed that as of Q1 2015 it expected to see an improvement in its net bank and long-term debt, has no debt maturities over the short term and continues its active commodity hedging program to minimize cash flow volatility. The Company also forecasted an approximate 70% increase in production over the next four years. All of these measures project sustainable improvements to the Company's leverage and liquidity and, importantly, are modeled on the assumption of low commodity prices.

It would appear that Pacific Rubiales' management team - those with the best insight into the prospects for the Company - believe that the future is bright for long-term shareholders.

3. Why is Pacific Rubiales using shareholder cash to secure votes - cash that should have gone to shareholders?

The Pacific Rubiales circular exposes the Company's intention to form a Soliciting Dealer Group in support of the Proposed Arrangement. Total costs related will be substantial and, like the consent solicitation fees in the amount of US$18.5 million, will be stripped from corporate funds rather than returned to shareholders. The Proposed Arrangement should stand on its own merits.

The Globe and Mail, Canada's national newspaper took a strong stance against this practice, stating on April 2, 2013:

"The practice of offering incentives to brokers to make recommendations to their clients to vote on one side or another in proxy battles and takeover votes is an undesirable one. It is not vote-buying, but it will tend to distort financial adviser-investor relationships and sooner or later to weaken trust."

Various regulatory bodies and proxy advisors have also expressed concern with the practice.

4. Why did the Board and Management team provide the prospective buyers with outlandish deal-protections, after dismissing any risk of an opportunistic bid by ALFA?

There are many aspects of the Proposed Arrangement that are of concern to shareholders and should be of concern to leading proxy advisors, like Institutional Shareholder Services, including:

  • Termination fees for transactions of this nature typically amount to approximately 2.5-3.5% of the equity value. But the termination fee under the Proposed Arrangement is US$100,000,000 or 5.94% of the equity value of the transaction.
  • Mr. Pantin was asked on the December 4, 2014 guidance call "Is there any kind of standstill agreement in place that would prevent ALFA from buying more shares or potentially all of Pacific Rubiales?" and stated the following:

    "We have been working on this in the JV, and there's no reason to have any standstill. If we have a standstill, it doesn't make sense. Actually, we have now a Company that we are going to be working together. I know that ALFA has a very important position in Pacific Rubiales. But with this market, I don't think nobody's going to be doing anything at this moment in time."
  • In addition to not seeing if a higher offer was available by conducting an auction or market check, the Board and Management did not bargain for the right to shop Pacific Rubiales after the deal was announced, thereby simply delivering Pacific Rubiales on a platter to ALFA and Harbour.
  • Why won't ALFA and Harbour waive the Dissent Rights Condition if they truly believe that the offer of C$6.50 per share under the Proposed Arrangement fully values Pacific Rubiales?

A condition precedent to the obligations of ALFA and Harbour under the Proposed Arrangement is that the aggregate number of Common Shares in respect of which dissent rights have been validly exercised and not withdrawn not exceed 5% of the issued and outstanding Common Shares (the "Dissent Rights Condition"). The Dissent Rights Condition may only be waived by ALFA and Harbour, but ALFA and Harbour have indicated that they do not intend to do so notwithstanding O'Hara's opposition to the Proposed Arrangement. Effectively, by agreeing to this, the Board has granted ALFA and Harbour a free option over Pacific Rubiales.

5. Please provide an explanation regarding the governance concerns with the Board, and why shareholders should put any weight into a recommendation from it?

The credibility of those recommending that shareholders support the Proposed Arrangement is in question with five different Pacific Rubiales directors having recently received WITHHOLD voting recommendations from leading proxy advisors. In addition to the concerns and inconsistencies highlighted above:

  • Institutional Shareholder Services, a leading proxy advisor, identified high governance risk at the Company in a report issued ahead of Pacific Rubiales' May 28, 2015 AGM and recommended:

    "Vote withhold for all Compensation Committee members (Chair Neil Woodyer, Francisco Sole and Miguel Rodriquez, who is also the Lead Director) because the Company has not adopted an advisory vote on executive compensation and, the pay and performance quantitative and qualitative review results in a High concern:
    • TSR [Total Share Return] underperformance relative to its peers
    • 40% increase in base pay amid continual precipitous fall in share price
    • 30% increase in discretionary bonus cannot be directly attributed to annual improvement from prior year
    • Continued lack of performance-conditioned equity awards (the new Executive DSUs [Deferred Share Units] which replaced options are still time-based vesting
    • 4 of the NEOS (2 Co-Executive Chairs, CEO and President) each received above $9M in 2014 (total $37M), almost 4 times that of CFO who received $2.5M"
  • Glass, Lewis & Co., LLC is another leading proxy advisor that articulated a number of concerns ahead of the May 28, 2015 AGM. In recommending that shareholders withhold votes from directors Woodyer, Efromovich and Martinez it noted, among other items:

    "INDEPENDENCE CONCERNS - Five of the twelve directors are either affiliated with the Company or are insiders. We believe this raises concerns about the objectivity and independence of the board and its ability to perform its proper oversight role…"
  • In the recently-completed uncontested re-election of directors for the Company, no director received more than 83% support of the votes cast and three directors came close to receiving less than 50% support
  • If the Proposed Arrangement is consummated, directors and officers of Pacific Rubiales will receive aggregate cash payments of approximately C$116,107,888.

O'Hara intends to VOTE AGAINST the Arrangement Resolution and urges its fellow shareholders of Pacific Rubiales to also VOTE AGAINST the Arrangement Resolution. O'Hara will file its own proxy circular and provide its own proxy for fellow shareholders, who have already expressed disappointment in the opportunistic and oppressive ALFA/Harbour Offer, to vote shortly.

Information in Support of Public Broadcast Solicitation:

The following information is provided in accordance with Canadian corporate and securities laws applicable to public broadcast solicitations. O'Hara is relying on the exemption under section 9.2(4) of National Instrument 51-102 - Continuous Disclosure Obligations ("NI 51-102") to make this public broadcast solicitation.

This solicitation is being made by O'Hara and not by or on behalf of the management of Pacific Rubiales.

The registered office address of Pacific Rubiales is 333 Bay Street, Suite 1100, Toronto, Ontario M5H 2R2.

O'Hara has filed this press release containing the information required by section 9.2(4)(c) of NI 51-102 on Pacific Rubiales' company profile on SEDAR at www.sedar.com.

O'Hara may solicit proxies in reliance upon the public broadcast exemption to the solicitation requirements under applicable Canadian corporate and securities laws, conveyed by way of public broadcast, including through press releases, speeches or publications, and by any other manner permitted under applicable Canadian laws. O'Hara has retained D.F. King to assist in the solicitation of proxies. O'Hara will pay D.F. King solicitation fees of approximately $150,000 and will reimburse D.F. King for its reasonable out-of-pocket expenses incurred in connection with the solicitation. All costs incurred for the solicitation will be borne by O'Hara.

O'Hara is not requesting that shareholders of Pacific Rubiales submit a proxy at this time. Once O'Hara has commenced a formal solicitation of proxies, a registered shareholder of Pacific Rubiales that gives a proxy may revoke it: (a) by completing and signing a valid proxy bearing a later date and returning it in accordance with the instructions contained in the form of proxy to be provided by O'Hara; (b) by depositing an instrument in writing executed by the Shareholder or by the Shareholder's attorney authorized in writing, as the case may be: (i) at the registered office of Pacific Rubiales at any time up to and including the last business day preceding the day of the meeting at which the proxy is to be used, or (ii) with the chairman of the meeting prior to its commencement on the day of the meeting; or (c) in any other manner permitted by law. A non-registered holder of common shares of Pacific Rubiales will be entitled to revoke a form of proxy or voting instruction form given to an intermediary at any time by written notice to the intermediary in accordance with the instructions given to the non-registered holder by its intermediary.

O'Hara and its joint actors hold 62,639,710 Common Shares, representing approximately 19.82% of the issued and outstanding Common Shares. With the exception of the foregoing, to the knowledge of O'Hara, neither O'Hara nor any associates or affiliates of O'Hara, has any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in any matter to be acted upon at the meeting.

Contact Information

  • Investors: Orlando J. Alvarado
    O'Hara Administration Co., S.A.
    Trump Ocean Club, Punta Colon Street
    BL 313, 3rd Floor, Punta Pacifica, Panama
    Tel: +917 434 5615
    E-mail: oalvarado@oharafinancial.com

    Media: Joel Shaffer
    Longview Communications
    Tel: 416-649-8006