BUSINESS WATCH

Inside Dome’s fragile empire

Peter C. Newman September 27 1982
BUSINESS WATCH

Inside Dome’s fragile empire

Peter C. Newman September 27 1982

Inside Dome’s fragile empire

BUSINESS WATCH

Peter C. Newman

The decision that turned Dome from the darling of the Canadian investment community into a four-letter word was taken at a dramatic confrontation during a private meeting in the energy giant’s Calgary headquarters on June 9, 1981. Around the boardroom table that day were Dome Chairman Jack Gallagher, President Bill Richards, Senior Vice-President (Finance) Peter Breyfogle, Toronto stockbroker Doug Mackay, Toronto lawyer Fraser Fell, former National Energy Board chairman Marshall Crowe and Calgary lawyer Mac Jones, who regularly collects $1 million a year in Dome legal fees.

The main issue before the group was how to finance the purchase of a company code-named “Swampy.” This was their confidential designation for Hudson’s Bay Oil and Gas (HBOG), the Canadian subsidiary of Conoco, of Stamford, Conn., 53 per cent of which had been bought out by Dome the previous month. At the time, Dome itself was flying high. Its stock float topped the worth of any Canadian security; highly favorable drilling results were expected from the Beaufort; Dome’s debt load was high (between $3 billion and $4 billion) but still manageable.

The meeting quickly decided to go for the 47 per cent of HBOG still in private investors’ hands. The reasoning was simple: only by acquiring the full 100 per cent could HBOG’s $600-million cash flow be diverted to Dome’s own coffers. HBOG’s assets could then be stripped for an expected $1.5 billion, with components of the newly acquired subsidiary already bid for by Dow Chemical, TransCanada Pipelines and Dome Canada Ltd. The meeting was told that buying out HBOG would cost $2 billion since shrewd investors such as Andy Sarlos in Toronto and Stephen Jarislowsky in Montreal had been cornering the shares, driving up their value.

The discussion then turned to how the purchase should be financed. A majority of the meeting’s participants sided with Gallagher’s strongly worded contention that “Dome was founded with $7 million in debt and $250,000 in equity” and that this ratio should be maintained. He advocated going back to the ever-generous banks that had already financed most of Dome’s expansion. Along with Richards he proposed putting off the deal until good news from the Beaufort had driven up Dome’s already high stock values.

Opposing Gallagher was a much smaller contingent led by Breyfogle, who had been hired by Dome three years earlier to manage the energy giant’s finances. In a lengthy and impassioned presentation, Breyfogle advocated immediate financing of the HBOG shares through a new offering of Dome convertible preferred shares. He documented the stock market’s propensity for absorbing a new Dome issue as opposed to the company taking on even more bank debt, making it vulnerable to upward pressures in the prime rate. But Gallagher’s opposing view easily carried the day.

By the time that fateful decision was implemented five months later, interest

rates had soared. Even had it wanted to, Dome could no longer take the equity route because its stock values had plummeted. The oil glut and the NEP had wiped out most of the cash flow expected from the HBOG properties, and Dome’s debt burden had spiralled. (Breyfogle resigned from Dome shortly after the June 9 meeting, though he still refuses to discuss what happened at that pivotal confrontation.)

Dome’s loans now stand at an astronomical $8 billion, with $1.35 billion due to be paid off by the end of September. The Canadian bankers, who hold so much Dome debt that they might as well print Smiling Jack’s portrait on their banknotes, at one point were

anxious to make Robert Bandeen, the former CNR chairman, Dome’s chief executive officer. That was fine with Gallagher—as long as Bandeen reported to him. The banks, however, wanted Bandeen to report to them. For his part, Bandeen promptly found a safer haven as chairman of Crown Life.

Apart from its bank loans, Dome has yet to pay off many other debts, including a large one to Hudson’s Bay Company for the 1979 purchase of Siebens Oil & Gas. The last $60-million instalment is now three months overdue. “We’re one of Dome’s smaller creditors,” says Rolph Huband, the Bay’s corporate secretary, “but we could put them into receivership.”

The Dome story is a tragedy of timing. The Beaufort Sea oil exists and one day it will fuel North America’s economy. The combination of adverse circumstances that brought Dome to heel might have been averted at that June 9 meeting, but that Gallagher prevailed is hardly surprising. He has personified Dome’s imaginative thrust ever since he founded the company in 1951. During the past year Gallagher’s personal holdings in Dome (5,292,220 shares) have declined in value from $132 million to less than $21 million, but his faith remains undimmed. The famous “fiscal engineering,” which has allowed Dome to flourish without paying out any significant dividends or taxes, will almost certainly save the energy empire one more time with at least some bank debt being switched into second-preferreds.

The banks were quite content to carry Dome’s debt on 10-year promisory notes until the HBOG deal. That transaction made them so nervous that they drastically shortened the payout terms. Now, in secret negotiations being held in the Imperial Bank of Commerce’s Toronto headquarters, they are trying to come up with a salvage deal. So far the bankers have hung tough, insisting that they will not refinance Dome unless the federal government provides some form of safety net. But one almost certain condition for support by the banks will be either the departure of Gallagher and Richards from their helmsmanship of Dome or their elevation into powerless, honorary positions.

Still, the cynics who discount Jack Gallagher’s achievements forget that he is no run-of-the-mill Jehovah. This is a man who has always marched to his own drum corps, unshakable in the sanctity of his mission to tap the oil pools beneath the unforgiving ice floes off Tuktoyaktuk.