BUSINESS

A crisis of confidence over Dome

James Fleming,Mary Janigan May 31 1982
BUSINESS

A crisis of confidence over Dome

James Fleming,Mary Janigan May 31 1982

A crisis of confidence over Dome

BUSINESS

James Fleming

Speculation over the future of Dome Petroleum Ltd. has been swirling around North American financial markets for months. Besieged by anxious clients, investment analysts have pounced on the dribs and drabs of information released by the Calgary-based energy company regarding the efforts to carry its crippling $4.5-billion debt load. Will the banks be lenient and reschedule debt payments? Will Dome be able to sell off enough assets to provide the needed cash?

Will the federal government step in to bail Dome out? These questions were being asked with increasing urgency as Dome Chairman Jack Gallagher and other executives huddled in private sessions with the company’s bankers. Then, last week the patience of many investors ran out.

In a wave of panic selling in Toronto and New York Dome’s shares fell dramatically in value; in Europe the company’s bond issues took a similar beating.

The stunning vote of nonconfidence by investors was triggered by two developments that proved too much for their already jangled nerves. First, a report filed by Dome with the Securities Exchange Commission in the United States revealed that the company’s reported loss of $25.7 million in the first quarter of 1982 did not include $62.5 million in capitalized interest—a standard accounting practice whereby the interest cost of debt is deferred from the income statement. In Dome’s case, this means that its actual loss was much greater, and as a result, according to Wilf Gobert, a Calgary analyst, the company’s cash flow is running close to zero.

Another element adding to the uncertainty was Dome’s announcement that it was putting its U.S. assets, worth roughly $750 million, up for sale. This

move in itself was not surprising— Dome has already sold $1.6 billion in assets since January and has declared its intentions to sell off another $1.5 billion worth by year’s end. But there was growing concern that in the prevailing depressed market conditions, those assets will be difficult to jettison in time for Dome to meet its debt obligations. By midyear the company must come up with $310 million to pay short-

term bank loans; by Dec. 31 it has a further $1 billion of debt to repay.

Some analysts were confidently predicting last week that Dome would be able to raise enough cash through selling assets to scrape by. Alternatively, the four Canadian banks to which Dome owes an estimated $3 billion were expected to reschedule the debt repayments— Maclean ’s has learned that Dome has requested this act of leniency. But the most heated speculation centred on what actions the federal government might take to help Dome out.

In a clear indication of just how urgent Dome’s problems have become, last week the planning and priorities

committee of cabinet was considering a planning paper that laid out several options. One was some form of overall tax relief for the oil industry, such as alterations to the petroleum and gas revenue tax, which oil companies claim cuts their cash flow by up to 20 per cent.

Also under consideration was a relaxation of the incremental oil revenue tax on old oil. But any such measures are not expected before June, and the committee was also considering immediate steps to aid Dome. The specifics are not known, but observers speculate that they range from guaranteeing new bank loans to stepping in with cash to buy out Dome assets in the Beaufort Sea.

Dome’s demise would deal a tremendous blow to the National Energy Program, which—in the wake of the collapse of the Alsands oil mega-project—the government could not afford. Not only had Dome been one of the few oil companies to applaud the controversial scheme but significant changes had been made to accommodate it. Specifically, the degree of Canadian ownership necessary for a company to qualify for the full benefit & of petroleum incentive g grants was dropped ifrom 75 to 65 per cent for Dome’s sake. As well, changes were made in the Canada Business Corporations Act that allowed Dome to increase the Canadian ownership of its newly created subsidiary, Dome Canada, by placing constraints on who could buy shares (i.e., not Americans). This ensured that the subsidiary could get full benefit from tax advantages for Canadian companies.

But the political ramifications of a Dome bailout would be great, given the fact that the federal government is already strapped for cash. (The deficit now stands at $16 billion.) There is also the question of whether or not the government should step into the marketplace to rescue a company largely re-

sponsible for its own woes. The prevailing opinion is that when Dome bought Hudson’s Bay Oil and Gas Co. (HBOG) last year in a deal that left it $6.25 billion in debt, the company had no way of foreseeing the coming slump in demand for its oil and gas or the costly effects of the September, 1981, Ottawa-Alberta energy agreement. However, in the opinion of some observers, the company may have made crucial mistakes in the takeover. Why, for instance, did Dome wait several months to make a suitably attractive offer for the remaining shares in HBOG after buying the initial 53-per-cent stake in the company on June 10, 1981? Had the company acted quickly, it could have raised the cash required to buy out HBOG’s minority shareholders by issuing new equity or exchanging the stock for convertible preferred shares. But Dome delayed a decision and was caught in the deepening recession which ruled out that course of action. As a result, it ended up acquiring the shares by having its subsidiary, Dome Resources, exchange

them for retractable preferred shares that mature in 1984. Moreover, Dome took out a $2.1-billion loan from a consortium of banks to be held in trust for paying dividends on the shares and to buy them from its subsidiary. Dome’s delay, it is charged, substantially contributed to its debt problems. As well, the company is criticized for taking on too much floating-rate debt as opposed to fixed-rate debt.

Whatever the cause, Dome’s problems mark a dramatic reversal in the fortunes of Smiling Jack Gallagher. Once investors waited excitedly for his dramatic pronouncements on oil finds in the Beaufort Sea. Last week the fear was that Gallagher’s next pronouncement would concern the fate of Dome.

With Mary Janigan in Ottawa.