Calgary is a tough place to keep a secret

An oilman dies, goes to Heaven and meets St. Peter at the Pearly Gates. "You can't go in the oilmen's room. It's full," St. Peter says. "What if I can make some room, then can I stay?" asks the oilman. "Sure, but I don't see how," says St. Peter.
The oilman pokes his head in the oilmen's room and yells, "Oil discovered in Hell!" Immediately, everyone leaves the oilmen's section and heads down to Hell to check out the rumour. To St. Peter's astonishment, the oilman runs toward Hell too. "Hey, where are you going? There's a space for you in Heaven now!"
"But what if the rumour is true?" says the oilman.

An old industry joke, courtesy of George Gosbee, managing director of Tristone Capital Advisors, that captures a central truth about the importance of rumour in the oil patch.
You just can't underestimate the importance of rumour in the oil patch. Take the last couple of weeks: The share prices of industry heavyweights Talisman Energy, Husky Energy and Canadian Hunter Exploration all jumped in heavy trading on the Toronto Stock Exchange as a result of rumours.
Talisman shares rose because of speculation it's in talks with a consortium of Japanese companies to sell its controversial Sudan interests. Canadian Hunter was high on rumours that it's close to being taken over. Husky rose on suggestions that it's on the verge of being sold.

The biggy making the rounds was that the French super major, TotalFinaElf, has a 10-day exclusive to bid for Husky at $ 20 per share. Also Canadian Natural Resources was rumoured to be buying Chesapeake Energy for about $ 200-mm. Unlike the rumours of oil being found in Hell, many oil patch rumours end up being true.
Mike Tims, CEO of Peters & Co. and one of the industry's top investment bankers, gives the Calgary rumour mill a 50:50 chance of being on the money -- or at least getting some of the key details right. Husky, for example, had to issue a news release last month at the request of the TSE confirming it is in talks -- three weeks after the rumour mill had the major development nailed down.
Tristone's George Gosbee, an investment banker specializing in private energy companies, says the exception are rumours about wells, which tend to be blown out of proportion. "That is why we are always saying, 'Buy on rumour, sell on news.' [The well] never lives up to everyone's expectations."
Rob Cook, director of market surveillance at the TSE, says the exchange insists companies do something about rumours if there is substantial truth to them and they are having an impact on the stock price. "Our policy says prompt clarification or denial of a rumour through a news release is the most effective manner of rectifying such a situation -- the situation being the market is unduly influenced by rumours." Companies don't have to comply but most do, he says.

One reason Calgary is a tough place to keep a secret is its geography. In other large energy centres -- Houston and London, for example -- oil companies are spread out all over town. In Calgary, most oil industry activity takes place downtown, within a nine-block area. Everyone knows everyone, making the comings and goings of those involved in a transaction prime fodder for gossip.
Some situations that can set off a wildfire of speculation: two CEOs lunching with each other, an investment banking firm placing a large order for pizzas on a weekend, out-of-towners visiting field facilities and an oilman suddenly cancelling weekend plans. Rumours also start with people in the know. Because of the nature of the oil industry, there are usually a lot of people in the loop.
The loop of course grows larger when a deal is almost done. Mr. Gosbee elaborates: "You have two boards, so that's 20 people. And you have management teams from two companies, there's another 20 people. And then you have the law firms and the investment banks, so you are already up to 60 people trying to keep a secret. So even if one person says, 'We're working on a deal,' people start speculating and start looking at who's over at the Petroleum Club having lunch together."

It doesn't help that Calgary is mostly a one-industry town where competitors are constantly talking to one another about better ways of finding and buying oil and gas, and where cross-board membership is common. That's why many oil companies require insiders to sign confidentiality agreements regarding deals. Beyond that, keeping a lid on rumours requires all sorts of cunning.
An investment banker with a large North American firm says he is so concerned about Calgary's rumour mill he holds meetings at airport hotels or out of town. He says he might even separate from his business associates when walking on Calgary streets. Mr. Tims says he gives a code name to all transactions; attempts to keep as few people as possible involved in deals; defers visits to field facilities until the deal is ready to roll; is always careful whom he's seen with; and prefers meeting in lawyers' offices to corporate offices.
He says many transactions are announced Monday mornings because many deals are hammered out on weekends, just to prevent leaks. "There is an enormous advantage to announce after a weekend, especially after a long weekend," says Mr. Tims. "Most sides feel that if they can get through the close of market on Friday without a leak, no one can act on anything that might leak between 2 p.m. on Friday Calgary time [when the TSE closes for trading] and 7 am on Tuesday morning [when the TSE reopens for trading] after a long weekend."

While Calgarians love market rumours (the city has more stock brokers per capita than anywhere else in Canada) and many buy and sell stocks based on what they hear, dealmakers say a big problem is that rumours can kill a deal. If a company is for sale and its stock soars above what any serious bidder is prepared to pay, it's hard for a board to recommend a deal at lower than the market price.
This is what could happen with Husky. According to the rumour mill, its board may reject the TotalFinaElf bid at $ 20, which would be below the stock price that the rumour mill has been predicting. "What you particularly don't want to see is the deal premium disappear -- that is, the targeted company's stock to rise so that in effect the economic basis of the deal that has been negotiated no longer looks so attractive to the target company's shareholders," says Mr. Tims.
Securities regulators get involved when they smell the potential for stock manipulation -- for example, when someone appears to be spreading false information to drive a stock up or down. Wayne Alford, director of enforcement at the Alberta Securities Commission, says that while rumours have always been a part of public markets, modern technology is providing investors with a lot more information to feed rumours -- some of it legitimate, some not: "Pre-Internet, it was very unusual for someone to start posting bogus news releases on the news wire, whereas now anybody with a point of view can publish it."

He has this advice for companies caught up in rumours: "Don't lie. If you do in fact have merger negotiations going on, you can't say, 'There aren't any.' You either say, 'No comment,' or you have to state to everyone what is going on."
The ASC, for example, is reviewing comments last month by J.C. Anderson, CEO of Anderson Exploration that his company was not for sale, days before it agreed to be bought by Devon Energy. Mr. Alford stressed the review has not come to a conclusion and doesn't imply that Mr. Anderson did anything wrong.
As for investors, Mr. Alford advises them to verify rumours before making investment decisions: "Don't buy on the basis of rumour, and if that advice leads you to miss out on an investment opportunity, that's fine. Most of the time, it's going to keep you from getting burned."