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Financial Post (Canada): Runaway rumours hurting Western: Time for oil company to end all the speculation

Published: Nov 28, 2006

Western Oil Sands Inc.’s main product is oil from the oilsands. But in the past six months, a close second has been rumours.

Haven’t you heard? There have been rumours about a widespread shareholders’ revolt about pressure from key shareholders to sell the company, sell its new business in Iraq, evict the management, convert into a trust.

There have been rumours about Calgary-based Western’s partners in the Athabasca Oil Sands Project in Northern Alberta — Shell Canada Ltd. and Chevron Corp. — making a takeover offer at $42 or so a share.

The stock is now trading below $30. The offer was rejected by Western’s board, according to even more rumours, making some shareholders very unhappy.

A good one is now making the rounds: Royal Dutch Shell PLC will make an offer of its own once it’s done buying the minority shareholders of Shell Canada, since with its recent $7.7-billion bid the Anglo Dutch oil major is signaling that it wants Canada’s oilsands to be a big part of its future growth.

There has been speculation about Western hiring TD Securities, and then jointly TD Securities and Goldman Sachs, to look at strategic alternatives. The upshot is a big deal would have to be in the works, since Goldman would not have taken the assignment without the promise of big fees. This is said to be widely believed.

In the case of Western, the rumours are not just passing noise. They’ve been around for months and have credibility. Analysts with several investment dealers have written reports about them. They’re driving the company’s stock price: Up when there’s new takeover talk, down when it doesn’t pan out.

The company’s response: silence, at least as far as people can tell. Apparently, some major shareholders or other market players got more out of the company, but then again, it’s all just speculation.

In his latest conference call, CEO Jim Houck could have addressed the rumours. Instead, he outlined its four planks for growth: development of current oilsands holdings, new in-situ projects, exploration in Iraq and finding more upgrading capacity.

The “loose-lips-sink-ships” communications strategy might keep the lawyers happy, the insiders feeling powerful and the folks at the Toronto Stock Exchange reasonably onside. (Under the exchange’s timely disclosure policy, listed companies aren’t obligated to address rumours unless they are correct in whole or in part.)

But in the end, it’s not a good idea. In the absence of official information, people come up with their own. Even the exchange encourages companies to promptly clarify or deny a rumour, particularly if it affects their stock price.

Here are five reasons why runaway rumours are adversely affecting Western:

– There are so many rumours about the company they are obfuscating everything else it says or does. Who cares about long-term plans for the Athabasca project when the company isn’t expected to be around in three months?

– Some people believe that if you don’t address rumours, they will eventually go away. There are situations when this is the best approach. In the case of Western, the rumour mongering is so out of control that new grist keeps getting thrown into the mill just to see what sticks.

– Management’s unwillingness to address rumours gives the rumours credibility.

– It shows the company lacks openness — not the desired image for a publicly traded corporation.

– It fuels perceptions of arrogance as management is seen as keeping a stiff upper lip.

All this is a pity, considering the company’s rags-to-riches past. Western was founded in 1999 by a group of 25 employees of mining giant BHP Billiton Ltd. of Australia who were on the verge of getting laid off because their company pulled out of the Athabasca project. The Canadians, Australians and Americans decided to tackle the project on their own and managed to raise the money to pay for their share of construction costs.

The flood of rumours started in late May, when Western announced an agreement to explore in Kurdistan, a region of Northern Iraq. The new strategy angered many of its big shareholders for launching a business in the world’s most troubled oil region. Some were even more upset that Western embarked on such a venture many months earlier without telling anyone.

Speaking of Iraq, here’s a fact: In announcing its capital spending plans for 2007 last week, the company said it’s still working “toward ratification of its exploration and production sharing agreement with the Kurdistan Regional Government, which is expected to include the finalization of a reduced contract area.”

It sounds like Western’s Iraq venture is not as firm or as big as previously thought. So here’s more fodder for the rumour mill: Wouldn’t it be something, if the move that kicked off all the rumours turns out to be fluff? It should be no surprise that the company did not return yet another phone call seeking clarification.

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