CEO Exits Serve as Warning to Canadian Energy Industry

(Reuters) -- The sudden departures of two energy industry chief executives this week should serve notice to their counterparts that corporate boards and the shareholders they represent are no longer willing to tolerate weak management.

Both Nexen Inc, (NXY.TO: Quote) a global oil producer and oil sands operator, and Connacher Oil and Gas Ltd CLL.TO, which operates a small thermal oil sands project, unexpectedly dismissed their chief executives in the past week, replacing them with stand-in managers until permanent replacements are found.

The two oil companies are very different but shared one troubling trait: In a time when oil is selling for around $100 a barrel, neither Marvin Romanow at Nexen nor Richard Gusella at Connacher convinced investors that they could take advantage of the good times.

Reaction to their exits was immediate, with shares of both companies rising as much as 9 percent after the news broke.

These were CEOs of oil companies in a $100 dollar oil environment with relatively weak share prices that were dismissed, and the stocks reacted quite positively, said Michael Dunn, an analyst at FirstEnergy Capital. That will not go unnoticed in the industry.

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Graphic on share prices link.reuters.com/rap95s

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The departures may make for nervous times for chief executives at other big Canadian energy companies whose shares have performed much worse than their peers, a list that features Encana Corp (ECA.TO:Quote) and Talisman Energy Inc TLM.TO.

The removal of the chief executives comes at a time when shareholders across the board are showing much less patience. Canadian Pacific Railway Ltd's (CP.TO: Quote) largest shareholder has launched a proxy battle in an attempt to dethrone CEO Fred Green.

As well, pension funds and activist investors are making their dissatisfaction public with a wide swath of companies, ranging from BlackBerry maker Research In Motion Ltd (RIM.TO: Quote) to grain handler Viterra Inc (VT.TO: Quote).

Shareholder activism isn't unknown in Canada's oil and gas industry but it is rare for a chief executive to get the sack. In the oil industry, shareholder dissatisfaction usually results in hastily arranged takeovers.

The last significant name among Canada's senior oil and gas producers to be shown the door was in 2001, when CEO David Tuer of PanCanadian Energy, one of Encana Corp's (ECA.TO: Quote) predecessor companies, was removed for undisclosed reasons.

Analysts say the departures of Romanow and Gusella signals a new willingness to hold management accountable for weak results.

At Nexen and Connacher we're seeing a combination of things, said Chris Feltin, an analyst at Macquarie Capital Markets. It's enhanced scrutiny by shareholders and more proactive moves by the boards. This is a good thing for shareholders overall. There should be a consequence for poor performance, and it's encouraging to see changes being made.

Over the past 12 months, Nexen shares have fallen by 24 percent. While that performance is considered poor, it is better than the 38 percent fall suffered by Encana Corp (ECA.TO: Quote) or Talisman Energy's TLM.TO 47 percent drop.

Weak natural gas prices, which slumped this week to 28-month lows due to mild winter weather, take much of the blame for the pair's weak performance.

But while Talisman CEO John Manzoni is credited with refocusing the company's North American operations on profitable, liquids-rich shale plays, Encana's Randy Eresman is taking heat for sticking too long with a strategy of boosting the company's production of low-value dry gas - natural gas that has no associated liquids.

Encana's leadership team has been feeling the heat for those past decisions to focus on dry gas, Dunn said.

Few expect more chief executives to get fired. But long-term shareholders only have so much patience. If, as with Nexen, there's no sign that management has a credible strategy to fix what's ailing the stock, investors are increasingly ready to press their directors for radical action.

Shareholders do seem to be more willing to get more proactive in making changes, Feltin said. Management teams are going to be tasked with making sure they are doing the right thing for shareholders - and you'll see more engagement by boards to ensure the proper actions are being taken.