Hamish Stewart: Why is Canada Pension Plan taking risky oil bets?

Avik Dey is steeped in the oil and gas sector. And, as director of the Canada Pension Plan Investment Board's natural investment team, he may just be the busiest man in Canada.

But maybe it's time to question whether his team's short-term oriented, high-risk investment strategy is the right one for the long-term retirement savings of 19 million Canadians.

Why does the CPPIB's private equity team appear to have a love affair with high-risk oil companies?

Prior to joining the CPPIB in 2014, Dey was the founder, president and chief executive of Remvest, a private investment company that focuses on the energy sector.

According to its website, Remvest is invested in several privately held oil and gas companies including Alvopetro Energy, Miramar Hydrocarbons, Fracar Energy Rentals, and Carrao Energy.

Remvest’s website indicates that ”the firm seeks to invest in the energy industry with a focus on ‘old’ oil, upstream, oilfield services, and midstream sectors. Within the upstream sector it seeks exploration and production opportunities.” The web site still lists Dey as its founding director, and it doesn't indicate a change in the status of his involvement with the company or the treatment of their investments since his joining the CPPIB in September of 2014. This raises questions over potential conflicts of interest as Dey wheels and deals on behalf of the Canadian pension savers while apparently maintaining parallel business interests. Alongside leading some of the CPPIB’s largest recent oil and gas acquisitions, Dey represents CPPIB on a number of oil and gas company boards of directors, including at Teine Energy and Seven Generations Energy.

Prior to setting up Remvest offices in Houston, Calgary, and Bogota, Columbia, Dey was the founder and CFO of private equity firm Remora Energy and held various positions at oil and gas private equity house First Reserve as well as at Encana (the parent company of Cenovus Energy and Encana USA). Dey then brought his deal-making acumen to the CPPIB, where he has led on a number of large acquisitions. Dey's role on the natural resources team appears to be managing the funneling of CPPIB pension saver money into oil sands assets when most other market analysts expect a transition away from fossil fuels to destroy the business model of high-cost oil producers in Canada and other parts of the world.

Not surprisingly, given his longstanding relationship with the company, it was Dey who led CPPIB’s recent deal to pay US$900M for fossil fuel extraction rights held by Encana’s US subsidiary in Colorado. While Encana's US management team does not feel the assets are worth holding on to as oil markets remain depressed and the energy system transitions away from fossil fuels, Dey remains bullish, commenting that the “investment offers attractive economics and aligns well with our [CPPIB’s] strategy for the energy sector.” In line with private equity investment practices, the project was acquired using a private shell company, Crestone Peak Resources. Crestone Peak Resources was created in February 2016, with no public information about a management team or board of directors to oversee the distribution of over Cdn$1 billion in pension savings.

The most concerning recent deal brokered by Dey is the investment of over half a billion Canadian pension saver dollars (US$450M) into Long Point Energy, a Colorado-based shell company. The company’s website provides no indication of a management team or board of directors. A phone call to enquire about the business was answered by James Lawson, one of two brothers apparently charged with running the company. Lawson was unable to explain the company’s precise line of business, or what would happen with the investment funds committed by the CPPIB.

The use of shell companies and a preoccupation with personal relationships and secrecy are necessary hallmarks of private equity transactions. But given the sums of money Mr. Dey and his associates are pumping into an acutely distressed oil and gas sector via anonymous companies with no track record, or in the case of LongPoint, no management and no apparent business plan, pension savers should be concerned. If Canada had a robust federal financial regulator, they would also be asking questions to CPPIB’s private equity team at this stage.

The lack of transparency demonstrated in the Long Point transaction is not appropriate for a public pension fund operated on behalf of 19 million Canadians. It is particularly inappropriate when Dey is leading the investment of billions of dollars of pension savers’ money into corporate shells with either no management or board oversight, or into entities that appear to be controlled by amateurs like the Lawson brothers at Long Point Energy. Pension savers should at least expect CPPIB’s shell companies to have competent board oversight and to be able to explain their planned business model. Pension savers also deserve better disclosure on potential conflicts of interest in the transactions carried out in their name by the CPPIB’s private equity deal makers.

The CPPIB did not respond to requests for comment.