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Sometimes you just can't see what is coming no matter how hard you look.

I've been stalking Canadian bitumen producer Connacher Oil and Gas (OTCPK:CLLZF) for a couple of months thinking that a transformational transaction was likely in the cards. My thinking was that the upcoming transaction would ease the stock market's concern over Connacher's somewhat absurd debt to cash flow ratio and allow for a much higher valuation of Connacher's oil reserves.

Connacher had advertised that it was seeking a joint venture partner to help develop its next stage of development. A joint venture partner would dilute Connacher's interest in its oil reserves but would eliminate a huge amount of spending required to grow production.

Investors got a surprise late in 2011, however, when Connacher announced that it had received an unsolicited takeover bid from an unnamed party. The stock market's reaction to this was favorable as Connacher shares which were as low as $0.24 in October almost touching $1.00. Alas, the takeover was not to be with Connacher's board rejecting the offer stating that it was not compelling and that the company would continue to pursue its joint venture initiatives.

Despite this, the shares of Connacher did not fall off too badly as the market still had the prospects of a joint venture to look forward to.

A Surprise Twist from the Connacher Board

Fast forward to this week and Connacher dropped a stunner of a press release on the market.

The press release contained some good news:

Connacher Oil and Gas Limited (CLL-TSX) today announced that it anticipates disclosing strong operating and financial results for the fourth quarter of 2011, based on preliminary information. The gains are primarily due to a significant increase in crude oil and bitumen prices and continued strong performance by its heavy oil refinery in Great Falls, Montana.

In November 2011 Connacher's bitumen selling price was $61.84 per barrel ("bbl") unhedged and $62.83/bbl with hedging, each of which was up 45% from October 2011 selling prices of $42.61/bbl unhedged and $43.48/bbl with hedging. Connacher's December 2011 final price data is not yet available but the company knows bitumen prices remained strong during the month. It is also Connacher's view that the trend may persist into 2012.

The press release also contained what many would consider bad news:

Connacher has decided to suspend its Great Divide oil sands joint venture initiative, primarily as a result of its improved outlook for 2012 and the stronger financial results being realized during the fourth quarter of 2011. Connacher expects the process will remain suspended until approximately mid-February, 2012, when it receives an updated reserve report from GLJ Petroleum Consultants.

And the press release contained some shocking news:

To deliver on its new growth plan and capitalize on the considerable opportunities available to the company, Connacher has made a number of personnel changes.

Peter D. Sametz, formerly President and Chief Operating Officer; Richard R. Kines, formerly Vice President Finance and Chief Financial Officer and Grant D. Ukrainetz, formerly Vice President of Corporate Development, are no longer with the company. Connacher thanks these gentlemen for their contribution to the company's growth and development and wishes them the very best in their future endeavours.

Effective immediately, Richard A. Gusella, Chairman and Chief Executive Officer, has reassumed the additional position of President and Interim Chief Operating Officer. Mr. Gusella is in discussions with candidates for the position of Chief Operating Officer and also intends to hire and appoint a new Vice President, Production. Announcements will be made once these positions have been filled and confirmed by the Board of Directors.

I'd say that was a material news release. Top executives leaving and the strategic direction of the company changed. Clearly, there has been a disagreement between the Board of Directors and top management. Given that the strategic direction of the company has now changed from finding a joint venture partner to going at it alone, the root of the disagreement surely lays here.

I wonder if management felt that the unsolicited takeover offer was something the company should have accepted and the Board of Directors felt otherwise. I would expect that the initial weakness in the shares of Connacher on this announcement would continue for a while. There must have been more than a few investors who were looking for a quick gain on a joint venture deal or outright sale of the company.

I am not a shareholder, and after this I likely won't become one unless the share price drops a long way. This is a company with over $900 million in net debt which had a Q3 EBITA of $37 million. Connacher will do fine in a world of high oil prices, but there is no margin for error should oil prices drop and stay down for a while or something temporarily de-rail production.

I don't know what Connacher's Board of Directors knows, but a going at it alone strategy is not the route I would take. I would instead be taking advantage of $100 oil and trying to get a fair price for either the entire company or a piece of it.

Connacher remains an intriguing play for those ultra-bullish on oil in the short term, but does not belong in the portfolio of an investor who likes to sleep well at night at all times.

Source: Connacher Oil's Board Throws A Nasty Curve At Investors