Polish oil giant makes bid for Calgary’s Kicking Horse

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Deals continue to trickle into Canada's bruised oil and gas sector as Poland's state-controlled oil company announced on Tuesday it wants to acquire Calgary-based junior producer Kicking Horse Energy Inc.

Orlen Upstream Canada Ltd., a subsidiary of PKN Orlen S.A., said it would buy Kicking Horse for $293-million – or $4.75 an outstanding common share. The cash deal is subject to Kicking Horse shareholder approval later this year, but the stock jumped almost 45 per cent in Toronto Stock Exchange trading after the news on Tuesday.

"The strategy is to build a material upstream business here in Canada in order to provide a natural hedge against oil prices," Matt Rees, president of Orlen Upstream Canada, said in an interview.

"Because of the downstream position that we have and the margins that are gained from that business, we do have capital available at this point. And we do see that as a competitive advantage."

PKN Orlen chief executive Jacek Krawiec spoke openly earlier this year about wanting to take advantage of low oil prices to buy upstream North American assets, especially in Canada. But even before oil prices dropped last year, Poland's largest oil refiner, a major player in Europe's retail gasoline market, was slowly building a small cache of Canadian companies.

The European oil giant made its first Canadian investment two years ago, when it acquired TriOil Resources Ltd. In June, 2014, TriOil bought privately held Birchill Exploration LP for $256-million. Earlier this year, TriOil formally changed its name to Orlen Upstream Canada. Today, the Canadian subsidiary holds land positions in the Cardium, Dunvegan and Montney formations with production volumes of 7,000 barrels of oil equivalent a day.

Kicking Horse – focused on the tight gas production in Alberta's Montney formation – is not likely to be the last of PKN Orlen's Canadian purchases. Mr. Rees says it is looking at several opportunities "and we'll continue to work that list."

Although the Polish government is the biggest shareholder in PKN Orlen, the purchase price for Kicking Horse is below Investment Canada's foreign state-owned enterprise review threshold.

With Kicking Horse, PKN Orlen is buying a greater foothold in a liquids and condensate-rich area of the Montney, but also furthers its on-the-ground experience in the upstream business as it seeks to capitalize on Poland's nascent shale gas sector. Kicking Horse was not its only proposed acquisition in North America on Tuesday – it also offered to buy U.S.-based FX Energy, Inc., with production in both the United States and Poland, for $119-million (U.S.).

The Kicking Horse deal follows last week's relative flurry of merger and acquisition activity in the energy sector, which many hope is a sign deep-pocketed investors believe oil prices are slowly on their way up after months of lows.

Activity just this month includes Suncor Energy Inc.'s $4.3-billion hostile offer for Canadian Oil Sands Ltd., Encana Corp.'s $900-million (U.S.) decision to sell Colorado oil and gas properties to a partnership led by Canada Pension Plan Investment Board and the Superior Plus Corp. play for Canexus Corp.

ConocoPhillips is expected to finalize deals shortly with buyers for a large package of oil and gas assets in Alberta and northeastern B.C., comprising 3.9 million gross acres.

Also last week, the Delek Group said it would invest $66-million (U.S.) in Calgary-based Ithaca Energy Inc., which operates in the North Sea. The deal gives the Israeli exploration and production company a stake of nearly 20 per cent in Ithaca.