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Canadian Natural Resources Ltd. is buying Painted Pony Energy Ltd. for $111-million to beef up its position in a natural gas-rich region of British Columbia at a fraction of what it would have paid three years ago.

It is the second sizable acquisition of gas-producing assets in B.C.‘s Montney area in less than three weeks, showing that the industry’s big-name players see opportunities to expand in the play as small producers struggle with attracting the capital they need to develop their properties.

The deals could signal the start of badly needed consolidation for the industry, which was hit hard in the energy market meltdown that accompanied the COVID-19 pandemic, said Cody Kwong, analyst at Stifel FirstEnergy.

“You can kind of get the sense that the characteristics of the bottom of the cycle is happening where weaker companies are being taken out by stronger companies,” Mr. Kwong said.

“A positive takeaway for Painted Pony would be that it wasn’t a zero. It actually had assets that people would buy in a down market, and it’s confirmation that the Montney is truly one of the best plays out there.”

The company had been hamstrung by high debt, falling cash flow and pricey commitments to process natural gas. At the end of July, Painted Pony said its banking syndicate had extended by a month the results of a review of its credit facility. It was the second extension in as many months.

In the friendly deal, Canadian Natural, one of the country’s biggest producers, has agreed to pay 69 cents a share in cash for Painted Pony, representing a premium of 17 per cent over the target’s closing market price on Friday. Canadian Natural will also assume $350-million of debt, bringing the total value to $461-million.

That is less than 1 per cent of Canadian Natural’s enterprise value, so it will have a minimal impact on its finances, the company said.

The deal, expected to be completed by early in the fourth quarter, follows ConocoPhillips’ US$375-million purchase of Montney assets from Kelt Exploration Ltd. last month.

The Montney straddles the B.C.-Alberta border and is estimated to have total reserves of 449-trillion cubic feet of natural gas and 14.5-billion barrels of natural gas liquids, according to a 2013 study by federal and provincial regulatory agencies. The region is often mentioned as being in league with major U.S. shale plays such as the Permian and Marcellus, but lately production performance has outshined its rival basins.

For Canadian Natural, the deal furthers a long-time strategy of snapping up companies and assets when they are out of favour in the market. The last was its $3.8-billion acquisition of Devon Energy Corp.‘s Alberta assets in 2019.

Painted Pony produces 270 million cubic feet of natural gas a day and 4,600 barrels a day of gas liquids. That will help insulate Canadian Natural against the supply costs of natural gas for its oil sands operations, president Tim McKay said in a statement.

Painted Pony is known for operations in the Blair, Daiber, Kobes and Townsend regions of northeastern B.C. Over the past three years, its share price has fallen from $3.85 to as low as 20 cents in March as fears over the economic impact of the coronavirus hammered Canadian oil and gas stocks.

With limited access to capital restricting its ability to develop its assets, the company had undertaken a quiet process to test the market for buyers, it said.

Painted Pony said the deal with Canadian Natural represents its best option in light of industry and market conditions. “The purchase price is all cash and not subject to any financing conditions, which provides Painted Pony shareholders with an immediate opportunity to realize full liquidity and certainty of value in cash for their investment in the corporation,” it said in a statement.

Its shareholders will vote on the deal in September. The company said holders of 25 per cent of its stock have agreed to support the sale. Painted Pony will pay Canadian Natural $20-million should the transaction not be completed.

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