Husky Energy Inc.’s hostile bid for MEG Energy Corp. points to a familiar oil-patch story line, but it also spells the end of an era.
MEG is the last of its breed, a pure-play oil sands producer with decent size. That’s because consolidation was forced on its sector of industry by a combination of low oil prices and high debt levels.
At the outset, the play looks to have more than a few similarities with Suncor Energy Inc.’s takeover of Canadian Oil Sands Ltd. in 2016. Recall that Canadian Oil Sands, which owned a stake in the Syncrude Canada Ltd. oil sands venture, was struggling as part of a consortium that had trouble keeping the operations running reliably. Suncor launched an unsolicited bid in an effort to gain more control over Syncrude, and then months later it sweetened the offer, leading to a friendly $4.2-billion deal.
MEG is no slouch on the technical front. It has been successful in boosting bitumen production from its Christina Lake project in Alberta using high-tech steam-driven methods. What’s been a drag on the company, though, has been a Canadian heavy-oil market that’s been unceasingly brutal for four straight years and its impact on the company’s balance sheet. It’s meant an era of austerity, asset sales and debt reduction. Even so, debt, at $3.1-billion, remains uncomfortably high.
Husky, with deep pockets and diversified assets, has sensed an opportunity to scoop up MEG with a cash-and-stock offer worth $3.3-billion, wagering that the shareholders feel they have endured enough pain. So much that they’ll accept $11 a share for a company that, slightly over four years ago, was worth $39.
Indeed, Boston-based Highfields Capital Management, MEG’s second-largest shareholder with a 9.9-per-cent stake, had complained publicly about the company’s direction. Highfields managing director Daniel Farb resigned from the board in July, decrying MEG’s “abysmal” hedging and capital-allocation record and high overhead. The move suggested to the market that MEG could become the target of an activist investor campaign or takeover, or both.
In August, MEG named Derek Evans as chief executive officer, replacing company founder Bill McCaffrey, who had stepped down May 31. Last month, Mr. Evans penned a letter to MEG shareholders laying out a plan to focus on cutting debt and expanding output within the Christina Lake project. It did little to comfort investors, and the share price weakened. Not helping matters was the heavy oil differential, the discount that Canadian crude suffers versus light oil, which widened to levels not seen in five years.
Part of Husky’s pitch is that it will be able to bring savings of $100-million just by refinancing that debt. Husky’s own financial improvements in recent years and its difficulties in increasing production at its own oil sands projects make MEG a good fit.
MEG has yet to offer a formal assessment of the bid. It said only that investors should not take any action yet. MEG has hired Bank of Montreal to advise it, and the betting is that it will seek a white knight, a near-mythical figure that never seems to materialize in hostile bids within the Canadian exploration and production sector.
It’s tough to see a clear rival to Husky among the oil sands stalwarts. Cenovus Energy Inc., whose operations are close to MEG’s, would be punished mercilessly in the market if it floated an offer while still working to get its financial house in order following the takeover of ConocoPhillips operations in 2017. Canadian Natural Resources Ltd., Imperial Oil Ltd. and Suncor Energy Inc. could have a look, though none has expressed a burning need to bulk up on more oil sands production.
After Husky mails out its bid circular Tuesday, MEG’s got 105 days to seek out richer options. If previous scripts are any indication, it’s possible that a deal with Husky could be in the final scene. Then it’s just a question of price.