Oil patch chief executive Andrew Phillips spoke for CEOs across the country on Monday when he set out plans to aggressively build his business, once the COVID-19 pandemic is under control.
Mr. Phillips, head of Calgary-based PrairieSky Royalty Ltd., announced plans to cut his company’s dividend by 55 per cent in order to grow its war chest by about $100-million a year – cash that is earmarked for potential acquisitions.
PrairieSky puts capital into energy companies by purchasing their properties, then earning fees when producers tap that land for oil and gas. The company is debt-free and has ties to all the major Canadian energy players, and Mr. Phillips said PrairieSky is already in talks on potential deals, as the strong prepare to acquire weaker rivals battered by both a health crisis and an oil price war.
Corporate leaders are balancing dual agendas these days. Their first priority is ensuring employees are safe and their businesses can navigate unprecedented challenges. But CEOs and boards are also looking past the storm, to a time when deals are once again possible and attractive assets are up for grabs, at significant discounts to the price they would have fetched a few short weeks ago.
In coming months, there promises to be a flurry of mergers and acquisitions driven in part by debt-heavy companies that see profits plummet as the fallout from COVID-19 cuts their sales. These players will be forced to sell divisions, or the entire franchise, to please their banks. Right now, most executives are hunkered down, as are key advisers at investment banks and law firms. But as markets stabilize and the financial crowd gets used to video conferencing with clients, rather than flying to meetings, deal-making promises to kick into high gear.
There are already blue-chip companies acting like carpet stores holding going-out-of business sales. In December, before the pandemic hit, German fertilizer maker K+S AG announced it would pay down debt by taking bids on its North American salt business – K+S owns the Morton and Windsor brands, which hold a 35-per-cent market share – and a stake in its recently opened Saskatchewan potash mine. Market dynamics have changed completely since K+S started this process, but the company still needs to pay back lenders.
Last week, in the midst of the market’s meltdown, K+S put out a news release to remind all interested parties that its market-leading salt business remains on the auction block, and must be sold by the end of the year. The unit posted sales of $2.3-billion last year, along with 15-per-cent profit margins. It’s the kind of reliable, cash-spinning business that induces drooling among private-equity executives. They will line up to buy from a motivated seller, at valuations well below what K+S could have expected before the world started working from home.
However, well-publicized issues with debt may attract more than just private-equity investors to wounded prey such as K+S, which has seen its share price cut in half this year and now has a market capitalization of €1.1-billion ($1.7-billion). The German company spurned a 2015 takeover offer worth €7.9-billion (about $9.7-billion at the time) from Saskatoon-based Nutrien Ltd. (before it changed its name from Potash Corp. of Saskatchewan Inc.). That’s the kind of deal that gets dusted off in the wake of a new reality and, even after the recent sell-off, Nutrien sports a $21.5-billion market cap.
The oil and gas and fertilizer space has been seen as ripe for consolidation for years. The same is true of number of sectors that feature deep-pocketed Canadian companies with ambitious growth plans – U.S. banking, gold mining, forestry, convenience stores, agriculture and a few (sadly, far too few) pockets of the industrial and tech industries.
Right now, CEOs are spending a significant amount of their time on managing day to day. But they are also looking years down the road, and laying plans on how to get to places they may never previously dreamed of going. The experience in every previous crisis shows that the tough times will pass, and there will be opportunities for companies such as PrairieSky that hold on to their cash, then put it to work.