An uptick in oil-patch takeover bidding has so far failed to unleash a rush of investors elbowing each other out of the way to get back into the sector.
A recent series of bids, both friendly and hostile, should be drumming up all kinds of excitement as investors wager on which companies may pushed into play next.
But that’s not happening. in fact, the Toronto Stock Exchange’s energy group is down about 10 per cent since Ensign Energy Services Inc. launched a hostile $470-million hostile offer for Trinidad Drilling Corp. in mid-August.
Early this month, Precision Drilling Corp. swooped in with an all-stock, $550-million rival offer for Trinidad, setting the stage for a possible bidding war. Yet shares in Trinidad – and, in fact, most of the entire sector – have only weakened.
Other action has included Husky Energy Inc.’s $3.3-billion unsolicited bid for MEG Energy Corp. and last week’s $514-million all-share offer for heavy oil producer BlackPearl Resources Inc. from International Petroleum Corp. The latter pair are related companies; both count the Lundin family as major shareholders.
So far, the activity in the industry has more of a mop-up feel than one suggesting an imminent expansion of valuations for Canadian companies that have languished while their peers in the United States have gone great guns.
A tell-tale sign is the financing behind these takeover bids – none of it is coming from public share issues. The equity markets traditionally provided the financial fuel for energy deal-making, and they’ve been all but closed to the industry.
Energy-related equity issues totalled $1.9-billion in the first nine months of the year, a fraction of the $15.5-billion the industry raised during the same period in 2017, according to Refinitiv. For context, the cannabis industry – much of which is still days from being fully legalized – raised $2.8-billion.
So what’s the deal with oil deals? For each one, there seems to be an explanation why it’s not part of some industry-wide rejuvenating trend.
The big problem is the black cloud hanging over Western Canada in the form a record discount on the region’s heavy crude oil. With U.S. benchmark West Texas Intermediate fetching about US$71 a barrel, Western Canadian Select – a blend of heavy oil and bitumen – was selling for about US$23 on Friday in essentially a three-for-one sale.
The reasons are both long- and short-term in nature. First, there’s the much-lamented insufficient capacity to export rising volumes of the stuff as major pipeline projects such as the Trans Mountain expansion remain in legal limbo. The recent skid has been made worse by seasonal maintenance runs at major refineries in the U.S. Midwest, which has left Alberta oil storage tanks brimming.
Consolidation is necessary in an industry where the need to lower costs and become more efficient is as important as boosting output. Husky’s bid for MEG is being sold that way. If Husky is successful in absorbing MEG’s Christina Lake oil sands project, Husky says it can bring its superior financial capacity and credit rating to bear on MEG’s high debt and offer more avenues to get the production to market.
The big question for investors is whether another company in a short list of potential white knights is willing to pay a higher price only to offer similar benefits. In recent history, the initial bidder has won the day with a slightly higher offer.
For the drillers, it is now up to Ensign Energy Services to determine if there’s enough value left on the table to raise its bid. It’s got to go up by at least the $20-million that Trininad would have to pay Precision as a break fee in its friendly deal.
But deep-value investors should probably take heart. The malaise won’t last forever, according to National Bank Financial. It projects that increasing capacity to move Canadian oil on Enbridge Inc.'s pipeline system and on trains will tighten the heavy oil differentials again. It may not be long before that discount is back in the US$15 a barrel a range, the bank said.
Then these bidders will have done well to beat the rush.