The acquisition of a 17.6 per cent stake in Calgary oil and gas producer NuVista Energy Ltd. by rival Paramount Resources Ltd. is part of a trend toward “forced” consolidation in the troubled Canadian energy sector, analysts say.
Shares in NuVista jumped by as much as 18.7 per cent to 76 cents in early Toronto Stock Exchange trading on Thursday after Paramount revealed it may buy more stock or make a takeover bid for the slightly smaller intermediate producer. They closed at 68 cents, up four cents or 6.2 per cent.
Paramount shares dropped by as much as seven cents or 3.5 per cent to $2.01 but closed up a penny at $2.08.
“What we’re seeing now is some forced M&A, if you want to call it that, where companies are being aggressive,” said analyst Jordan McNiven of Tudor Pickering Holt & Co.
He compared Paramount’s market move on NuVista to Obsidian Energy Ltd.’s takeover bid for Bonterra Energy Corp., initially signalled by making public a letter to the CEO. Later, Bonterra made official its hostile offer of two Obsidian shares for each Bonterra share.
The stock market’s disdain for oil and gas investments is illustrated by the S & P/TSX Capped Energy Index, which has fallen by 54 per cent from Dec. 31 as oil prices tumbled during a global price war and the COVID-19 pandemic, and have only partly recovered.
NuVista shares have traded between 24 cents and $3.36 in the past 52 weeks and Paramount between 81 cents and $7.90.
The lack of access to capital to fuel drilling and replace produced oil and gas means that many energy firms are offside with their creditors and that will add pressure to make deals during semi-annual credit reviews, analysts say.
“I think the trend is we’re definitely going to see more M&A. A lot of that’s going to be driven by the banking syndicates,” said Cody Kwong, managing director, institutional research, for Stifel FirstEnergy in Calgary.
In a news release, Paramount said it made a block trade through the exchange to buy 17.3 million shares of NuVista – about 7.7 per cent – for 61 cents each or a total of $10.6 million. It revealed it already owned 22.4 million shares, representing 9.94 per cent of the outstanding total.
Paramount said it decided to increase its investment in NuVista because of the attractive share price, adding it may in future “make public or private proposals” to NuVista or its shareholders to buy more shares or all of the shares or complete a corporate takeover.
Merger activity in Calgary’s energy sector has been heating up over the past few months.
Recent deals include the bid by major Canadian Natural Resources Ltd. to buy cash-starved Painted Pony Energy Ltd. for $111 million in cash and the assumption of $350 million in debt, a deal made to grow its position in the liquids-rich Montney natural gas region of northeastern B.C.
The Montney was also the attraction for Houston-based ConocoPhillips, which agreed in July to spend $510 million in cash for Calgary-based Kelt Exploration Ltd.
Whitecap Resources Inc., meanwhile, struck a friendly all-stock deal to buy private oil and gas producer NAL Resources Ltd. for the equivalent of about $155 million.
Last week, Topaz Energy Corp., a subsidiary created by Tourmaline Oil Corp. partly to buy interests in producing and gathering oil and gas assets, announced it filed a preliminary prospectus to raise $252.5 million through an initial public offering.
Neither Paramount nor NuVista responded to a request for comment on Thursday.
In the second quarter, NuVista reported producing 50,900 barrels of oil equivalent per day while Paramount’s output was 68,800 boe/d.
In a report, ATB Capital Markets analyst Patrick O’Rourke said both companies “stand well” on their own but a combination would also be attractive to investors given their complementary asset bases.
The synergies and efficiencies inherent in consolidation of the two companies would make sense for the long-term viability of the combined entity and its assets, with limitations, said National Bank analyst Dan Payne in a note to investors.