A hostile bid in the oil patch may be a harbinger of deals to come as the market grows impatient with share prices lagging the recovery on crude oil.
Velvet Energy Ltd., a private-equity-backed company, has launched a $116-million all-cash bid for Iron Bridge Resources Inc., a recently restructured junior producer that made some headlines early this year when it launched a side business in cryptocurrency mining.
The prize is intertwined acreage in an oil-rich part of the Montney formation in Alberta known as Gold Creek, where Velvet has been amassing a land position for about five years.
Iron Bridge called the bid flawed, saying it undervalues the company and seeks to deny its shareholders the eventual spoils of its operations. It says holders with 30 per cent of the shares support its management.
The offer is a rare unsolicited advance in a business that is known as being rather clubby. However, some of the niceties have gone by the wayside, as shown by the scrappy and ultimately unsuccessful activist campaign by Cation Capital Inc. directed at Crescent Point Energy Corp., another company whose stock had languished.
Velvet is offering 75 cents a share for Iron Bridge, a 45-per-cent premium to the volume-weighted average price for the 20 days up to May 18. The stock had traded between 43 cents and 83 cents through the past year. It closed a penny over the bid price on Wednesday.
Snapping up Iron Bridge would help Velvet and its financial backers move toward a possible initial public offering. The company, owned by Warburg Pincus LLC, Trilantic Capital Partners, 1901 Partners Management LP and Canada Pension Plan Investment Board, had considered going public in 2014, but called the IPO off when oil prices cratered. In the past year, U.S. crude has climbed 40 per cent, selling on Wednesday for US$71.78 a barrel.
“We’re not there yet, but we’re watching it closely for sure. This transaction would be in that context,” said Ken Woolner, Velvet’s chief executive officer.
Royal Dutch Shell PLC’s recent $4.3-billion sale of its shares in Canadian Natural Resources Ltd. showed the chill on oil and gas in the capital markets to be thawing, Mr. Woolner said.
Iron Bridge is not alone in a junior energy sector that has been passed over by institutional investors, even as the broader industry recovery takes hold. Operations, especially in shale-like plays such as the Montney, are pricey, with wells running $6-million to $10-million apiece. Investment bankers say more small firms are expected to find themselves in the sights of bidders.
Rob Colcleugh, Iron Bridge’s CEO, declined to say how his company might try to fend off Velvet, although it is expected to seek a white knight. Besides Velvet, another private company, Hammerhead Resources Inc., has a sizable land position in the Gold Creek area.
Meanwhile, the company “has a number of options,” having discussed with financial players obtaining non-dilutive funding to allow it to develop assets on its own, he said.
In January, shortly after Bitcoin had surged to more than US$19,000, Iron Bridge launched a cryptocurrency mining pilot, with the aim of using some its natural-gas production to generate power for computers at its field sites rather than sell the fuel for deeply discounted prices in the Alberta market.
Velvet said the initiative distracts from the company’s core operations, though Iron Bridge does not appear to be betting the farm on it. In its first-quarter results, Iron Bridge said it had spent about $50,000 with the aim of getting one facility in a container up and running by the end of June. A Bitcoin is currently worth about US$7,500.
Jeffrey Jones