Precision Drilling Corp.’s plans to acquire Trinidad Drilling Ltd. in a friendly all-stock deal are being upended in a falling market that shows how, in times of strife, cash is king.
In early October, Precision agreed to make a takeover offer, at the time worth $550-million, for Trinidad, a smaller oil and gas driller with international operations. That put its offer above a hostile bid for Trinidad from Ensign Energy Services Inc. valued at $470-million in cash.
Since then, however, the market has soured. Energy shares have been pressured in the overall stock market downdraft and by lingering fears over weak Canadian oil and gas prices. Precision stock has tumbled 28 per cent since it uncorked its bid, selling for $3.19 on the Toronto Stock Exchange on Monday.
Precision, Canada’s largest drilling contractor, has offered 0.445 of one of its shares for each Trinidad share. That puts the value of its bid at $1.44 for each Trinidad share, down from $1.98 on the day the deal was announced.
Ensign, whose chairman is London-based billionaire Murray Edwards, has been wise not to be hasty in deciding whether to raise its offer of $1.68 in cash in response to Precision’s agreement. Indeed, Trinidad shares were worth $1.66 on the TSX on Monday, showing how investors now see little chance for a richer bid.
Ensign’s 15-per-cent premium to Precision’s bid clearly gives it the upper hand as its offer expiry of Dec. 14 nears, said Jon Morrison, analyst at Canadian Imperial Bank of Commerce.
“And while we believe a large number of Trinidad shareholders have a strong affinity for a stock consideration, the gap between the bids is wide and leaves Ensign in a strong position to take over the entity, if all else holds,” Mr. Morrison said in a research note.
Ensign, which reported relatively strong third-quarter results on Monday, is not the only energy firm that has launched an unsolicited bid for a rival as investors grow ever weary of a downturn in the sector now entering its fifth year. Husky Energy Inc. has offered $3.3-billion in cash and stock for MEG Energy Corp., an oil sands producer. Husky issued a news release on Monday reminding investors of what it says are the benefits of its bid. It did not make any adjustments to the offer, however.
MEG has urged its shareholders to reject the bid, saying the odds of a better deal emerging are good.
Bob Geddes, Ensign’s president, said in a conference call that his company’s bid offers certainty while that of Trinidad’s white knight does not. “Given the dramatic drop in Precision Drilling’s share price, their overweight exposure to the Canadian market and the ongoing volatility in the commodity and equity markets, Precision Drilling’s inferior all-share proposal is a risky and illogical proposal for Trinidad shareholders,” he said.
If Precision decides to up its offer for Trinidad, it faces the question of whether it needs to also throw some cash into the deal, given the stability it offers investors in a shaky market.
Meanwhile, investors have been less than welcoming of many energy acquisitions this year, and the shares of buyers have taken big hits in the aftermath.