Vermilion Energy Inc. is buying Spartan Energy Corp. for $1.2-billion in stock to boost production of light oil as the industry struggles with share-price weakness despite improving crude markets.
In the friendly deal, Vermilion gets output of 23,000 barrels of oil equivalent a day in southeastern Saskatchewan from the mid-size company at a price that analysts view as a bargain.
It is offering 0.1476 of its shares for each Spartan share, representing a small premium of 5 per cent from the target’s closing price on Friday. Vermilion will also assume $175-million in Spartan debt.
Investors were less than ecstatic with the deal, which consolidates a large portion of the province’s crude oil production under Vermilion. Shares in Spartan closed down 2 cents at $6.17 on the Toronto Stock Exchange. Vermilion, which also has operations in Europe and Australia, fell 3 per cent to $42.75.
With the industry in its fourth year of downturn, this may not be the last such deal, said Travis Wood, analyst at National Bank Financial. “Vermilion has kicked off what could continue to be a theme for the remainder of the year, given cyclically low valuations across a fragmented basin,” Mr. Wood said.
Indeed, it says a lot about how investors view the riches available in the Canadian oil patch these days, and little of it is positive.
Normally, a big takeover deal lights a fire under a slow sector as the market places bets that more merger-and-acquisition activity is on tap. In the case of Spartan, the announcement arrived as the industry struggles for numerous reasons to woo investors. Not least of which has been the view that a big increase in sorely needed oil export capacity is anything but assured, even after Ottawa recommitted to the Kinder Morgan Inc. Trans Mountain pipeline expansion last weekend.
As a result, it’s feared investment returns could keep lagging those of U.S. oil companies that operate in regions such as the Permian basin.
Spartan shareholders are not being offered any cash. Acquisition-related equity raising has been all but off-limits to Canadian oil and gas companies since last year, when such producers as Cardinal Energy Ltd. and Painted Pony Energy Ltd. were punished for issuing stock.
Vermilion is paying the equivalent of 4.5-to-5 times forecast 2018 cash flow for Spartan’s 23,000 barrels a day of output, according to Mr. Wood, a bargain compared with just a few years ago for similar assets and comes even as oil prices improve. Meanwhile, Vermilion expects cash flow a share to increase by 15 per cent.
With the deal, Vermilion’s proportion of North American production increases to 60 per cent from 46 per cent, with European output at 35 per cent and Australian production at 5 per cent.
Vermilion chief executive officer Anthony Marino said he believes investors are better served in a larger organization. “In this equity market that we exist in, we do think that it’s hard for small companies to attract the attention of institutional investor,” he told analysts on a conference call. “And the smaller you are, the bigger the impact is and that’s another reason I think that we’ll find that the transaction works well for the Spartan shareholders.”
Vermilion’s own shareholders will also benefit from more heft, Mr. Marino said.
Spartan’s chief executive officer, Rick McHardy, was not available to comment on why it was time to sell and at this price. As recently as January, Spartan shares topped out at $7.29.
Mr. McHardy has exemplified a breed of oil-patch executive that has made a career of starting up companies, building them up to a certain size, selling them off, then repeating the process. Spartan Energy is the third incarnation of the company for the CEO, who was named Saskatchewan Oilman of the Year in 2017 for his success in the southeastern corner of the province.
Now, the selling-them-off part has become a lot more difficult amid the extended downturn and negative investor sentiment, and the entrepreneurs have been left running the businesses much longer than they had planned, leaving them frustrated.
In Saskatchewan, other would-be buyers for Spartan have been dealing with their own struggles. Crescent Point Energy Corp. has sworn off corporate acquisitions for now after irking investors with equity offerings to fund them. It is now the target of an activist investor, Cation Capital Inc., which is pushing to remake the board of directors.
Raging River had previously been speculated as a possible suitor for Spartan, and for assets that Crescent Point has up for sale. It is now studying a “strategic repositioning,” leaving the market to wonder whether it is on the sidelines of deal-making.
Now, Spartan shareholders have the opportunity to throw their lot in with Vermilion, which means dividends and a much more diversified suite of assets.