Husky Energy Inc. has snapped up the Western Canadian assets of Marathon Oil Corp. in a surprise $588-million (U.S.) deal that will see the Canadian energy company spin off part of the acquisition at a hefty premium to its own purchase price.
Under the terms of the proposed transaction, Calgary-based Husky is to acquire the equivalent of 27,000 barrels a day of production from Marathon, the majority of which is natural gas.
But it will then spin off just over a quarter of that output to U.S. independent EOG Resources Inc. for $320-million. EOG is a publicly traded company that is a spinoff of collapsed energy conglomerate Enron Corp.
As a result, Husky will get nearly three-quarters of Houston-based Marathon's Canadian production of oil and gas for just under half of the total outlay - a bargain that both wowed and puzzled industry analysts.
"It caught everybody off guard," William Lacey, a research analyst at FirstEnergy Capital Corp. in Calgary, said yesterday.
He said Husky will pay just under $20,000 (Canadian) for each daily barrel of production, an unusually low amount and well below the price placed on the company's current output. At the same time, EOG will be paying about $60,000 for each daily barrel of production, a substantial premium to the amount typically paid to acquire production.
The FirstEnergy analyst said it is likely that the buyer expects to be able to reap major gains from exploration in the properties being acquired. EOG said the assets it plans to acquire from Husky are adjacent to other shallow-gas properties it already operates in southeastern Alberta.
The Houston-based company said the acquisition will allow it to expand its Canadian drilling program, adding that it has identified 600 locations where new wells can be drilled and 380 other locations where more gas can be extracted.
Marathon's Canadian assets had been on sale for more than four months, and had been the object of widespread interest in the oil patch. The company had wanted to raise at least $400-million (U.S.) when it announced the sale in late March, a goal it beat by nearly 50 per cent.
Despite the interest in the Marathon sale - which Mr. Lacey called the "crown jewels" among assets available to be purchased - no firm offer had materialized before Husky's. Analysts said no one buyer wanted the entire breadth of Marathon's assets.
Husky's spinoff approach neatly sidestepped that roadblock, Mr. Lacey noted. "The turbo-charged puppy just won the Marathon," he joked, alluding to the Husky dog that is the emblem on some of the company's retail outlets.
Husky will pay for the acquisition from the cash flow from its operations, and topping that up with debt financing from already established credit facilities. It is the largest transaction for Husky since its acquisition of Renaissance Energy Ltd. for $2.58-billion three years ago this month.
In the quarter ended June 30, Husky saw its cash flow jump to $540-million (Canadian) from $498-million. The cash-flush company announced a special dividend of $419-million last month, and also boosted its regular dividend by 10 per cent.