U.S. private equity firm Warburg Pincus LLC's move to sell down its stake in MEG Energy Corp. is unexpected given the oil sands developer's outlook for some improvement in the coming months and suggests repositioning within its own investment portfolio.
The $157-million sale, through a secondary offering, will cut Warburg Pincus's stake to 17 per cent, down from around 19 per cent, just as the company is nearing startup of a new phase of its Christina Lake oil sands project in Alberta that will almost double output. It will remain MEG's largest shareholder, however.
For its part, the private equity player, which made headlines this month by hiring former U.S. Treasury Secretary Timothy Geithner as president and managing director, isn't giving any indication of its rationale. It first bought into MEG in 2004 and held 24 per cent of the company when it went public in 2010.
MEG announced late Monday that Warburg Pincus was launching the bought-deal secondary offering of five million shares to BMO Nesbitt Burns Inc. at $31.40 apiece, a 1-per-cent discount to the closing price that day. MEG will get no proceeds from the offering.
MEG vice-president John Rogers said he did not know of any specific reason for the sell-down. "It was really their decision to do the transaction the way they did," Mr. Rogers said.
Warburg Pincus is no stranger to the Canadian oil patch. It has stakes in such other companies as Osum Oil Sands Corp., Black Swan Energy Ltd., Canbriam Energy Inc. and Endurance Energy Ltd.
The oil sands company is expected to start production from phase 2B of Christina Lake by the end of this year, lifting output by 35,000 barrels a day. It has been active finding options beyond congested pipelines for moving crude to market, including trains as well as river barges. Meanwhile, some new U.S. pipelines are due to start up in 2014, which would boost access for Canadian crude to Gulf Coast refineries, a potential positive for heavy oil pricing.
Still, MEG shares have been pressured in recent weeks as the spread between the price of Canadian heavy oil and U.S. benchmark West Texas Intermediate has widened again to as much as $40 (U.S.) a barrel, up from around $15 in the summer.
MEG sank $1.08 to $30.75 on the Toronto Stock Exchange on Tuesday, representing a drop of 16 per cent in the past two months.
Expected improvements in heavy oil pricing over the next several months could lessen the impact of further divestments by Warburg Pincus, should there be any, said Phil Skolnick, analyst at CanaccordGenuity. The private equity firm gave no indication of future moves.
"We believe this offering will provide an opportunity for investors to take a sizable position in MEG as a lack of trading liquidity is often cited as a key reason why many have shied away from investing in the stock," he wrote in a note to clients. "Any further sales by Warburg Pincas can do the same especially as we see heavy oil differential fundamentals improve."
MEG's second-largest shareholder is China's state-owned CNOOC Ltd. at about 13 per cent. It bought its stake in 2005.