An analyst says he sees Cenovus Energy as a possible acquisitor of MEG Energy. Here are boilers pictured at the Cenovus Christina Lake oil sands facility southeast of Fort McMurray, Alta., on April 24, 2024.AMBER BRACKEN/The Canadian Press
Strathcona Resources Ltd.’s SCR-T $5.9-billion unsolicited takeover bid for MEG Energy Corp. MEG-T could just be the opening ante in a series of higher offers for the last of Canada’s large pure-play oil sands producers.
Strathcona last week said it would bid about $23.27 in cash and stock for each share of MEG. A successful deal would make the suitor Canada’s fifth-largest oil producer at around 219,000 barrels a day. Strathcona is controlled by Calgary-based Waterous Energy Fund, which is led by former investment banker Adam Waterous.
Canada’s energy industry has doubled down on oil sands assets in recent years as U.S. and other foreign players retreated from the capital-intensive industry that has struggled with limited access to global oil markets.
Sentiment has improved with last year’s opening of the Trans Mountain pipeline expansion to the West Coast, which has shrunk the discount on oil sands-derived crude, and growing support nationally for the concept of new pipelines.
Mr. Waterous has described the two businesses as highly complementary “doppelgangers,” making it easy to combine them and wrest major cost savings from the combination.
Analysts suggest there could be higher offers in the cards for MEG, which has yet to give a formal response to the bid. They cite a who’s who of domestic producers as possible rivals.
MEG shares closed down on Tuesday, but still well above Strathcona’s indicated bid price, which suggests investors are wagering on a higher offer emerging. They finished 63 cents lower at $24.66 on the Toronto Stock Exchange. Strathcona was down 6 per cent at $28.58.
Greg Pardy, an analyst with RBC Capital Markets, sees Cenovus Energy Inc. as the most logical acquisitor. Both companies have operations in the Christina Lake region of northeastern Alberta, which could translate into operational savings, he said.
However, Cenovus has large expenditures under way to add its own production and improve performance at its U.S. refineries. That could be dealt with by selling some of its international assets, such as those in the South China Sea, Mr. Pardy wrote in a note to clients.
Cenovus chief executive officer Jon McKenzie told analysts on a May 8 earnings call he was confident that Cenovus could decrease its capital budget from $5-billion to a lower number in 2026, though his comments came prior to Strathcona’s proposal.
Mr. Pardy also floated Imperial Oil Ltd. as a possible white knight as MEG’s assets would complement its own steam-assisted gravity draining oil sands operations. But Imperial, too, has significant spending on tap for its own projects in the Cold Lake area, he noted. Imperial, the Canadian affiliate of Exxon Mobil Corp., has often been suggested as an acquirer of companies, but has rarely made large acquisitions.
Imperial executives have made it clear the company has a high bar for deals. “It has to be in our wheelhouse. We have to bring competitive advantages. It has to be accretive. It has to compete with our internal opportunities as well,” Daniel Lyons, senior vice-president of finance and administration, said during Imperial’s Investor Day in April.
Brad Corson recently retired as Imperial’s CEO. His replacement, John Whelan, has said he doesn’t expect Imperial’s approach to mergers and acquisitions to change under his leadership.
Travis Wood, an analyst at National Bank Financial, said he believes Strathcona’s offer for MEG Energy is low, arguing a bid for the company should reflect a takeover price of $24 to $26 a share, based on 2026 financial estimates.
An offer based on longer-range estimates and potential savings could lift that price tag to $28 to $29.50 a share, but that cuts down the list of potential suitors, Mr. Wood wrote in a research report.
Canadian Natural Resources Ltd. tops Mr. Wood’s list, based on the likelihood of large costs savings stemming from the company’s acquisition several years ago of the Canadian assets of Devon Energy Corp., which are close to MEG’s operations. The company has for years increased its holdings in the oil sands with large deals, most recently last year’s takeover of Chevron Corp.’s Canadian assets.
Canadian Natural president Scott Stauth told analysts on an earnings call in March that the company is pleased with its assets but will see how the market unfolds.
“You look at our reserve base, we have ample opportunity to grow organically,” he said. The company has been successful with acquisitions that offer increased earnings and cash flow, “and unless there’s something that changes significantly in the environment going forward, I don’t see our strategy changing.”
Mr. Wood said he expects more M&A activity in the Canadian oil patch, following on the heels of other takeovers, including Whitecap Resources Ltd.’s just-closed $6-billion takeover of Veren Energy. “The Canadian energy sector has witnessed some interesting transactions so far this year, both from a corporate and asset-level transaction perspective, with what we believe is a goal to expedite, unlock and expand value for shareholders,” he wrote.
He said ARC Resources Ltd. is another potential takeover target, based on its liquids-rich natural gas reserves in the Montney region. Oil sands producers covet such production as a blending agent that allows heavy crude to flow in pipelines.