Veteran investment manager Adam Waterous heads Strathcona Resources, which is owned by a private equity firm.Supplied
In the oil patch, the question of the day is who will be Adam Waterous’s next target?
The executive chair and guiding light at Strathcona Resources Ltd. SCR-T just won the consolation prize in the fight for MEG Energy Corp. MEG-T Mr. Waterous, an M&A expert, agreed to support rival Cenovus Energy Inc.’s CVE-T bid for MEG, ending a five-month takeover battle.
What does the consolation prize look like? Strathcona owns 14 per cent of MEG, worth $1.1-billion, after putting the company in play last May by making a hostile bid. Strathcona also holds an easy-to-sell stake in Tourmaline Oil Corp. worth $270-million, courtesy of asset sales last spring meant to fund the MEG bid.
In a line, Mr. Waterous and Strathcona are flush.
And while he didn’t land MEG, Mr. Waterous and the team at Waterous Energy Fund – Strathcona’s controlling shareholder – have the confidence that comes from winning two previous hostile bids for Osum Oil Sands Corp. and Greenfire Resources Ltd.
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What’s Mr. Waterous’s next move? He’s not saying anything until the MEG takeover closes. But fund managers are already placing their bets.
Athabasca Oil Corp. ATH-T, one of the few remaining mid-sized oil sands producers, is winning fans among hedge funds and institutional investors that try to invest ahead of takeovers. So far this year, shares in the Calgary-based company are up 22.4 per cent, well ahead of the 14.3-per-cent rise in the S&P/TSX Composite Energy Index.
Like MEG, Athabasca is widely held, which makes it easier to mount a takeover. Athabasca’s largest shareholder is fund manager Fidelity Investments, with a 13.2-per-cent stake, according to regulatory filings.
Fidelity just played kingmaker at MEG by holding out until Cenovus improved its offer for a second time.
Athabasca’s five largest owners also include Canoe Financial and Ninepoint Partners LP, both of which were significant shareholders in MEG. Each fund manager owns 3 per cent of Athabasca.
Strathcona, another mid-tier oil producer, targeted MEG because the $8-billion company was a relatively small player in an oil sands industry that rewards scale and features massive producers such as Canadian Natural Resources Ltd., which has a $66-billion market capitalization.
Athabasca is roughly half MEG’s size, with a $3.3-billion market cap.
Strathcona and Cenovus also fought it out for MEG because the company uses steam-assisted gravity drainage to produce bitumen, and the two bidders use the same technology. That translates into significant operational savings.
Athabasca is also a disciple of steam-assisted gravity drainage.
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The challenge for Mr. Waterous, and any potential bidder for Athabasca, is kicking off a showdown where the winner is the company with the deepest pockets.
Canadian Natural, led by executive chair Murray Edwards, is going to come out on top of any contest determined by who can write the biggest cheque. Suncor Energy Inc., Imperial Oil Ltd. and ConocoPhillips are also oil sands operators with bigger wallets than Strathcona.
Here is where Mr. Waterous’s deal-making acumen, honed in his former role as head of investment banking at Bank of Nova Scotia, comes into play.
Strathcona has cash and is taking steps to make its equity a better currency in future deals.
The company is increasing its public float by allowing limited partners in the Waterous Fund to sell 13 per cent of Strathcona, share sales that are forecast to take place by early next year. That eliminates the issue around potential dilution of Strathcona public shareholders that Cenovus successfully used to differentiate its bid for MEG.
The Waterous Fund has significant backers, including insurer and asset manager Fairfax Financial Holdings Ltd.
For Mr. Waterous, one key question is whether to build Strathcona with the hostile approach to acquisitions he has employed in the past.
“Current economic and industry conditions have in some ways created the ideal environment for hostile takeovers,” said Ben Rye, vice-president of Calgary-based Sayer Energy Advisors, in a recent report. “However, prior failed attempts will likely temper the enthusiasm for buyers to pursue this acquisition strategy.”
The market is telling us Athabasca is the next oil sands takeover target. As this round of consolidation plays out, Mr. Waterous will not be satisfied with another consolation prize.
Editor’s note: A previous version of this article incorrectly stated that Waterous Energy Fund won a hostile bid for Greenfield Resources Ltd. The successful bid was for Greenfire Resources Ltd.