Consolidation has long been prescribed for an ailing oil patch, and five months into the pandemic-fuelled downturn the deals are starting to roll in.
The latest attempt shows the industry’s recovery may not follow the familiar script of the strong picking off the weak. Obsidian Energy Ltd. is seeking to merge with Bonterra Energy Corp. in a share exchange that would bring together mid-size producers with complementary oil assets and their own sets of struggles.
It was one of two notable oil-industry takeover plays on Monday. Manulife Financial Corp. is selling its wholly owned unit, NAL Resources Ltd., to Whitecap Resources Ltd. for $155-million in stock.
At Obsidian, interim chief executive Stephen Loukas sent a letter to Bonterra chairman and CEO George Fink, pointing out the companies have flirted with a transaction for at least a year. The letter, made public on Monday, said Obsidian last proposed to sign confidentiality agreements and start serious talks in June. Despite some initial encouraging words from Bonterra and its advisers, Mr. Loukas said the process has stalled.
Mr. Loukas said he’s tired of waiting, and has proposed that Obsidian exchange two of its shares for each Bonterra share to create a larger force in a central Alberta light oil play known as the Cardium. Here’s the catch: Bonterra is trading well above the price of two Obsidian shares. Bonterra is overvalued, Mr. Loukas argues, and its valuation won’t hold up. As a result the offer is “competitive and highly compelling.”
“Bonterra currently trades at a premium to Obsidian Energy and other relevant public oil producing companies, despite recent performance that has been weaker than Obsidian Energy as measured by cash flow, operating costs and well results,” said Mr. Loukas, who is also a partner at activist fund FrontFour Capital Group LLC, a large Obsidian shareholder.
And while he recognizes the attractiveness of Bonterra’s portfolio, Mr. Loukas added, “we do not believe that the Bonterra valuation premium will be sustained in the stand-alone entity.”
It’s an unusual ploy to woo one’s prospective mate by telling them they aren’t worth as much as they think they are. Obsidian must now await a response from Mr. Fink, an industry veteran who is Bonterra’s largest shareholder. Mr. Loukas said he’d consider raising the proposed bid if Bonterra can demonstrate that there’s some hidden value somewhere.
One thing is for sure: Both companies have been under severe pressure since the pandemic took its toll on energy markets in March. Even before, investors had largely turned their backs on small Canadian producers whose stocks had limped along for years. That’s a reality Obsidian spells out in its letter.
Bonterra shares are down 65 per cent in the past year, as the company slashed its capital spending and suspended its dividend. Investors also worried as the company and its lenders huddled for extended talks about its line of credit. In August, Bonterra agreed with the Business Development Bank of Canada for $45-million in subordinate debt, subject to approval by its banking syndicate.
Obsidian, the former Penn West Petroleum, has dealt with years of setbacks. Last September it began a formal search for strategic alternatives. Lately, its well results have been encouraging, says Raymond James analyst Jeremy McCrea, but investors remain wary of its high debt and substantial obligations for cleanup of spent well sites.
Market prices notwithstanding, the companies will be much stronger together, with more financial flexibility, up to $100-million in cost savings and a scale that will boost its relevance with institutional investors, Mr. Loukas wrote.
In Monday’s other deal, Whitecap CEO Grant Fagerheim pointed out that NAL Resources has assets in many of his company’s operating regions in Saskatchewan and Alberta, where Whitecap has done numerous acquisitions over the past decade.
The deal will boost Whitecap’s production by about 37 per cent by next year without increasing its debt. When the transaction closes, expected in early January, Manulife will have a 12.5-per-cent stake in Whitecap and has agreed to hold the shares for one year, after which it can sell a third each after 12, 15 and 18 months. In a sign the market welcomes the activity, Whitecap’s stock gained 1.6 per cent on Monday.
Add this to recent acquisitions in the oil patch by Canadian Natural Resources Ltd., ConocoPhillips and Waterous Energy Fund, and it is shaping up to be a busy period for deals in an industry in dire need of them – even if they stray from established playbooks.
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