Last Thursday, Strathcona launched a $5.93-billion hostile takeover bid for neighbouring oil sands producer MEG Energy Corp. An oil pump jack in a field near Calgary, on July 21, 2014.Todd Korol/Reuters
On March 19, Strathcona Resources Ltd. SCR-T executive chairman Adam Waterous and eight other oil patch CEOs published noan open letter to the federal government, outlining a crisis in the country’s energy sector and a plan to solve it.
That afternoon, days ahead of an election call, Prime Minister Mark Carney phoned Mr. Waterous to discuss the group’s issues, including a request to lift the federal cap on carbon emissions and speed project approvals. The next day, the two met face-to-face in Edmonton.
Mr. Waterous clearly liked what he heard. Last Thursday, Strathcona launched a $5.93-billion hostile takeover bid for neighbouring oil sands producer MEG Energy Corp MEG-T. Mr. Waterous, an experienced M&A practitioner, would only attempt such an acquisition if he believed Alberta’s energy future is brighter than its present.
This deal represents a vote of confidence in Mr. Carney and the newly elected federal Liberals’ evolving energy policies. There’s a touch of political irony in this sentiment, as Mr. Waterous joined numerous CEOs in signing an election ad backing the federal Conservatives.
The MEG takeover is also an endorsement of the signature infrastructure project during Justin Trudeau’s much-maligned regime: the expansion of the Trans Mountain pipeline. That’s the investment in Alberta that Premier Danielle Smith conveniently seems to forget when she complains about the province’s treatment within the federation.
And if Strathcona’s offer for MEG kicks off a bidding war – and it is expected to do so - it will show that oil patch CEOs are shifting gears by using strong balance sheets to fund growth strategies rather than focusing on returning cash to investors by boosting dividends and buying back shares. (That’s been MEG’s approach – the company returns 100 per cent of its free cash flow to shareholders.)
Last Thursday, when Strathcona launched its bid, Mr. Waterous said MEG’s board had turned down takeover overtures, so he decided to go public with plans to combine the companies with complementary operations, which make them “doppelgangers, brothers from another mother, twins.”
Strathcona’s pitch came in at a relatively thin 9.3-per-cent premium to MEG’s share price. On Friday, MEG shares soared 18.7 per cent, a clear sign the market expects Strathcona to sweeten its offer or another bidder to emerge.
What Mr. Waterous didn’t say is that he’s trying to snap up MEG before engineers boost the Trans Mountain pipeline’s capacity through relatively simple, safe steps such as diluting oil sands bitumen, making it easier to pump it through the 1,150-kilometre network. The pipeline’s operators can increase capacity by 25 per cent or more, said analyst Robert Hope at Bank of Nova Scotia in a recent report.
Last week, days before bidding for MEG, Strathcona took steps to reduce the risk of bottlenecks by lining up an alternative transport route. The company spent $45-million to buy the Hardisty Terminal, roughly 200 kilometres southeast of Edmonton, which loads bitumen into tanker cars and sends it to refineries.
Newly appointed federal Energy Minister Tim Hodgson – like Mr. Waterous, a former investment banker – visits Alberta this week, just after being sworn in to cabinet. The trip is the first sign of a government intent on delivering on election promises to increase oil sales to Asian markets to lessen the country’s dependence on exports to the United States.
Mr. Waterous decided not to wait for details of Ottawa’s new approach to the oil sands. He’s bidding for MEG while there’s still uncertainty over Mr. Carney’s appetite for an economic diet consisting of larger helpings of fossil fuels.
Other CEOs are likely to react the same way, by making rival offers for MEG. Their role model is Murray Edwards, who built Canadian Natural Resources Ltd. into the country’s largest energy company and became a billionaire by systematically snapping up oil sands properties when market downturns and climate change concerns pushed others to sell.
It’s been seven years since the last large hostile takeover attempt in the oil patch. In 2018, Husky Energy Inc., controlled by Hong Kong billionaire Li Ka-shing, took an unsuccessful run at MEG. Three years later, the Li family exited their investment by selling Husky to Cenovus Energy Inc. in a $23.6-billion transaction.
Calgary-based Cenovus suffered a bout of indigestion after the Husky purchase as it paid down debt from the deal. Its balance sheet has now been rebuilt, and the same synergies that drove Husky to make an offer for MEG exist for Cenovus.
On Thursday, Strathcona predicted that combining forces with MEG could cut costs by $175-million a year. Cenovus and other oil sands platforms can expect similar operational savings.
Strathcona also demonstrated that banks continue to be willing to lend in the oil sands. The Calgary-based company revealed that Bank of Nova Scotia and Toronto-Dominion Bank are backing its bid.
Mr. Carney’s government still needs to turn election pledges into legislation that boosts the energy sector. Strathcona’s big bet on MEG shows that Mr. Waterous, an experienced and well-connected deal maker, sees a shift in policy coming. If other oil patch CEOs share this view of a changing political dynamic, there will be a bidding war for MEG.
Editor’s note: A previous version of this article incorrectly stated that Energy Minister Tim Hodgson went to Alberta last week. He will be visiting Alberta this week.