Mike Rose, CEO of Tourmaline Oil Corp.
Tourmaline Oil Corp. chief executive officer Mike Rose just bought what the company says is prized real estate in an old haunt at a bargain price.
The Calgary-based company late on Thursday announced a deal to acquire British Columbia and Alberta natural gas assets from Royal Dutch Shell PLC for $1.4-billion in cash and stock, boosting its production by 13 per cent.
The deal includes lands and processing infrastructure in the Alberta Deep Basin that Mr. Rose originally sold to Shell at the peak of the market in mid-2008, when oil prices climbed as high as $140 (U.S.) a barrel and gas prices fetched more than double current levels.
At the time, the European oil major bought Mr. Rose's last company, Duvernay Oil Corp., for $5.23-billion (Canadian). That deal also included the Groundbirch asset that has become a core holding for Shell in northeastern British Columbia.
The latest transaction underlines how far oil markets have fallen in recent years and shows that asset values remain under pressure, even as crude has nearly doubled from lows hit earlier this year.
Tourmaline is paying $1-billion in cash and the rest in stock, giving Shell a sizable equity stake in the company one analyst valued at $279-million (U.S.).
It follows a similar deal structure used by Paramount Resources Ltd., which acquired a stake in Seven Generations Energy Ltd. as part of payment for an asset sale earlier this year. Paramount last month sold three-quarters of its position for $735-million (Canadian).
Mr. Rose, who once worked for Shell, said Friday that the equity portion of the deal helped close a "valuation gap" and gives Shell added upside if it can sell the shares at a higher price at a later date.
"I think it's a fair price in this market," he said in an interview. "Gas was $8 [per 1,000 cubic feet] when they bought Duvernay, and it's now closer to $3, so you've got to factor that in. Now the flip side is the wells are, from a performance standpoint, three times better now and they cost half as much."
Tourmaline shares jumped as much as 7 per cent in midday trading Friday on the Toronto Stock Exchange before paring gains.
To fund the deal, the company is issuing $635-million of common shares in a private placement, and is selling another $100-million in stock in a bought deal to underwriters led by Peters & Co. Ltd. Sources said Friday that the bought deal was massively oversubscribed.
A spokesman for Shell in Calgary said Friday that the deal's price tag was agreed upon by both parties and deemed acceptable by the company. It has embarked on a $30-billion (U.S.) divestiture program globally as it seeks to cut debt.
While showing progress on that plan, several analysts said the deal's structure reflects a spotty market for asset sales.
Shell's "willingness to accept an equity stake in Tourmaline is unusual and is perhaps indicative of the state of the M&A market for these sorts of assets," Citigroup Global Markets Inc. analyst Fernando Valle said in a research note.
Tourmaline also picked up properties in B.C.'s liquids-rich Montney zone. In all, it is adding production of about 25,000 barrels of oil equivalent (boe) a day and 474 million boe of proved plus probable reserves. "The Montney and the Deep Basin are Canada's two premiere gas plays," Mr. Rose said.
"They are the two plays that compete toe-to-toe with all the best gas plays in the U.S., including the Marcellus and Utica, and we just got bigger in both, so strategically it makes a lot of sense."