M&A uncertainty prevails

Hopes for a gusher of deals in Canada lack clarity; signs from Crescent Point-Legacy deal point to interest in energy assets by SOE

Gary Park

For Petroleum News

Chances that the Canadian oil patch could come to life with a round of merger-and-acquisition deals, providing help to a reeling oil market, is an ongoing topic that lacks any sense of clarity.

So far transactions this year have been only intermittent, further inhibited by the absence of any sign from the Canadian government that it might relax rules on acquisitions by foreign state-owned companies.

Market sources say that hard line may have put a clamp on a months-long effort by debt-burdened Legacy Oil + Gas to find a buyer that reportedly attracted interest by a state-owned enterprise, believed to be Chinese, who have retreated from the limelight over the past three years.

Word from the street pointed to a “non-binding” bid that was worth more than the successful offer by Crescent Point Energy of C$563 million for Legacy, plus an assumption of C$967 million in debt, which valued Legacy shares at C$2.85,less than 30 percent of the company’s 52-week high of C$10.03.

If concluded, the deal will boost Crescent Point’s current production of 152,500 barrels of oil equivalent per day by 22,000 boe per day (82 percent oil and liquids), of which more than 15,000 boe per day is from Bakken plays in Saskatchewan, Manitoba and North Dakota.

The assets include 1.64 million acres, of which 336,000 acres are in southeastern Saskatchewan; 940 net internally identified drilling locations; and proved plus probable reserves of 102.7 million boe, representing a reserve life index of 14.1 years based on output of 20,000 boe per day.

Activist investment firm

Zachary George, who leads FrontFour, said the Crescent Point offer was a win for his firm, which acquired its Legacy holdings for C$2 a share, noting that there is significant interest in Legacy’s Saskatchewan acreage.

Whatever money might have been put on the table for Legacy, the company said in a circular the late overture would have been “subject to a number of Canadian and foreign regulatory approvals, which would introduce material transaction risk and delay.”

Although details are scarce, it is believed the Chinese SOE that approached Legacy was not among Beijing’s powerhouses, such as CNOOC, Sinopec or PetroChina. Even so, it suggests interest remains strong in Canadian energy assets, despite the Canadian government’s virtual ban on foreign SOEs taking control of oil sands projects.

Catharine Sterritt, managing director, global equity, at the Bank of Nova Scotia, said SOE investments in Canada have “not worked out” as planned, consuming more capital and time than anticipated.

Otherwise, deal-making has been restricted to small- and mid-sized producers, such as Whitecap Resources’ C$517 million cash and share purchase of Beaumont Energy, a Saskatchewan light oil producer; Torc Oil’s C$430 million takeover of Surge Energy; and Tourmaline’s C$257 million acquisition of Perpetual Energy, which operated in the Alberta Deep Basin.

Only C$5 billion

Adam Waterous, co-head of global equity at the Bank of Nova Scotia, told the Globe and Mail the big deals that have occurred over the past three years were “really the weak being culled from the herd. We don’t have that situation today.”

Suncor Energy and Encana have issued word that they are in no hurry to complete transactions, with Encana Chief Executive Officer Doug Suttles suggested some companies will survive rather than get swallowed up because capital markets have been more inclined to issue debt and equity.

Crescent Point Chief Executive Officer Scott Saxberg holds the view that if Alberta’s New Democratic Party government changes its royalty regime that will open the door to “companies such as ourselves to buy Alberta-based companies for discount value.”