Canadian heavyweight scrap

Midstream rivals Brookfield and Pembina in bidding war for Inter Pipeline; Brookfield has edge; analyst looks for ‘multiple’ offers

Gary Park

for Petroleum News

It’s turned into a bare knuckles contest unlike anything seen in the Canadian oilpatch for many years, as Pembina Pipeline and Brookfield Infrastructure Partners wage battle to secure the prized midstream assets of Inter Pipeline.

Over the last four months the contest has moved from a hostile takeover bid by Brookfield, trumped by a proposal from Pembina, then to a counteroffer from Brookfield.

“Continue holding on for the ride … it should be fun,” said National Bank of Canada Financial Markets analyst Patrick Kenny in a research note, adding he “would not be surprised to see multiple rounds of bids.”

Other observers were caught off guard, with Rafi Tahmazian, who manages energy-focused funds at Canoe Financial, admitting he “didn’t really anticipate” the second offer from Brookfield.

In fact, Canoe sold its Inter Pipeline shares after Brookfield launched its initial offer and moved the proceeds into midstream rivals Keyera and Gibson Energy.

Tahmazian expects the bidding war to send equity prices rising across the midstream sector, ending with Brookfield using its financial clout to win the day.

“The margin is thinning really quick for Pembina … they don’t have a lot left in the tank for fighting Brookfield,” he said.

Whatever the outcome, Brookfield “stands to make a handsome profit given its accumulated direct and indirect stakes” in Inter, said Raymond James analyst Frederic Bastien.

Brookfield took advantage of the first wave of COVID-19 and the Saudi Arabia-Russia oil price war last year to assemble the largest shareholding in Inter, whose shares bottomed out at one point to C$7.76 per share. Those shares have since posted a major rebound, topping C$20.

Brookfield went public in February with a C$7.1 billion bid, including up to C$4.9 billion in cash. Inter initially dismissed that offer outright, arguing its company was worth significantly more, then changed its tune after conducting a strategic review.

On June 1, Pembina won the favor of Inter’s board by offering C$8.3 billion in shares to absorb Inter’s assets and create a combined entity with 16,000 miles of oil and natural gas pipelines and capacity to transport 6.2 million barrels equivalent of oil, gas and natural gas liquids. In addition, a merger of Pembina and Inter would increase its processing capacity by 40 percent to 8.8 billion cubic feet per day.

Pembina offer

Pembina Chief Executive Officer Michael Dilger said Inter had been in his sights for 10 years, including two previous failed bids.

“The timing is right. Scale matters, service matters, the synergies here are incredible,” he said.

Pembina has estimated its takeover would deliver pretax synergies worth C$150 million to C$250 million a year.

Brookfield wasted no time embarking on a third round June 2 by raising its bid to C$8.48 billion, upping its cash-and-shares bid to C$19.75 per share. It blasted Inter’s board for privately snubbing an offer of C$19.50 per share while accepting Pembina’s “inferior offer” at the same time agreeing to pay Pembina a C$350 million break fee if their deal did not close.

The bidding battle drove Inter’s shares to almost C$20.30, an indication that investors were counting on Pembina and Brookfield to drive the purchase price even higher.

Also caught up in the mix is Inter’s continuing search for a commercial partner in its unfinished Heartland petrochemical complex north of Edmonton, with cost overruns of C$500 million hiking the projected cost to C$4 billion.

The Heartland facility is scheduled to convert Alberta propane into polypropylene plastic pellets for manufacturers if it becomes fully operational in 2022.