Providing coverage of Alaska and northern Canada's oil and gas industry
September 2020

Vol. 25, No.37 Week of September 13, 2020

Flurry of Canada consolidations could raise status of 2 companies

Gary Park

for Petroleum News

Canada is entering a round of petroleum industry consolidation as the weak get picked off by the strong, though the only nastiness at present involves an Alberta-Texas power struggle for control of a Calgary-based oilfield services company.

With the pandemic-driven downturn having started to overpower some of the shakier players, the latest round of deal-making has been dominated by a move towards the ranks of medium-sized players as Obsidian Energy (previously Penn West Petroleum) has launched a bid to swallow Bonterra Energy and Whitecap Resources has offered C$155 million in shares to take over NAL Resources from Manulife Financial.

Obsidian, with current production of about 30,000 barrels of oil equivalent per day, would gain 12,305 boe per day most of it drawn from the Pembina Cardium play in Alberta, rated as the largest reservoir in Canada, plus some minor stakes in British Columbia and Saskatchewan.

Whitecap would bolster its output of 70,000 boe per day, including 54,000 bpd of oil, with NAL’s 40,000 boe per day, 60% of which is crude oil and natural gas liquids.

Those two deals come closely on the heels of Canadian Natural Resources, one of Canada’s biggest and best-financed energy companies, snapping up debt-laden natural gas producer Painted Puny Energy, and ConocoPhillips acquiring British Columbia properties from Kelt Exploration for C$510 million.

Bare-knuckles scrap

While the forays by Obsidian and Whitecap proceed in what seems an orderly fashion, a bare-knuckles scrap has broken out as Wilks Brothers of Texas makes its second attempt to acquire Calfrac Well Services, despite getting a thumbs down from a United States court.

Wilks was rebuffed in its efforts to prevent Calfrac from gaining bankruptcy protection, which would have given Calfrac a chance to hold a vote of its shareholders and noteholders to recapitalize the company and try to save it from insolvency.

With 3,900 employees in Western Canada, 10 U.S. states, Western Siberia and Argentina, Calfrac is ranked fifth among its 10 hydraulic fracturing competitors.

Calfrac said it has the backing of 78% of holders of senior unsecured notes, while Wilks, which owns almost 20% of Calfrac’s shares, has urged those investors to reject the company’s strategy.

Calfrac has called Wilks, which owns U.S. oilfield services company ProFrac services, a “wolf in sheep’s clothing.”

The proposed reorganization, which faces separate votes by shareholders and debtholders on Sept. 17, is being tested under the Canada Business Corporations Act and must be supported by two-thirds of debtholders to proceed.

Wilks said Sept. 1 it would offer C18 cents per share, or C$26.13 million in total, for the shares it does not already own.

Alternative to restructuring

Matt Wilks, vice president of investment, told the Globe and Mail his company is launching its bid to give Calfrac shareholders an alternative path to fiscal recovery if they reject Calfrac’s proposed restructuring.

“We have continuously pushed to get a fair deal on the table,” he said. “We’re not the big, bad wolf.”

Wilks rejected claims that a takeover would pit Calfrac against ProFrac, noting that anti-trust laws in the U.S. and Canada would prevent anti-competitive behavior.

In 2014 Calfrac shares were holding at around C$20, but two years later had plunged to C$1.25 and are now hovering around C15 cents. The company reported a net loss of C$277 million in the second quarter after revenues slumped by 79% and is dragged down by long-term debt of C$947 million.

Wilks has proposed to buy up a large chunk of the Calfrac debt, swap the debt for shares and pump C$80 million into the floundering company, in return for a 60% equity stake in Calfrac.

“We are patient and thoughtful and persistent and we’re not done here,” said Wilks.

He believes Calfrac, if its balance sheet can be cleaned up, would be well positioned to spur industry consolidation through acquisitions in both Canada and the U.S.

However, Calfrac Executive Chairman John Mathison, who believes consolidation in the oil patch is overdue, said Wilks has been unable to demonstrate how it would run two companies that would be in direct competition.

George Armoyan, founder of Armco Capital, described the tussle between Calfrac and Wilks as “dirty and nasty,” though Mathison and Wilks insist it is not as ugly as it may appear, despite a C$100 million lawsuit Calfrac launched in 2018.

The legal action accused Wilks Brothers of attempting to drive up Calfrac’s financing costs in its attempt to acquire Calfrac’s U.S. operations.

Effectiveness questioned

While a surge in takeover activity is welcomed by many sectors in the oil patch, there are doubts that consolidation can help services firms, whose activity has nosedived since March.

Vladislav Vlad, an analyst with Scotia Capital, said recovery in the services sector “will be prolonged and disproportionately impacted compared to exploration and production companies.”

He said E&P companies’ priority will be to “resume shut-in production rather than firing up machines.”


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