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‘Inflection point’: Oilpatch companies scramble to find new partners to scale up, access capital after commodity rout

Two proposed deals highlight uptick in consolidation and could be a harbinger of more transactions in coming weeks

CALGARY — Two proposed deals Monday by mid-sized oil and gas companies highlight a recent uptick in consolidation in the depressed Canadian oilpatch and could be a harbinger of more transactions in the coming weeks, according to analysts.

Obsidian Energy Ltd. revealed Monday its desire to merge with a reluctant Bonterra Energy Corp. on Monday morning by releasing previously undisclosed details of negotiations between the two companies in an attempt to force Bonterra to the negotiating table.

On the same day, Calgary-based Whitecap Resources Ltd. announced a $155-million acquisition to buy NAL Resources, which is partially backed by Manulife Financial Corp, with the aim of expanding the size of the company’s asset base.

“It seems that anybody with a pulse knew consolidation was around the corner in the (Western Canadian Sedimentary Basin), the questions were just when and how much,” Athena Capital Markets managing partner Michael Zuk wrote in a note to clients Monday, noting that the two deals announced Monday offer “two interesting data points.”

Both transactions demonstrate that management teams in the domestic oil and gas industry believe size and scale will enable them to access capital and funding at a time when smaller producers struggle to attract financing from banks and financial institutions, Zuk wrote.

“I suspect we are at an inflection point where the deals start to pick-up into fall/winter,” he wrote.

Obsidian interim president and CEO Stephen Loukas released a letter addressed to competitor Bonterra Energy Corp. president and CEO George Fink that laid out previous merger discussions between the two companies, and urged Fink to agree to sell his company in an all-share deal.

Loukas wrote that his company’s board “has been prepared to immediately engage in substantive discussions and work expeditiously and collaboratively with Bonterra towards the announcement of a mutually beneficial combination transaction since June.”

Obsidian says it’s prepared to offer two of its own common shares for each share of Bonterra in an all-stock transaction that would leave Bonterra shareholders with 48 per cent of the combined company.

The move is unusual as Obsidian, which has been looking to either sell itself or merge with another company since announcing a “strategic alternatives process” in Sept. 2019, has a smaller market capitalization than Bonterra.

Obsidian’s most recent financial statements show the company has $2 million in cash and $56 million in current assets.

Obsidian shares rose 15 per cent Monday after the letter was released to reach 60 cents each on the Toronto Stock Exchange, bringing the company’s market cap to $45 million. Bonterra, by contrast, traded flat at $1.50 per share on the TSX and has a market cap of around $50 million.

Loukas’ letter to Fink acknowledged that Bonterra trades at a premium to Obsidian “but we do not believe that the Bonterra valuation premium will be sustained in the stand-alone entity.”

The letter also argued the combined entity would see Bonterra’s common shareholders enjoy an almost 600 per cent price surge to $10.50 by 2022, assuming US$45 per barrel oil prices and $1.95 per thousand cubic feet natural gas prices.

“Given the significant equity appreciation that would result from a combination between our companies, we feel strongly that engaging with Obsidian Energy is a far better outcome for Bonterra shareholders than the pursuit of incremental second-lien debt financing from the Business Development Bank of Canada,” Loukas said in the letter.

Fink did not respond to a request for comment on the proposal or whether he’s concerned that Obsidian would attempt an unsolicited bid for Bonterra.

Calgary-based Whitecap Resources’ shares rose just over 2 per cent to reach $2.59 each on the TSX after it announced an agreement for a $155-million deal to acquire NAL Resources, backed by Manulife Financial. When the all-share deal closes in 2021, Manulife will own 12.5 per cent of Whitecap.

In a release, Whitecap announced that NAL’s lands and production base overlaps with its own properties in Alberta and Saskatchewan. The deal will boost Whitecap’s total production next year to as much as 83,000 barrels of oil equivalent per day from from 60,000 boepd currently.

As oil and gas prices have recovered from lows seen during the height of the COVID-19 pandemic, there’s been a noticeable uptick in oilpatch mergers and acquisitions over the summer.

On Aug. 10, Canadian Natural Resources Ltd. spent $350 million to acquire Painted Pony Energy Ltd., a mid-sized natural gas producer focused primarily in northeast British Columbia’s Montney natural gas formation.

In addition, local private equity firm Waterous Energy Fund announced Aug. 14 that it had purchased a 45 per cent stake in privately owned Osum Production Corp., which produces 20,000 barrels of oil per day, from its stakeholders Blackstone, Warburg Pincus and Singapore’s sovereign wealth fund GIC.

Waterous also announced the combination of Cona Resources Ltd., which bought and took private oilsands producer Pengrowth Energy last year, and natural gas producer Strath Resources Ltd. on the same day to create Strathcona Resources, a 60,000 boepd production company, which it says is the largest private-equity owned oil and gas company in North America.

Canada’s oil, gas and consumable fuels sector has seen 22 M&A deals valued at $1.65 billion year-to-date, compared to $13.6 billion across 35 deals during the same period last year, according to FP Data.

Source: Financial Post | This text was excerpted from the media outlet cited on August 31, 2020 and is provided to Noia members for information purposes only. Any opinion expressed therein is neither attributable to nor endorsed by Noia.