MEG Energy in ‘defence mode’ as takeover talk overshadows quarterly earnings in the oilsands

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Cenovus is expected to deliver weaker second-quarter results Thursday due in part to lower oil prices and production cuts from wildfires and planned maintenance.

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Cenovus executives had previously downplayed the possibility of joining the fray for MEG, but speculation began to heat up earlier this month when the company hosted an in-person, technical presentation on its upstream operations for analysts and investors.

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The presentation was seen by some as “trying to warm up the street” to the possibility of a bid, said Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners, which holds stock in both companies.

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“I think they will. I think they should,” Nuttall said of a potential bid from Cenovus. “An asset like this with such massive synergies does not come around every day. I think they’ll be required to submit a bid for for MEG. The question, then, is price.”

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A competitive bid will have to top Strathcona’s mixed offer to MEG shareholders of partial ownership in Strathcona, plus a cash payout.

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Strathcona offered $4.10 in cash plus 0.62 of a Strathcona share for each of MEG’s shares. When it announced the deal in May, the implied value was $23.27 per share of MEG, representing a roughly nine per cent premium to its pre-bid share price.

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Since then, the implied value has moved up along with Strathcona’s share price, reaching $25.77 per share at close Tuesday — representing a premium of roughly 21 per cent.

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Strathcona has argued a takeover would create a top-tier heavy oil producer with better access to capital and a stronger balance sheet.

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But MEG’s board reportedly rejected an overture from Strathcona in April, prompting the Waterous Energy Fund-backed company to formally launch its hostile bid a few weeks later.

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Strathcona began hoovering up shares of MEG on the open market in the first quarter of the year, accumulating nearly 10 per cent of the company by early May, prior to launching its formal bid.

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The moves are in keeping with a successful pattern for Strathcona chairman and Waterous Energy Fund chief executive Adam Waterous: target an undervalued or undercapitalized oil producer, build a meaningful stake, then pursue control through acquisition, board changes or strategic consolidation.

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But Waterous may face stiffer opposition this time from some MEG shareholders who have vowed to fight Strathcona’s bid. Critics say Strathcona’s offer undervalues MEG and worry that investors won’t be to trade shares as easily in the combined company, since most of the stock would be controlled by Waterous Energy Fund.

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“Strathcona’s bid is going to fail. I will fight aggressively, and have,” Nuttall said, adding that he had “a lot of respect” for Waterous. “I just don’t think it’s a good fit, and I think it’s dilutive as a MEG shareholder in every regard.”

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Waterous said in a statement Wednesday that MEG’s board continues to refuse to decline to include Strathcona in its sales process.

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Market watchers have pointed out that even if Strathcona’s bid fails, the company could very well come out ahead, particularly in the event its large stake in MEG climbs in value in response to a rival bid emerging.

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Waterous has previously said the company would likely issue a special dividend of $10 per share if the bid for MEG falls through.

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