Consolidation continues in the oil sands as Husky makes $6.4 billion offer for MEG Energy
Husky Energy has launched a $3.3 billion hostile bid for MEG Energy, plus the assumption of $3.1 billion in debt.
According to the Globe and Mail, Husky CEO Rob Peabody approached MEG's chairman last spring, initially seeking a friendly merger of the two companies. Peabody later began discussions with Daniel Farb, managing director of Boston-based Highfields Capital Management, who owns a 9.9% stake in MEG. Farb had repeatedly expressed concerns over MEG's direction and lacklustre share performance, later resigning his position on the board in June.
The Chinese connection
China's CNOOC (China National Offshore Oil Corporation) acquired a sizeable stake in MEG Energy back in 2005, now owning about 12% of the company. The state-owned entity has a significant footprint in the oil sands, including the Long Lake SAGD facility (owned through subsidiary Nexen) and a 7.23% stake in the Syncrude mining project.
Husky is controlled by Hong Kong billionaire Li Ka-shing, whose son Victor sits on the company's board. Husky and CNOOC have a good working history, having jointly developed China’s first deepwater offshore natural gas field. Peabody downplayed the CNOOC connection in his decision to buy MEG Energy, but says he thinks the Asian oil major will find Husky's offer "compelling."
A pure play on the oil sands
MEG is considered a rare pure-play in the sandbox, highly leveraged to the price of Western Canadian Select (WCS). The company focuses exclusively on in-situ extraction of bitumen from the oil sands, using steam-assisted gravity drainage (SAGD) technology.
Despite higher world oil prices, WCS sells at a very deep discount to global benchmarks due to ballooning supply and lack of pipeline space. Husky says although MEG has high quality assets, it has "failed to create shareholder value" for its investors due to insufficient takeaway capacity and lack of integration with downstream refineries.
According to Husky, the two companies "fit hand-in-glove," potentially realizing $200 million in savings annually. The combined company would have an upstream production rate of over 410,000 boe/day, and an equivalent refining capacity.
Taking its message directly to shareholders
Husky has now taken their offer directly to MEG shareholders, after concluding the SAGD operator "would not be open to further discussions."
The company has formally commenced its tender offer at $11 in cash or 0.485 of a Husky share for each MEG share, a 37% premium over MEG’s closing price the day the deal was announced. MEG shareholders will also be able to participate in Husky's 2.2% dividend.
MEG says it has received the unsolicited offer but no formal offer has been made to its board. The company is now shopping for a better deal and asks its shareholders not to tender their shares.
Husky's offer is open until January 16, 2019.