Husky targets MEG Energy

The Canadian oil sands space is set for a shakeup, as Husky Energy (ticker: HSE) announced a hostile takeover bid for MEG Energy (ticker: MEG) over the weekend.

Under the terms of Husky’s proposal, the company will pay each MEG shareholder either C$11 in cash or 0.485 shares of Husky, subject to a maximum cash consideration of C$1 billion. Based on MEG’s closing price of C$8.03 on Friday this transaction implies a 37% premium.

In total, Husky will pay C$3.3 billion for MEG Energy, and it will also assume MEG’s C$3.1 billion in debt, giving a total deal valuation of C$6.4 billion.

Husky believes the combined company’s size and integrated model will improve prospects. Pro-forma, the company will have total upstream production of 410 MBOEPD and refining and upgrading capacity of 400 MBPD, giving some protection against the steep WCS-WTI differential. Additionally, the larger company will have a stronger footprint to expand operations in the capital-intensive oil sands business.

MEG also currently holds significant debt, with net debt over five times EBITDA and financing costs of $10.02/bbl. Husky has significantly lower debt loads, and would be able to absorb MEG’s C$3.1 billion in debt. In addition, Husky would likely be able to refinance MEG’s debt at a lower rate.

Hostile Takeover Bid Shakes Up Canadian Oil Sands

Source: Husky Energy Investor Presentation

The MEG board announced it will consider the Husky offer but encourages shareholders to take no action until the offer has been reviewed.

Husky CEO Rob Peabody commented “Husky is confident the proposed transaction is in the best interests of Husky and MEG shareholders, employees and stakeholders. However, to date, the MEG Board of Directors has refused to engage in a discussion on the merits of a transaction, giving us no option but to bring this offer directly to MEG shareholders. We believe MEG and Husky employees will benefit from substantial opportunities for growth and development as part of a stronger, combined Canadian company.”

Hostile takeover bids like this are rare in the oil and gas space, and successful bids are even more scarce. According to Bloomberg, there have been 35 other hostile takeover attempts since 2000, including unsolicited bids that turned hostile and hostile bids that became friendly. However, out of these 35 bids only 10 were successfully completed and only one since the downturn. While larger bids have been proposed, if Husky’s bid is successful it will be the largest hostile takeover completed in the oil and gas space in at least 18 years.

Investors appear excited by the deal despite the history of oil and gas hostile takeovers, however, as MEG is currently trading at C$11.10. Investors may expect additional bids, as oil sands producers like Suncor, Imperial Oil and Canadian Natural Resources may take an interest in MEG.

Q&A from HSE conference call

Q: Rob, I want to start off by talking a little bit about the integration. I think you had a good slide in here that said, 375,000 barrels a day if the pro forma company would get takeaway. And I guess one of the market questions historically around MEG has been perceived as a company that’s been highly exposed to the Western Canadian crude differential. And one of the things that supported Husky stock has been the view that you guys have been relatively protected from that weakness in local pricing. And so, can you just talk about the levers that you have in order to manage that WCS differential and why you don’t think there’ll be the sensitivity that might be perceived to be there at first blush?

Robert J. Peabody: What I’d say is there’s a lot of elements to managing the differential and realizing the best price when you go Downstream, and that’s something Husky has got a lot of experience in ultimately where we deliver end products and how we use our Midstream infrastructure and Downstream infrastructure to get the best price for every barrel we produce. Some of those ways I mentioned, the 7 million barrels of storage, that allows us to move products around in a way other companies can’t to get them to the best markets that are available at any given time. We’re also very good at blending the product in various ways to actually ensure that we’re getting the best price for every barrel, fundamentally taking things and blending them together to produce products where we can get better overall product prices for.

And then, of course, at the moment, we have a little bit of surplus capacity in that system, which we can use to absorb some of the MEG barrels. And then finally, I’d also say that, and I referenced it in the script, we’re actually adding capacity in our Downstream through improvements we’re making to handle more heavy crude at Lima. Of course, we just finished a program to do that at Toledo. We still continue to creep that capacity up, and we have a program in Superior, which is heavying up the feedstock there as well.

Q: Any color that you can kind of provide on how this proposed transaction came together. It sounds like you’ve approached management previously, but if you can help us fill in some of the details where you can.

Robert J. Peabody: Most of those details will actually be in the management circular that will be issued tomorrow for people who want to read the detail. I just say that, look, we’ve looked at potential acquisitions over time. We always look at potential acquisitions, but this one just became too compelling to ignore. I mean, we believe this offers a great deal for MEG shareholders, a 44% premium to the last 10 days, much higher if you look at the last two years, gives them immediate access to a dividend, and to this investment grade balance sheet would of course, when you have that much debt, is incredibly valuable and a key source of our synergies. So, we ultimately feel this is a very friendly deal to shareholders

As you mentioned, we approached the MEG Board and were rebuffed sort of. But we believe shareholders, MEG shareholders will find this offer compelling and they need to have a chance to make a decision on it. But we remain and we’d love to engage with the MEG Board to complete this transaction faster and bring these benefits to shareholders as quickly as possible.

Q: The environment seems right for consolidation and therefore potentially competitive. If other bidders now enter the picture, can you talk about how you intend to defend your offer and perhaps modify it if needed?

Robert J. Peabody: I think the main thing I’d first stress is that I think we’re really uniquely positioned to do this deal. I think when we look at our Downstream infrastructure in both Canada and the United States that really gives us an advantage in terms of adding value here. Clearly, our strong balance sheet makes this deal work where if we were much more levered or it would be a much more difficult deal to do. As I’ve said we’re not willing to jeopardize an investment grade credit rating to do anything like this.

So, we just believe this is a really compelling offer. And one of the things is certainly as I visualize this deal to me, this is a real hand-in-glove sort of deal. It just fits together extremely well. And so, I think we certainly would like to believe that when MEG shareholders look at this, they’re going to realize there are very few companies out there, if any, that can add this total combined value to the deal.

Also, I’d emphasize that two-thirds consideration of this deal is shares, and we would certainly hope that a lot of MEG shareholders will decide to retain the shares and participate in the upside that we believe is inherent in the joint company. And again, I think, because of the scale of the companies involved, and you’ve looked at this, there’s a lot more upside in that share price than you would get if, say, a larger company necessarily did the same transaction.


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