Cenovus Energy had been floated by analysts as a possible white-knight buyer after Strathcona Resources said it planned to launch a hostile takeover big for MEG Energy.AMBER BRACKEN/The Canadian Press
MEG Energy has found its white knight.
Two months after rejecting a nearly $6-billion hostile takeover offer from Strathcona Resources Ltd, MEG agreed Friday to a friendly deal with Cenovus Energy Inc. that values the last of Canada’s large pure-play oil sands producers at nearly $7-billion. Analysts had been expecting another bidder to emerge since shortly after Strathcona launched its bid in May, with Cenovus specifically named by Royal Bank of Canada analyst Greg Pardy as the most likely suitor.
Cenovus and MEG have neighbouring operations in northern Alberta, and combining the two companies would create Canada’s second-largest oil sands producer, with an average production of roughly 720,000 barrels per day. That represents more than one out of every five barrels produced in Canada’s oil sands, according to Canada Energy Regulator data.
“The fit is exceptional, and it plays right into what we do best,” Cenovus chief executive officer Jon McKenzie said on a Friday morning conference call discussing the deal. “These assets will be producing for decades to come.”
Strathcona executive chairman Adam Waterous said in an emailed response to questions that Cenovus was “preying on a weak board” and that negotiating with MEG “was like taking candy from a baby.” He accused MEG’s board of directors of adopting an “anybody but Strathcona” view.
Cenovus is offering a mix of cash and stock for MEG, worth the equivalent of $27.25 per share and composed of 75 per cent cash and 25 per cent stock. The total deal value, including MEG’s existing debt, is $7.9-billion. That equates to $5.2-billion in cash and approximately 84.3 million shares, Cenovus chief financial officer Kam Sandhar said on the call.
Although the Cenovus offer bests what the Strathcona offer was worth when it was made by roughly 17 per cent, the hostile bid has a much larger stock component, composed of 0.62 Strathcona shares and $4.10 per MEG share.
Because Strathcona’s shares have increased in value by more than 28 per cent since the offer was made, ATB Capital Markets said in a report on Friday that the hostile offer is currently worth the equivalent of $28.17 per MEG share. That is nearly a full dollar per share more than what Cenovus has agreed to pay.
“The MEG Board has just agreed to a take-under by Cenovus,” Mr. Waterous said. “The structure being mostly cash is crystallizing value for MEG shareholders instead of Strathcona’s mostly share offer, which would allow MEG shareholders the opportunity to ride the upside.”
Strathcona plans to continue engaging with MEG shareholders before its Sept. 15 deadline, Mr. Waterous said. However, if its bid ultimately fails, he said the company will use its 9.2-per-cent ownership stake in MEG to vote against the Cenovus offer.
For Cenovus, buying MEG represents one of the largest acquisitions the company has made since it was created in 2009 through a spinoff of the oil assets previously held by Encana Corp. The natural gas assets remained under Encana until early 2020, when the company was rebranded as Ovintiv Inc. and its headquarters were relocated from Calgary to Denver.
Cenovus has pursued an aggressive growth-by-acquisition strategy over the past decade in particular. In 2017, the company made its largest-ever acquisition, paying $17.7-billion to ConocoPhillips Co. for its oil sands assets. That deal effectively doubled production for Cenovus overnight.
In 2020, Cenovus agreed to pay $3.8-billion for Husky Energy Inc. – a company that had been controlled for decades by Hong Kong billionaire Li Ka-shing. That transaction allowed Cenovus to dramatically expand its refining capacity in Canada and the United States.
Cenovus CEO Mr. McKenzie said the combined company would be producing more than 850,000 barrels per day from the oil sands by 2028. That would rival long-time industry leader Suncor Energy Inc., which had oil sands production of roughly 748,000 barrels per day in its most recent quarter.
Cenovus also expects to generate significant cost savings once the MEG transaction closes, before the end of 2025. Mr. McKenzie said operational savings, or synergies, will reach $400-million per year by 2028, while lower spending on areas such as administration and IT should generate another $120-million in savings earlier, in 2026.
“We know these assets well, and we have very high confidence in our ability to achieve the synergies that we’ve identified, with the potential for even more to come as we look at our long-term development options,” Mr. McKenzie said.