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Husky deal not the trigger for Canadian consolidation wave

M&A activity may have started to rally, but further big-ticket transactions look unlikely

Dealmaking has been picking up in the Canadian oil patch after stumbling to a record low level in the first half of the year. And late October saw a significant fillip to the trend when Canadian oil firm Cenovus Energy bid C$3.8bn (US$2.89bn)—C$10.2bn including debt—to acquire Albertan peer Husky Energy.

But the blockbuster deal, the sixth-largest in Canadian history, may be a one-off. The move was based on a decision by Husky’s majority owner, not a result of financial necessity like other recent deals in the low oil price environment. Funding options, whether debt or equity, have largely dried up for all but the largest E&P companies, making another major consolidation between Canada’s bigger players unlikely in the foreseeable future.

Husky commits hari-kari

Fear of possible hostile takeover attempts appear to have motivated Hong-Kong multi-billionaire Li Ka-shing, Husky’s largest stakeholder since the early 1990s, to entertain Cenovus’ all-stock offer. Both companies looked increasingly vulnerable in a low oil price world where their share prices had been hammered more than most and quarterly losses had mounted.

There are no obvious takeover targets of similar or greater size than Husky

The two companies had anecdotally been discussing a possible deal, off and on, for several years, but chose to pull the trigger now to achieve cost savings. The goal, according to Cenovus CEO Alex Pourbaix, is to bring the combined company’s breakeven crude price down to $36/bl next year and less than $33/bl by 2023, compared with c.$40/bl presently.

Rob Peabody, CEO of Husky, who will retire upon close of the deal in the first quarter of next year, says it is not a divestment by Li, as his holding companies plan to hold their soon-to-be 27pc stake in Cenovus over the long-term. They presently have an almost 70pc stake in Husky.

Another mega-deal?

Looking forward, there are no obvious takeover targets of similar or greater size than Husky among Canada’s oil and gas companies, in part because the attractiveness of major oil sands producers to non-Canadian buyers is hugely limited given how far the high-carbon, high-cost resource is out of investment favoureven at bargain basement prices.

Once the Cenovus-Husky deal is finalised, the merged company will be the third-largest Canada-based oil and gas producer by output, behind only Canadian Natural Resources Limited (CNRL) and Suncor Energy, and the fourth-largest by market capitalisation, with Imperial Oil also ahead on this metric.

Cenovus and Husky had a market cap of C$5.5bn and C$3.6bn, respectively, at the time of the deal, with the former paying a 21pc premium for the latter. The only other Canada-based producer with a market value greater than Husky’s is Tourmaline Oil, the largest gas producer in the country, at C$5bn, with the next largest, ARC Resources, at less than half that.

C$3.8bn – Husky merger value

Post Cenovus-Husky, it is unlikely the management teams of any of the largest Canadian firms would be amenable to a takeover even if an external suitor emerged, and all are better placed than pre-deal Husky or Cenovus to rebuff unwanted advances. CNRL and Suncor are protected by their size—with a market cap of roughly C$25bn eachwhile Imperial Oil is majority-owned by ExxonMobil.

Tourmaline may appear an attractive acquisition target for any one of the now ‘big four’, especially given the chance to diversify from oil sands and a recent rebound in gas prices. But Tourmaline’s highly conservative and focused management team, led by longtime CEO Mike Rose, would be well-placed to resist. The company has a debt-equity ratio of 0.21very low for a Canadian-based producer—and a long-term strategic plan to develop its large, high-quality resource base in the Montney and the Deep Basin in a disciplined manner.

The domestic buy-side potential is also limited. CNRL, the past several years’ most aggressive predator, has a debt-equity ratio of 0.66, blunting its firepower, while Suncor CEO Mark Little stated at third-quarter earnings that he will not cut capital spending and jobs just to then spend on acquisition. Imperial Oil does not have a history of making large acquisitions, and Cenovus will be preoccupied with amalgamating Husky for the foreseeable future.

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