Cenovus floated as potential competing bidder for hostile takeover target MEG Energy

Oilsands giant Cenovus Energy Corp. has been cited by industry watchers as one of the potential competing bidders for MEG Energy Corp., which has spurned an unsolicited offer from Strathcona Resources Ltd. and launched a formal review of alternative options.

MEG and Cenovus have neighbouring flagship oilsands projects south of Fort McMurray, at Christina Lake, that use steam wells to draw the bitumen from underground.

So from an operational perspective, it would make sense for Cenovus to want to further scale up and capture cost-savings and efficiencies, said Dane Gregoris, managing director of Enverus’s oil and gas research group.

But whether or not an acquisition would work financially is another matter given relative weakness in Cenovus’s stock, he said.

Over the past year, Cenovus shares have fallen nearly 30 per cent to trade around the $20 mark.

“It’s kind of an interesting dynamic. I think in a normal market environment where Cenovus had strong equity currency … they would definitely be the logical buyer.

“I think it makes it a little more complicated, a little bit more of a wrinkle.”

Earlier this year, Strathcona offered a combination of 0.62 of one of its own shares and $4.10 in cash for each MEG share it doesn’t already own. MEG shares have been trading higher than the implied offer price, suggesting investors think a better bid will emerge.

MEG has urged shareholders to reject the bid, in part because it said combining with Strathcona would expose shareholders to inferior assets and capital market risk — assertions the would-be acquirer disputes.

The Financial Post, citing unidentified sources, reported earlier this week that MEG has set a Monday deadline for alternative bids and that Cenovus was said to be working on an offer.

Cenovus did not reply to a request for comment on Friday. MEG declined to comment.

On a call with analysts after the unsolicited bid was announced in May, Strathcona executive chairman Adam Waterous said his company and MEG have assets so complementary they are like “doppelgangers” or “brothers from another mother.”

Gregoris said operationally, Strathcona is not as compelling a fit as Cenovus would be, though there would be some synergies.

Part of Strathcona’s pitch is that a combination with MEG would increase its share float, enabling more institutional investors to get in on the stock of the combined company, Gregoris said.

In late May, Strathcona announced an equity commitment letter with Waterous Energy Fund, also led by Waterous. The fund owns almost 80 per cent of Strathcona shares, and the new investment is worth about $662 million.

MEG has raised concerns over Waterous Energy Fund owning 51 per cent of the combined company post-takeover, but Waterous has said the fund has no intention of selling its stake after a deal is completed.

It would be an “unworthy end” if MEG were to finish its more than quarter-century run through a “financial-engineering-styled transaction” at a modest premium, said Kevin Burkett, portfolio manager at Victoria-based Burkett Asset Management, whose firm owns Cenovus shares.

“A competing Cenovus bid would underscore just how strategic MEG’s contiguous oilsands assets have become in the broader consolidation story,” he said.

“It isn’t just about paying a premium, it’s about capturing immediate synergies in production, power and infrastructure that a financial buyer simply can’t replicate.

“A tie-up with Cenovus would signal a new phase of operational consolidation in Alberta where scale and integration, not just capital, drive value.”

Other potential bidders floated by analysts include Suncor Energy Inc., Imperial Oil Ltd. and Canadian Natural Resources Ltd.

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