COMMENTARY: A MEGnificent Opportunity – William Lacey

If there is one thing you can say about Adam Waterous it is that he doesn’t let the moss grow under his feet. No sooner had he announced that Strathcona had sold $2.8 billion in natural gas assets, then we wake up and see that Strathcona had made an unsolicited offer for MEG Energy, offering 0.62 of a Strathcona share and $4.10 in cash per MEG share. Using the closing price of SCR that implies a bid of $22.86/sh versus MEGs closing price of $25.29/sh, or almost 11% higher.

Now, no disrespect intended to Waterous, as they turned into the wind and bought while everyone was sheltering in place, and created vast wealth for early investors. But as a friend of mine recently said “Strathcona is a box of broken toys.” Now, I’m not sure I would call it that (OSUM and Lindbergh are pretty good) but I get the point. That, plus it is a company that is wildly illiquid, and you end up with something that is not the most attractive offer that shareholders could wish for.

MEG is a crown jewel asset that would be a prized possession for many. Unlike the previous hostile takeover offer by Husky Energy, which was incredibly opportunistic and predicated on a broken capital structure, this bid is different. Unlike the other offer, which many attributed the failure to outside politics (China and Huawei), I suspect this offer will result in a transaction, albeit not with Strathcona.

So, who do I think will win the day? Though Cenovus is the most logical company, I don’t believe they have the runway to do a deal such as this as shareholders are very much in a wait and see pattern for their downstream business, and are geared towards seeing greater shareholder returns (buybacks, dividends). Personally, I think this comes down to Suncor (lots of discussions around mismatches between base mine reserve life and upgrader) and potentially Imperial Oil (core strength in thermal assets and material financial capability to execute). Fire up the music and let the dancing begin; someone is going to end up with a great dance partner.