Copyright of the Daily Oil Bulletin 2018
Recent Uptick In Strategic Alternative Activity Not Surprising
A recent surge in smaller oil and gas companies entering a strategic alternatives process comes as little surprise to the head of an industry association whose membership includes many entities that are choosing to go that route.
Gary Leach, president of the Explorers and Producers Association of Canada (EPAC), says that with traditional exit strategies in large part falling by the wayside, some companies have little choice but to explore strategic alternatives.
“Of course smaller oil and gas companies have always been built with the intention they will be eventually sold to a larger acquirer or launched into the public markets through a public offering. That’s how investors would realize the hoped for return on their investment,” he said.
“When optimism is widespread and prices for oil and gas companies are buoyant, deal-making is a lot easier. However, the depressed commodity price and business cycle we are living with today closes the door on most of these options. Assets are going without bids, stock prices are suffering, new capital is scarce and expensive.”
Jeremy McCrea, equity research analyst at Raymond James Ltd., agrees that many smaller companies remain in tough and that options are currently limited.
“Given oil prices today and where costs have fallen, the sector is seeing return on capital at some of the highest points in a long time. Unfortunately, given capital markets, proper valuation to reflect this new profitability is not there,” he said.
“Given the amount of land inventory, companies are pursuing strategic alternatives as a quicker way to monetize this land as oppose to drilling it up within cash flow that could take 20-plus years. For example, no companies are jumping to do equity at these levels.”
What’s the reason for the disinterest in Canadian energy? McCrea said there are multiple reasons.
“The constant political noise regarding pipelines, differentials on AECO/heavy, which aren’t as material as some investors think, competing plays in North America that offer better growth and a changing dynamic with active portfolio managers [less of them as they compete with ETF funds]. As a result, smaller companies under $2 billion [market cap] just aren’t getting the attention they once use to.”
Leach said it is clear that, to a significant degree, the sector is “suffering from uniquely Canadian problems” as compared to the United States energy sector.
“The damaging effects of government policy on this side of the border in terms of taxes, regulatory costs and lack of visibility on new pipeline capacity has played a major role in the sorry state of asset values and stock prices of Canadian energy companies,” he said.
“This has left a lot of Canadian energy companies and their investor base stranded. Yet investors, boards and management know the status quo is not acceptable. They do not want to be in the same position a year from now. And commodity price forecasts don’t offer much optimism to change the outlook,” Leach added.
“Thus the continuing search for levers to pull to increase value and provide liquidity for their investors as companies announce strategic alternatives. Some do so publicly, but many are pursued privately and quietly… seeking buyers or looking at … combinations that will be accretive in value for their investors. It is not an easy time for the smaller Canadian oil and gas producers.”
The growing SA brigade
The following is a sampling of some of the companies that have opted to seek strategic alternatives in recent weeks.
Granite Oil Corp. announced March 20 that it was launching a strategic alternatives process.
The board believes that the current trading price of its common shares does not adequately reflect the underlying value of the company and its successful EOR project.
The board has appointed an independent committee to undertake a broad review of potential alternatives to enhance shareholder value.
“Granite has not set a definitive schedule for the process and the company does not intend to provide updates or otherwise disclose developments with respect to the process until the board has approved a definitive transaction or strategic alternative, or otherwise determines that disclosure is necessary or appropriate,” the company stated.
Granite will continue to execute its 2018 business plan, which includes drilling and completing its second well of the year early in the second quarter. “The company will continue to prioritize its balance sheet and dividend while efficiently converting barrels in the ground into producing barrels,” it said.
Marquee Energy Ltd. announced its strategic alternatives process on March 14.
Marquee's board of directors has “determined it is timely, prudent and in the best interests of the company and its stakeholders to commence a formal process to explore strategic alternatives.”
This may result in a corporate sale, merger or other business combination, a sale of all or a portion of Marquee's assets, a royalty, a joint venture, strategic investment or other significant transaction.
“The company believes that the current trading price of its common shares does not reflect the value of Marquee,” it said.
Raging River Exploration Inc. believes it can enhance shareholder value through a strategic repositioning process, which the company’s board of directors has launched.
In its Q4 and year-end 2018 financial and operational results, the company announced a review to evaluate a number of available alternatives in light of common shares trading at a price the board does not see reflecting the company’s underlying value.
According to the news release, Raging River has a clean balance sheet with estimated year-end 2018 net debt to trailing funds flow from operations of less than one times, with a conservative credit facility of $500 million. Further, a strong Viking drilling inventory or 2,500-plus locations enables the company to meet and exceed expected growth forecasts, with consistent success and an industry-leading, light-oil netback.
Toscana Energy Income Corporation initiated a process to explore and evaluate strategic alternatives in February.
The company believes that the current trading price of its common shares does not reflect the value of the company.
This could result in a corporate sale, merger or other business combination, a sale of all or a portion of Toscana’s assets, the refinancing or extension of the outstanding debentures, commencing a substantial issuer bid pursuant to which Toscana will acquire its common shares, or any other transaction or transactions that will “result in unlocking additional value for shareholders.”
Trinidad Drilling Ltd. started a formal process to initiate a strategic review in February.
The company believes that the current trading price of its common shares does not reflect the value of the company, despite improving industry fundamentals and recent steps taken by Trinidad to improve shareholder value.
In connection with this process, the board intends to undertake a comprehensive review to identify and consider a broad range of alternatives and their potential to enhance shareholder value, including a sale of selected assets, a merger, a corporate sale, a strategic partnership, various capital re-deployment opportunities or any combination of these.
The company does not intend to set a definite schedule to complete its evaluation or process and cautions that there are no assurances or guarantees that the process will result in a transaction or, if a transaction is undertaken, the terms or timing of such a transaction.
Laricina Energy Ltd. also initiated a formal process to explore strategic alternatives in February.
Such strategic alternatives may include, but are not limited to, a corporate sale, merger or other business combination, a sale of all or a portion of Laricina's assets, a royalty, a joint venture, strategic investment or other significant transaction.
Laricina will continue under its base business plan which has been designed to preserve the integrity, value and optionality of the assets, manage financial capacity and maintain cost discipline while sustaining the company's efforts to evaluate and pursue strategic alternatives, it said.