CNRL makes deal to buy Painted Pony for $461 million
Prime B.C. Montney natural gas assets to fuel larger firm’s oilsand operations
Canadian Natural Resources Ltd said on Monday it will buy smaller rival Painted Pony Energy Ltd for about $461 million including debt, as Canada’s biggest oil and gas producer seeks to expand its Western Canada acreage.
Natural gas prices have come under pressure from reduced consumption as efforts to tackle the COVID-19 pandemic resulted in a drop in manufacturing activities, while cancelled liquefied natural gas exports have led to high natural gas inventories.
“This transaction also allows us to further insulate against natural gas costs in our oilsands operations and has minimal impact on the company’s low overall corporate decline rate,” said Canadian Natural President Tim Mckay in a statement.
Canadian Natural said the deal includes Painted Pony’s properties in northeast British Columbia areas of Blair, Daiber, Kobes and Townsend, which together produce about 270 million cubic feet per day of natural gas and 4,600 barrels per day of natural gas liquids (NGLS).
“We believe the acquisition price for Painted Pony is the best case scenario for a company that would have otherwise struggled in its existing corporate structure,” Cody Kwong, analyst at Stifel Firstenergy, said in a note. “As well, given the processing commitments and troublesome net debt levels, there aren’t a large number of entities within the WCSB that functionally consider a corporate transaction of this nature.”
According to the terms, Canadian Natural Resources will acquire Painted Pony’s outstanding shares for $0.69 per share in cash, a premium of 17 per cent to Friday’s closing price on the Toronto Stock Exchange. Painted Pony’s stock jumped nearly 16 per cent to $0.68 per share, while Canadian Natural rose half a per cent to $26.89 on the Toronto Stock Exchange. Shares of other small Canadian oil and gas firms also perked up with Seven Generations Energy Ltd. up 3.75 per cent to $4.41, Advantage Oil & Gas Ltd. rising nearly 4 per cent to $1.85 and ARC Resources Ltd. 4 per cent higher to $6.68 per share.
Canadian Natural will also take on about $350 million of Painted Pony’s debt.
Painted Pony was one of the more promising natural gas players in the prized Montney formation in northeast British Columbia. Its stock traded as high as $14 in 2014, but the company has seen its share price collapse as part of an industry-wide rout in Western Canada and cancelled LNG projects over the past six years.
In July, Cormark Securities Inc. picked Painted Pony as one of its two top picks among Canadian juniors with a price target of $1.75 per share. Painted Pony also has a 20-year strategic alliance with Altagas Ltd. which provides for additional natural gas processing, marketing and egress solutions.
Calgary-based Painted Pony will hold a special meeting of security holders in September, where it requires 66.67 per cent of votes in favour for the transaction to close. The company’s executive suite, board of directors, and two largest shareholders, which represent an aggregate 25 per cent of shares outstanding, have already entered into agreements to vote in favour of the transaction. The deal is expected to close in late third quarter or early in the fourth quarter and includes a $20 million break fee.
The deal is an “opportunistic one” for Canadian Natural, according to Michael Dunn, analyst at Stifel, as the assets being acquired are high-quality drier gas assets, and provides an exit point for Pony which has hindered by high debt levels and long-term take-or-pay contracts that had limited its flexibility.
“This transaction may cause some to wonder whether CNQ is angling for a strategy with regards to LNG feedstock, as at Stifel Firstenergy we viewed PONY’S assets as amongst the most attractive northeast B.C. leaner gas asset bases not already in the hands of those with LNG plans,” Dunn said.
The slump in oil and gas prices has sent energy stocks to record lows, providing larger companies with a chance to increase their holdings by buying smaller rivals cheap. The first half was muted in the Canadian oil, gas and consumable fuels sector with 18 M&A deals valued at $827 million, compared to 25 deals worth $6.78 billion during the same period last year, according to FP Data. But the second half has already surpassed the value of deals in the first half, with now two deals exceeding $961 million.
Last month, U.S. oil major Conocophillips agreed to buy assets from Kelt Exploration Ltd in the Montney shale oil play for $500 million.
The acquisition price for Painted Pony is the best case scenario for a company that would have otherwise struggled.