Morningstar | Husky Energy Proposes to Acquire MEG Energy; MEG’s Shares Skyrocket
Husky Energy proposed to acquire all of the outstanding shares of MEG Energy in a deal valued at CAD 6.4 billion. Under the proposal, MEG shareholders would receive CAD 11 in cash or 0.485 of a Husky share, subject to a maximum cash payment of CAD 1 billion and a maximum of 107 million shares, and Husky would incur CAD 3.1 billion in debt.Husky made the proposal directly to MEG shareholders after MEG’s leadership declined to discuss the bid with Husky. In response, MEG’s board will consider the offer when it is received and has advised shareholders to take no action. Husky plans to make its formal bid on Oct. 2.
The combined company will average 410 barrels of oil per day in upstream production and have refining and upgrading capacity of 400 mboe/d. More importantly, Husky believes that the company will have 375 mboe/d of heavy oil processing, upgrading, and transportation capacity, which will limit the exposure of MEG’s Christina Lake bitumen production to the heavy oil discount. Husky’s management also expects the company to realize CAD 200 million in annual synergies, including CAD 100 million related to debt refinancing and CAD 70 million in operational efficiencies, driven by Husky’s integrated corridor and transportation commitments.
The CAD 11 proposal represents a 37% premium to MEG’s closing share price on Sept. 28. Accordingly, MEG’s stock jumped 38% and is trading just over CAD 11 per share. We think this is a good deal for MEG shareholders, as it represents a 57% premium to our CAD 7 fair value estimate. At this time, we are maintaining our CAD 7 fair value estimate.
Husky shareholders are less optimistic about the deal. Shares are down 6% on the news of the proposal, driven by uncertainty of Husky’s exposure to the heavy oil discount. Many shareholders invest in Husky due to its limited exposure to the discount. AT this time we are maintaining our CAD 20 fair value estimate.
For a detailed look at Canadian crude and pipeline trends, please refer to our September Energy Observer, "Don't Overlook Oil Sands: Falling Costs and More Infrastructure Will Make Canadian Production Globally Competitive."
MEG Energy is engaged in a steam assisted gravity drainage oil sands development at its 80 section Christina Lake Regional Project. As of Dec 31 2010, Co. had total proved bitumen reserves of 605.9 gross thousand barrels (470.5 net thousand barrels).
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