Of all the responses so far to falling oil prices – projects deferred, dividend cuts, large equity issuance, staff layoffs and asset sales – the most unusual is the unsolicited offer by Suncor Energy for Canadian Oil Sands.
That deal – it has been rejected by COS’s board and came six months after Suncor first approached COS to try to complete a friendly transaction, and one that put a higher value on COS shares — is also unusual because it represents one of the very few hostile deals in the oil patch.
But there will be more to come. At least that’s the view of Zac George of FrontFourCapital, a Connecticut-based money manager who has also been an activist in the oilpatch and who spoke at a conference in Toronto this week.
“That announcement [Suncor and COS] is just the beginning of a lot more activity to come in the space,” said George, who argues industry consolidation will be a “natural extension,” because “there are more companies than management talent to run them all.”
So far, the labour shedding that has occurred in the energy sector, George noted, has tended to occur at the level of the professionals — geologists, engineers, accountants and analysts. “But CEOs are not stepping aside. There is a bid/ask spread and with a very small corporate community, taking the step of making a hostile offer for a target company is very rare.”
Accordingly, expect more hostile deals, George argues because some CEOs of potential target companies have an inflated view of either oil prices or their own value.
“Some management teams have a psychological attachment to a share price or a value of a company that they think they should transact at [as if] they were living in the same world that we had a year back,” said George, the son of former Suncor CEO Rick George.
As a result, “looking at historical share price to determine whether an offer is fair today doesn’t make a lot of sense,” he argued.
“We expect more transactions of this type,” he said, though the hardest part of any deal will be “getting management teams and not shareholders to accept the transactions.”
For good measure he repeated that theme in response to a question about the “dream” of investing in natural resources, but having to settle for something less than the brass ring. “The focus should be on the challenge of getting management teams to accept these transactions and not shareholders.”
George regards the Suncor/COS deal as significant for reasons other than for it hostile nature. That significance arises from what it implies for Suncor “relative to the costs of building a new mine and upgrader.” As well Suncor is planning to acquire COS, which implies that it is prepared to take on all the risks, including financial and regulatory.
George also referred to the coming woes for the junior oil and gas sector. “When we come out of the cycle there will be less capital available for them, so a consolidation will be important.”
As well, George noted that when the current underweight institutional investors return to the market “they will take every opportunity to highgrade. They want more liquid names, more transparent names and higher quality management teams and boards. The tide is going out for that smaller company.”
Financial Post
bcritchley@nationalpost.com
