Wilks Brothers running out of appeals to push its Calfrac offer as most acrimonious M&A fight in the oilpatch this year draws to a close

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“We’re chiefly concerned that investors haven’t fully internalized the degree of dilution embedded in the restructuring plan,” Bradford wrote.

Alberta Investment Management Corp. (AIMCo), which manages $119 billion in Alberta’s public sector pension money, confirmed to the Financial Post that it voted in favour of the Calfrac management’s proposal over the Wilks’ offer.

AIMCo was Calfrac’s third-largest shareholder at the time of the vote with 16.5 per cent of the company’s shares and ended up swinging the acrimonious proxy fight away from Wilks and in favour of Calfrac management.

Calfrac’s largest shareholder is the company’s executive chairman Ronald Mathison, who controls 25 million shares through MATCO Investments Ltd. and a numbered company, according to company disclosures.

As new shares in Calfrac are issued, AIMCo’s existing equity stake will be diluted sharply. But AIMCo also owned $30 million of Calfrac’s senior unsecured notes and may be able to offset the dilution by exercising its options on new shares.

AIMCo spokesperson Dénes Németh said in an email the firm would be able to convert its debt into shares but did not specify exactly how many shares it’s entitled to or how its equity stake in the company would change as a result of the transaction.

AIMCo is also the co-owner of Glass Lewis, which had recommended the Wilks’ offer.

The pension fund manager’s decision to vote against its own shareholder advisory firm’s recommendation “may devalue Glass Lewis’ services a little in the sense that the owner of your company is not taking your advice,” said Ari Pandes, finance professor at the University of Calgary’s Haskayne School of Business.

But AIMCo said it’s not bound by the advisory firm’s decision.

“AIMCo’s proxy processes are highly robust — guided by our own bespoke proxy voting guidelines and internal assessments, and informed, but not bound, by research from third party independent firms,” Németh said, adding that AIMCo votes with its clients’ “bests interests in mind, so it is not uncommon for AIMCo to vote contrary to the guidance of proxy advisory firms.”

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Blue wave or not, a green wave is sweeping the Canadian oilpatch

CALGARY – In a sign of the changing environment in the oilpatch, North America’s largest pipeline company Enbridge Inc. set new net-zero emissions targets Friday and outlined how the company sees the global energy transition from carbon-based energy to renewables playing out over the next few decades.

Enbridge’s target of net-zero emissions by 2050 aligns the Calgary-based pipeline and utilities giant with the country’s three largest oil producers Canadian Natural Resources Ltd., Suncor Energy Inc. and Cenovus Energy Inc., along with European oil majors Royal Dutch Shell Plc, Total SA and BP Plc. — all of whom have adopted net-zero targets.

“Sustainability is integral to our ability to safely and reliably deliver the energy people need and want,” said Al Monaco, president of


. “How well we perform as a steward of our environment, a safe operator of essential energy infrastructure, and as a diverse and inclusive employer is inextricably linked to our business success and our ability to create long-term value for all stakeholders.”

The move comes as the Canadian oilpatch is facing extreme pressure from influential pension funds and fund managers to reduce its carbon footprint, the federal government’s stringent environmental policy measures, and companies’ fears of being excluded from ESG-indexes which are attracting billions of dollars from a growing number of eco-conscious retail and institutional investors.

“We expect energy companies to focus on this aspect of ESG more closely given increasing


interest. It is by addressing all components of ESG that the Canadian energy industry can move away from its international reputation as “dirty” or higher GHG oil and increase the understanding of practical initiatives that lower carbon intensity and help improve the livelihood of those in local communities,” wrote Dennis Fong, an analyst with The Canadian Imperial Bank of Commerce, in a note in October.

The industry is also watching a changing political landscape in its biggest market south of the border, with the possible election of former vice-president Joe Biden as the next president of the country. Renewable energy and transitioning away from oil are key planks of the Democrat challenger’s economic policy.

Republican President Donald Trump had officially withdrawn from the Paris Agreement, but as Biden appears poised to win the election, he has vowed America will rejoin the global climate change accord in “77 days.”

The Canadian industry is embarking on its own green wave, regardless of new environmental policy measures that may be implemented by a possible new U.S. administration.

This week, the governments of Canada and Alberta signed a deal on methane emissions reduction targets, wherein the federal government accepted the oil-producing province’s target of reducing methane emissions 45 per cent below 2014 levels by 2025. Alberta also recently outlined a natural gas strategy to facilitate the global energy transition.

The moves by Enbridge and upstream producers Canadian Natural and Suncor to set net-zero targets and reduce emissions are an encouraging sign across the oil and gas value chain, said Pembina Institute’s Benjamin Israel.

“I think Enbridge announcing a net zero target is a great response, especially given the growing stringent requirements from investors, governments and society,” said Israel, a fossil fuels analyst, adding that as the industry makes these pledges, they could go a step further by reducing the emissions intensity of the oil and gas flowing through the pipelines.

Enbridge ships the bulk of Canadian oil exports to U.S. refineries primarily in the Midwest, and has faced delays and challenges on a number of pipelines projects, including its Line 3 replacement project in Minnesota, and its Line 5 tunnel project in Michigan, amid opposition from environmental and local groups.

 Enbridge sees opportunity in such emerging areas as renewable natural gas.

In a move to reduce environmental scrutiny surrounding its operations, the midstream company set a target of net-zero emissions by 2050 and also pledged to reduce its emissions by 35 per cent by 2030. At the same time the company intends to diversify its board by appointing women to at least 40 per cent of board positions and have visible minorities represent 20 per cent of positions by 2025.

In an investor call Friday, Al Monaco said the company continues to see opportunities in offshore wind projects, in solar projects and also in emerging fields such as renewable natural gas and hydrogen projects.

“Global energy demand will rise in the next two decades, driven by population growth and an increasing middle class and urbanization,” Monaco said, noting that energy demand in developing countries is expected to rise by at least 35 per cent.

“We’re going to need all sources of supply to meet demand until at least 2040 and very likely beyond,” Monaco said, adding that hydrocarbon-based energy would still be in demand in 2040 given growing energy demand and natural gas, in particular, “will dominate global energy.”

“Some people call this the bridge (fuel) but in our view it’s an awfully long bridge,” Monaco said.

The company’s most recent sustainability report shows that Enbridge emitted 6.5 million tonnes of CO2 in 2019 from its operations, including natural gas combustion. The company also counted just shy of seven million tonnes of CO2 emissions from electricity it purchased and consumed in the same year. All told, a 35 per cent reduction translates to a 4.71 million tonne CO2 emissions reduction for the company.

Enbridge plans to reduce its emissions intensity and overall emissions through a combination of replacing old equipment and changing how its existing equipment is powered by installing additional solar arrays, chief sustainability officer Pete Sheffield said.

The new targets, he said, are also tied to employee and executive bonus compensation across the organization.

Projects and operations such as cogeneration, carbon capture and sequestration, CO2 flooding, and wind farms are not only helping to improve the GHG intensity of the electrical grid (equivalent to removing over 4.5 million cars annually from the road), but they are also driving lower supply costs for producers at competitive rates of return, CIBC’s Fong wrote.

“Full adoption of ESG-based investing is becoming a major focus, and appropriate and fulsome disclosure standards are needed to improve both intra- and inter-industry comparability,” Fong said. “We believe the mass adoption of ESG-based portfolio management and appropriate carbon-related disclosure could provide better transparency for Western Canada’s role as a participant in the energy transition.”

Still, Pembina’s Israel said, the commitments by large companies show that government can adopt more stringent environmental policies, as companies are making pledges that are more stringent than existing government targets.

For example, Israel said the commitments by Enbridge take the company further than the United State’s own current emissions pledges. He likened the move to the way power companies in Alberta have shown they’ve been able to eliminate coal-fired emissions years earlier than the scheduled phase-out date of 2030.

“It is great that there is a willingness in the sector to go beyond current policies,” Israel said.

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Why a Biden victory may turn out to be an unexpected boon for the Canadian oilpatch

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“To the degree that there are these centrist politicians going to the Senate Energy Committee, he’s going to be put in a position where he will have to provide votes for not just green energy projects, but all-of-the-above energy projects,” Morse said.

The same considerations would limit the potential of an outright fracking ban, which would require legislation, he said.

As a result, Biden in the White House would be able to limit the issuance of new licences on federal lands, but would need Congress to pass an outright ban on fracking, limiting the potential that such a ban would come to pass.

Morse is more confident that a Biden administration would engage with Iran to renegotiate a nuclear agreement, potentially paving the way for that country’s production to come back to the market in stages in 2021 or later.

Currently, two million barrels of Iranian oil production are sitting out of the market as a result of U.S. sanctions on the country. Should those barrels come back into the market, even in stages, it would have a bearish effect on global oil prices at a time of anemic consumption.

Global oil demand is currently about eight million bpd lower than it was at the beginning of the year, so adding production from either Iran or Venezuela would be “disruptive,” said Ian Nieboer, managing director of Enverus, an energy analytics provider.

“A disruptive amount of volume could be re-entering the market at a time when we probably least need it,” he said. “It’s not only the magnitude of the volumes that can come back, we’re in this COVID-19 period and the sensitivity to supply in the market is big.”

Nieboer said various policy factors in the U.S. are in flux, so what effect a Biden presidency would have on global oil markets is extremely uncertain.

“It’s an important moment in the energy industry, full stop,” he said. “It’s an important moment in U.S. history, full stop.”

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Cenovus is merging with Husky Energy: What that means for jobs and the future of the oilpatch

The last time Cenovus Energy swung for the fences with a bold move to vastly expand, the mega-deal was a major flop.

It was more than three years ago when the Calgary company snatched up the majority of ConocoPhillips’ Canadian assets for $17.7 billion.

Investors balked at the acquisition, the price tag, and the sheer amount of debt Cenovus took on to make the purchase. Soon Cenovus’ CEO announced he was heading out the door and the company’s share price had plunged almost 50 per cent since the deal was announced.

Now, Cenovus is again trying to pull off a home run with a $3.8 billion merger with Husky Energy.

After struggling to pull off the last deal, the big question is whether Cenovus can make this ambitious play work as it takes over assets stretching from offshore Newfoundland and Labrador to the waters near China and Indonesia.

While there are parallels to the deal three years ago, this move is also quite different.

This time the players, environment and the acquisition itself are all distinct.

Cenovus Energy’s Christina Lake oilsands project near Fort McMurray, Alta. (Todd Korol/Reuters)

Cenovus CEO Alex Pourbaix will remain as chief executive of the merged company. He took over from Brian Ferguson after the fallout from the ConnocoPhillips deal. 

New energy landscape

Instead of buying Husky, it’s a merger. Both companies are carrying a relatively hefty amount of debt and that’s why joining forces made financial sense. 

While the oilpatch has struggled for many years, this deal is happening in a remarkably unique time in the industry, with many companies bleeding money with historically low oil prices that even turned negative this year.

So far in 2020, Cenovus and Husky shares have lost 63 per cent and 70 per cent of their value, respectively.

“It will allow us to make better returns in a tougher environment, so that’s always always something we need to be looking to do,” said Husky CEO Rob Peabody in an interview, adding it will also be easier to attract investment as a bigger company.

Husky Energy president and CEO Robert Peabody said the two companies have talked about a merger for several years, but discussions picked up in March. (Jeff McIntosh/The Canadian Press)

Workforce changes

With any ownership change, there will no doubt be concerned employees at both companies wondering whether they will still have a job when the dust settles. Cenovus expects to find savings of $1.2 billion.

The merger also comes during a recent wave of layoffs in the industry and will likely lead to further job losses.

“The downside to that is a lot of the time synergies and efficiencies and cost containment usually means fewer jobs,” said Rory Johnston, managing director and market economist at Price Street in Toronto, who described the deal as “massive announcement” in the sector.

With head offices in the same city, executives already say that’s one area of overlap.

The makeup of the Canadian oilpatch is slated to change yet again, after other major deals in recent years such as CNRL’s blockbuster move for the majority of Shell’s Alberta assets in 2017.

After the Husky deal, Cenovus will be the third largest producer in the country. The merger will also continue the recent trend of Canadian companies buying up a bigger share of the oilsands, which is a repatriation, of sorts.

Hong Kong tycoon Li Ka-shing is the largest shareholder of Husky at about 40 per cent, through his investment company. After the merger, his stake in the new company will be 15.7 per cent.

Cenovus CEO Alex Pourbaix says the combined company will have one head office in Calgary. (Jeff McIntosh/The Canadian Press)

While the ConocoPhillips deal changed the makeup of Cenovus with the assets it acquired, the addition of Husky could present a more complex makeover.

Cenovus was generally regarded as a pure-play Alberta oil company that rode the roller-coaster of commodity prices. Now, it’s adding much more refining capacity, in addition to branching out into owning gas stations, offshore terminals on the east coast and as far away as the Asia Pacific region.

“It wasn’t hard to convince me that this was an incredibly compelling opportunity,” said Cenovus’ Pourbaix in an interview, pointing to the reduced exposure to heavy oil prices in Alberta and the reduced volatility overall of the new company.

The oil pipeline and tank storage facilities at the Husky Energy oil terminal in Hardisty, Alta. Husky’s CEO says the combined company will be better able to achieve climate targets, such as the goal to have net-zero emissions by 2050. (Larry MacDougal/The Canadian Press)

The big risk

Some Cenovus investors will appreciate the change to a more integrated, stable company, while others will have preferred a more focused firm, according to Rafi Tahmazian with Calgary-based Canoe Financial.

Regardless of their stance, the big question is whether Cenovus can make the merger work. That’s the big risk to investors, employees, and the overall stability of Alberta’s oil and gas sector.

To this point, Cenovus is experienced in the oilsands and conventional oil and gas production, in addition to owning a 50 per cent stake in a pair of U.S. refineries. 

However, it has no retail or offshore involvement, let alone experience operating in the Asian market. 

“They need to demonstrate their awareness of an area that is uncharted for them,” said Tahmazian. 

“They’re going to have to emphasize the asset they bring from Husky [which is] the people that can help them manage that asset.”

It’s not just managing the combination of the two firms, but also making decisions about what areas of business to prioritize and whether to divest any properties or facilities.

“There are a lot of moving parts in this one to watch … because we’ve never seen it all combined and working together right,” said Tahmazian.

One pressing issue is the fate of the White Rose expansion project near Newfoundland and Labrador, which Husky indefinitely halted as part of a wider review last month of its future in the area. The facility was first sanctioned three years ago and was originally supposed to begin producing oil in 2022. Next year’s construction season is already cancelled.

When the merger officially closes next year, the combined company will be worth 23.6 billion, including debt, according to the firms.

After Cenovus’ last big-time deal, the negative reaction from investors was swift and harsh. This time, the response will likely take more time and focus on whether the combined company is capable of pulling so many different properties together and achieve the cost savings being promised.

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Canadian oilpatch deals since the pandemic crushed prices

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ConocoPhillips buys natural gas assets from Kelt Exploration Ltd.

Calgary-based Kelt Exploration had almost reached its limit on its bank lines before selling 140,000 acres of natural gas properties to Houston-based ConocoPhillips on July 22 for $510 million in cash. The deal eliminated Kelt’s debt.

Canadian Natural Resources Ltd. buys Painted Pony Petroleum

Canada’s largest oil and gas company CNRL announced on Aug. 10 it would pay $111 million in cash to buy Painted Pony, a mid-sized natural gas producer, and assume its $350 million of debt. Analysts described the The $461-million deal as a best-case scenario for Painted Pony, which had been struggling to raise capital following the pandemic.

Obsidian Energy Ltd. offers to buy Bonterra Energy Corp.

Heavily indebted Obsidian hoped shareholders of Bonterra Energy will swap shares in their company for shares in Obsidian when it announced an unusual, all-share hostile takeover bid on Aug. 31. Bonterra, which was worth roughly $50 million at the time, had previously rebuffed merger talks with Obsidian, which had a market capitalization of $45 million.

Whitecap Resources Ltd. buys NAL Resources

Manulife Financial Corp. had been looking for a way to sell off portfolio company NAL Resources and this year found a buyer in Whitecap Resources Ltd., which announced a $155-million deal to buy NAL on Aug. 31.

TC Energy Corp. buys TC Pipelines LP

Calgary-based pipeline giant TC Energy Corp., previously known as TransCanada, announced Oct. 5 its intention to buy the remaining shares in a subsidiary called TC Pipelines LP. The parent company is offering to exchange its own shares for the subsidiary in a deal worth just shy of $1.5 billion.

AltaGas Ltd. increases its stake in Petrogas

AltaGas announced on Oct. 16 it would spend $715 million to buy up an additional 37 per cent stake in privately held Calgary-based midstream company Petrogas Energy Corp., a deal which would give AltaGas a 74 per cent ownership stake in Petrogas. As a result, AltaGas will now own two facilities to export liquid propane to markets in Asia.

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