Varcoe: Strathcona Sources going public, after Pipestone deal creates $8.6B producer

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Privately held Strathcona Sources, which has made its mark with a string of aggressive acquisitions previously a number of years whereas different gamers have been promoting in Western Canada, has determined to chart a distinct path ahead.

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It can change into a public firm — the fifth-largest oil producer within the nation — with greater plans to continue to grow.

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Strathcona, which is owned by Calgary-based non-public fairness agency Waterous Power Fund (WEF), introduced Tuesday an settlement to accumulate junior producer Pipestone Power Corp. in an all-stock transaction.

The share alternate ratio with Pipestone implies an preliminary market capitalization of Strathcona of about $8.6 billion. With $2.9 billion in debt, its enterprise worth is anticipated to succeed in $11.5 billion, and it is going to be listed on the Toronto Inventory Change.

“What we’re looking for to do is to construct one other Canadian oil and fuel champion,” Adam Waterous, chief govt of WEF, mentioned in an interview.

“We predict that Strathcona now’s of the dimensions that it’ll, as a Canadian champion, appeal to worldwide buyers.”

Beneath Tuesday’s settlement, Strathcona buyers will personal 91 per cent of the mixed entity — which is able to proceed as Strathcona Sources Ltd. — with Pipestone shareholders holding the rest.

As soon as the deal is accomplished, possible within the fourth quarter, Strathcona will function in three core areas: Chilly Lake, the Lloydminster heavy oil area and within the Montney formation. It can change into Canada’s six-largest petroleum producer by output, and fifth-largest oil producer.

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The Calgary-based agency may have about 700 staff.

Waterous, who based WEF in 2017, can also be Strathcona’s executive chair. Rob Morgan will stay as Strathcona’s CEO and president.

The Pipestone deal marks the fruits of a string of aggressive strikes by Strathcona.

In lower than seven years, the corporate has expanded from 5,000 barrels of oil equal (boe) per day to 185,000 by way of acquisitions and natural progress, and Pipestone marks its tenth main acquisition, Waterous famous.

Final August, Strathcona made the most important company transaction of the 12 months within the Canadian oilpatch, shopping for privately held heavy oil producer Serafina Power for $2.3 billion.

Strathcona closed the amalgamation with Caltex Sources in March 2022, which produced about 13,000 bpd of heavy oil in Alberta and Saskatchewan, and snapped up the Tucker thermal oilsands asset from Cenovus Power for $800 million in December 2021.

In 2020, it acquired Osum Oil Sands Corp, after shopping for Pengrowth Power Corp. in 2019.

“Our investing thesis has been what we’d describe as a core space consolidation technique,” Waterous mentioned.

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“The analogy that we like is that in actual property, if you discover that enticing neighbourhood, you discover a avenue you want, you purchase a home, and then you definately purchase up the block. That’s what we’ve been doing in constructing Strathcona.”

As a non-public agency and trade consolidator, Strathcona has pursued its aggressive progress plan even by way of the intense lows and highs of oil costs in the course of the previous three years.

The Pipestone takeover takes place towards the backdrop of a latest rally in oil markets, with U.S. crude costs closing Tuesday at $81.38 a barrel, down 43 cents. But, many public corporations have been hesitant to aggressively spend cash to spice up manufacturing and incur the anger of buyers who favour elevated dividends and share buybacks.

With its massive asset base, Strathcona believes it has the chance to organically enhance output inside eight years to 220,000 boe per day — and doubtlessly as much as 325,000, together with by way of new greenfield initiatives — even with none future acquisitions.

“That is an unloved sector and an out-of-favour sector. Usually talking, we predict the general public market has uninspiring values . . . Why go public then?” mentioned Waterous.

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“There are some targets that will make sense to mix with Strathcona which are extra serious about taking shares in a publicly traded firm as consideration.”

Pipestone itself has boosted its output from simply 152 boe per day within the first quarter of 2019 to succeed in 35,000 boe a day this 12 months, creating condensate-rich belongings within the Montney formation in Alberta.

By way of the deal, firm buyers will nonetheless get ongoing publicity to the sector, in “arguably one of many largest, most likely most diversified upstream producers in Canada, in Strathcona,” mentioned Dustin Hoffman, Pipestone’s interim CEO and chief working officer.

“This new firm has simply acquired dimension, scale . . . and the power to maintain long-term manufacturing progress. So it simply made a number of sense,” he mentioned in an interview.

On Tuesday, shares in Pipestone fell 27 cents to shut at $2.45.

Even with larger commodity costs, fund managers say they nonetheless wish to see corporations stay disciplined and centered on returning cash to buyers. And working a public firm is clearly a lot completely different — and comes with completely different expectations — than working a non-public agency.

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“Typically, your finest enterprise resolution isn’t what the market needs and, as a non-public firm, you’ll be able to shelter your self from that. As a public firm, you can’t,” mentioned Rafi Tahmazian, a senior portfolio supervisor at Canoe Monetary.

The decision for a higher return of capital by producers isn’t fading away, added Eric Nuttall, a senior portfolio supervisor with Ninepoint Companions. Whereas there’s a want for extra consolidation, he’s uncertain if that is the beginning of a brand new wave of such M&A deal-making.

“It’s nice to have a brand new oil-levered funding alternative,” mentioned Nuttall.

“I like (the) administration. I just like the technique. I like that they have been counter-cyclical and purchased significant publicity to medium and heavy oil with low declines. I feel they must pay down their debt.”

From his perceptive, Waterous mentioned it is smart to proceed to develop its oil and fuel output in Canada — and Strathcona is planning on doing simply that.

“We’ve got a possibility to considerably improve manufacturing, each organically and thru extra acquisitions,” he mentioned.

“And we predict that large-scale oil and fuel companies, usually talking, are wholesome and so they make for a stronger sector.”

Chris Varcoe is a Calgary Herald columnist.

[email protected]

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