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MEG shares soar as analysts predict Husky will strengthen hostile takeover offer

The Husky Energy logo is shown at the company's annual meeting in Calgary, Alta., Friday, May 5, 2017. Shares in MEG Energy Corp. soared higher in early trading after Husky Energy Inc. announced a hostile takeover bid for the company.
The Husky Energy logo is shown at the company's annual meeting in Calgary, Alta., Friday, May 5, 2017. Shares in MEG Energy Corp. soared higher in early trading after Husky Energy Inc. announced a hostile takeover bid for the company. THE CANADIAN PRESS/Jeff McIntosh

Financial analysts say Husky Energy Inc. will likely have to sweeten its $3.3-billion hostile takeover bid for fellow Calgary oilsands producer MEG Energy Corp., although they concede there are few white knights that are big enough to ride to its rescue.

In its offer Sunday, Husky said it was going directly to MEG’s shareholders after its board refused to consider a proposal.

READ MORE: Calgary-based Husky Energy makes $6.4B hostile bid to acquire MEG Energy

Shares in MEG soared in early trading on the Toronto Stock Exchange on Monday to as high as $11.70, surpassing Husky’s $11 per share cash-or-shares bid, before falling back to hover near the bid level.

Husky shares were down $1.39 or about six per cent at $21.29 at about 11 a.m. ET.

The situation is similar to Suncor Energy Inc.’s courting of rival Canadian Oil Sands three years ago where there was insufficient support for the initial hostile bid, no competing offer emerged and three months later the two companies agreed to a deal that was 12 per cent higher, said Michael Dunn, an analyst for GMP FirstEnergy.

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The bid could go as high as $15 per share, said analyst Phil Skolnick of Eight Capital Research in a note, suggesting that Calgary-based oilsands producers Suncor or Imperial Oil Ltd. were among the few corporations that could mount a counter offer.

On a Monday morning conference call, Husky CEO Rob Peabody said MEG has outperformed operationally at its Christina Lake development in northeastern Alberta but has failed to deliver value to shareholders.

“It’s difficult to see this pattern of performance changing any time soon given their limited financial flexibility and exposure to heavy oil differentials,” he said.

“MEG’s highly stressed balance sheet leaves them with few options. Their net debt is quite a bit larger than their market cap.”

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Because MEG produces only raw bitumen, it is more exposed to large Canadian heavy oil discounts than Husky, whose bitumen production is balanced by refinery output, said analyst Nick Lupick of AltaCorp Capital in a note that said Husky’s offer is “opportunistic.”

READ MORE: Oilsands companies upbeat about future after Q2 results

Watch below: In the summer of 2018, Doug Vaessen reported on how rising oil prices were helping to boost Alberta’s economy.

Rising oil boosting Alberta’s economy
Rising oil boosting Alberta’s economy
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The blended company would have a much higher exposure to heavy oil discounts as its overall production rises to about 410,000 barrels of oil equivalent per day from Husky’s output of 296,000 boe/d at the end of the second quarter, he added.

The hostile offer is for a combination of cash or shares worth $11 for each MEG share. The maximum cash available under the deal is capped at $1 billion and the maximum number of shares is limited to 107 million.

MEG said it has formed a special committee to consider Husky’s bid when it is received and has asked shareholders to take no action until it can make recommendations.

Husky values the transaction at $6.4 billion, including the assumption of $3.1 billion in debt, and says the proposal will be open for acceptance by MEG shareholders until Jan. 16.

It says the blended company would realize $200 million in annual financial, operational and other synergies.

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