IN THE NEWS / Hard Times Lead To Hostile Bids In Oil Patch
In the fifth such case of '98, PrimeWest offers $126-million for two rival trusts
By CLAUDIA CATTANEO
The Financial Post
CALGARY -- Motivated by an oil price crisis that is raising the spectre of economic warfare among some oil-producing countries, PrimeWest Energy Trust unveiled hostile takeover bids yesterday for rivals Starcor Energy Royalty Fund and Orion Energy Trust.
In the Canadian oil patch's fifth hostile takeover showdown this year, PrimeWest is offering $126-million, plus the assumption of $74-million in debt, for the two trusts.
The four prior hostile bids were all successful, with the latest being locked up late Thursday when Blue Range Resource Corp. failed to line up a better offer to save it from a $190-million bid (plus $110-million in debt) from a much smaller company, Big Bear Exploration Ltd.
In another sign of the industry's tough circumstances, Precision Drilling Corp., the country's largest drilling contractor, reported yesterday that the number of wells it drilled in the six months ended Oct. 31 declined by 50% from last year to 1,150.
PrimeWest is offering 1.207 of its units for each Starcor unit, and 0.968 of its units for each Orion unit, or a 15% premium over closing prices on the Toronto Stock Exchange on Thursday. The offers are open for 22 days after mailing and are conditional on poison pills being removed.
The bids value Starcor at $55-million, not including the assumption of $40-million in debt, and Orion at $71-million, not including $34-million in debt. Both funds are managed by Starvest Capital Inc. of Calgary. While jointly managed, the trusts have been kept separate because they were formed at different times.
Kent McIntyre, PrimeWest's vice-chairman and CEO, said low commodity prices are driving energy companies around the world to look for cost savings by combining operations.
A merger of the three trusts would allow PrimeWest to reduce overhead costs by 30%, cut operating costs, and reduce management fees so it could deliver higher distributions to unitholders.
If the takeover succeeds, Prime-West promises to reduce its cash management fees to 1.75% of net production revenue from 2.5%.
Production would increase from 13,000 barrels of oil equivalent daily, of which 40% is natural gas and the remainder oil and natural gas liquids, to 23,000 barrels daily, of which 43% would be natural gas and the rest oil and liquids.
Spokesmen for the targeted funds said they were reviewing the bids and were not prepared to comment.
PrimeWest said it started talking to Starvest about a combination in June, but the idea was rejected in October when the company opted to keep its funds independent.
Concerned about low oil prices and weak stock prices, Starcor and Orion adopted poison pills two weeks ago, as did another royalty trust, Canadian Oil Sands Trust, a partner in the Syncrude Canada Ltd. oil-sands project.
Meanwhile, Blue Range said it took all reasonable steps to find a better deal than Big Bear's.
"Unfortunately, in light of current commodity prices and market conditions, an acceptable alternative transaction did not materialize," said Keith Farries, chairman of Blue Range.
Searching for white knights has been difficult for Canadian energy companies targeted in takeovers. Low oil prices have reduced or wiped out earnings, increased debts, and battered stock prices, slashing the list of potentially sympathetic acquirers.
At the same time, hostile takeovers are expected to continue, with the bidders being the handful of companies with strong stocks, plenty of cash, little debt, or friendly bankers.
Tensions are growing in other oil-producing countries as well, as output cuts aimed at boosting prices are instead rewarded with further price declines.
Algeria, for one, has highlighted the producers' rising alarm with a broadside against fellow members of the Organization of Petroleum Exporting Countries. It accused them of deepening the price crisis and vowed to take action to protect its own interests.
"Algeria remains in solidarity with OPEC, but if this selfishness persists, Algeria will utilize all its capacities. We are in a situation of economic war," Ahmed Ouyahia, the prime minister, told Algeria's Parliament on Thursday.
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