IN THE NEWS / Waiting game could pay off for Alberta Energy
Monday, September 21, 1998
Mathew Ingram - Globe & Mail
Calgary -- With last week's $446-million offer for heavy oil producer Amber Energy, Alberta Energy Co. CEO Gwyn Morgan gets the award for best timing in launching a takeover bid. Sure, luck and global markets may have played a part in producing all the right conditions for such a purchase, but so did AEC's prudent decision-making in the past.
By waiting until now to make a play for Amber, Calgary-based AEC probably slashed about a billion dollars off the purchase price -- turning what might have looked far too pricy into a reasonable acquisition. Like many heavy oil producers, Calgary-based Amber was much in demand last year but has since fallen on hard times as oil prices plummeted close to record lows.
Not only is the cost of the acquisition low, but the fall in oil prices has also lowered the share value of AEC's competitors, meaning they aren't as able to finance a purchase with stock as they might have been last year. AEC, whose stock and balance sheet have remained relatively strong, has come in with a high cash bid, and that goes a long way.
As with many things, success in acquisitions is as much a function of the deals you don't complete as the ones that you do. Last year, several large producers swallowed what turned out to be slow-acting poison when they spent billions of dollars to acquire heavy oil producers.
Canadian Occidental beat out Talisman Energy with a bid of $1.9-billion for Wascana Energy. Then, Gulf Canada launched a hostile bid for CS Resources and was rebuffed -- whereupon PanCanadian scooped CS for $465-million. Soon afterward, Gulf gobbled up Stampeder Explorations for $680-million, and Ranger Oil bought Elan Energy for $566-million.
AEC, however, stayed out of the fray. As Mr. Morgan has said, the current offer reflects the company's efforts to avoid an "overheated acquisition market," thereby maintaining "financial flexibility to pursue counter-cyclical acquisition opportunities" such as Amber. AEC's previous acquisition was of Conwest Explorations in 1996.
Now, AEC has come forward with a bid for Amber probably 75 per cent less than it would have had to spend when the heavy oil buying frenzy was in full swing. Amber may have looked too rich last fall, when a bid would have cost about $1.6-billion. But at $446-million now (not including assumed debt), it looks like quite a sweet deal, indeed.
That offer of $7 a share, or the equivalent amount in AEC stock, represents a premium of more than 50 per cent to Amber's recent share price. The smaller company's actual market capitalization just before AEC launched its bid was $260-million; early last week the shares were trading at $4.55 -- down from a high of about $27 last fall.
In fact, AEC was able to save about $285-million just by waiting a week to make an offer. Amber's stock was trading at $9.50 on Sept. 8, and within a week it had dropped by almost $5. Investors took a chainsaw to the share price after Amber cut spending plans by $100-million and sharply reduced production estimates.
Needless to say, Amber's response to the AEC bid has not been kind -- even though Mr. Morgan did his best to give the takeover offer a rosy hue by calling it an "unsolicited friendly offer." Amber CEO Richard Lewanski described it last week as "totally inadequate," although several analysts have said AEC's offer represents fairly good value.
Amber shareholders -- including Mr. Lewanski, who owned 1.3 million shares as of last year -- are bound to have problems adjusting to the fact their stock is now worth barely one quarter of its year-earlier value. But imagine the chagrin of those who snapped up Amber's most recent share issue; they paid $17 just six months ago.
Amber was riding high last year for a couple of reasons. For one, just about any company focused on oil looked rather good, given crude prices in the range of plus-$20 (U.S.) a barrel. Second, for a heavy oil producer, Amber's production costs were extremely low -- about $2 (Canadian) a barrel.
Heavy oil (so called because it is thicker than conventional crude) normally costs a lot more to extract. It has to be coaxed out of the ground, using various methods -- including steam injected into the well -- to thin the oil for pumping. But Amber's deposits are light enough that they don't require any special measures, making production cheaper.
Although the oil price has tanked, Amber hasn't lost the benefit of those low costs, and they are even lower with the completion of a pipeline to take oil away from its Pelican Lake play in Alberta. The company also has proven oil reserves of about 80 million barrels and a significant amount of gas -- all of which AEC stands to get at a substantial discount. |
