Husky Energy walks away from its hostile takeover bid for MEG Energy

Husky Energy Inc. is walking away from its hostile takeover offer for MEG Energy Corp. after failing to win enough shareholder support.

Oil producer cites 'several negative surprises' in the market since making offer

The company cited production cuts for the oil industry mandated by the Alberta government and a lack of progress on Canadian oil export pipeline developments. (David Bell/CBC)

Shares in MEG Energy Corp. plunged Thursday morning after Husky Energy Inc. abandoned its hostile takeover bid for the company.

Husky — the much larger of the two oilsands-producing Calgary firms — shocked observers when it announced it would not extend the offer that expired Wednesday without receiving the needed two-thirds support.

"Although this doesn't drastically alter our investment thesis on Husky, as it was fairly valuation neutral, it will obviously place strong pressure on MEG's share price out of the gate," CIBC analyst Jon Morrison said in an early morning note.

On the Toronto Stock Exchange, MEG shares fell by as much as 40 per cent to $5.11 from a close of $8.54 on Wednesday. Meanwhile, Husky shares rose by as much as 14.7 per cent to $17.82.

Lack of support

Husky said in a statement it decided not to extend its cash-and-shares offer because of the lack of MEG board and shareholder support.

"Given the outcome of the tender process, Husky will continue to focus on capital discipline and the delivery of the five-year plan we set out at our investor day in May 2018," CEO Rob Peabody said.

"We are investing in reliable, higher-margin production growth that continues to lower the oil price we need to break even. Both our integrated corridor and high-netback offshore businesses receive global pricing and provide insulation from ongoing commodity price volatility."

Husky Energy president and CEO Robert Peabody addresses the company's annual meeting in Calgary in 2017. Peabody says Husky will focus on capital discipline and its five-year plan. (Jeff McIntosh/The Canadian Press)

Husky also cited "several negative surprises" in the market since it first announced its offer at the end of September last year.

Those include the Alberta government's departure from "free market principles" to impose 325,000 barrels per day of oil production cuts on the industry beginning Jan. 1 and a "continued lack of meaningful progress on Canadian oil export pipeline developments," Husky says.

Husky's offer had propped up MEG's share price in spite of its greater exposure to steep price discounts because it produces only raw bitumen from its northern Alberta oilsands facilities, noted analyst Nick Lupick of AltaCorp Capital.

"Overall we view the conclusion as being very negative for MEG shareholders in the near term as heavy oil-weighted mid-cap energy producers have seen their equity value fall by an average of 40 per cent since July 2018 (when Canadian differentials began to widen materially), a decrease that MEG was insulated from due to the offer from Husky," he wrote.

Those price differentials have tightened to less-than-typical levels — improving bitumen prices — since the Alberta curtailment program was announced last month.

Shares to be returned

Husky didn't say how many shares had been tendered, but analysts speculated based on market signals that more than 50 per cent were put forward.

All of the MEG shares that had been tendered to the offer will be returned to shareholders.

MEG initially rejected the bid as an "opportunistic" offer that didn't recognize its underlying value.

It urged shareholders again last month not to sell, pointing out that Husky's initial offer worth $11 per share had fallen to just $8.12 per share because of a substantial decline in the value of Husky's stock.

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