Strathcona Resources [TSE:SCR], based in Calgary, Alberta, is eager to use stock as currency for acquisitions following its CAD 11.5bn (USD 8.37bn) EV reverse takeover of Calgary-based Pipestone Energy [TSX:PIPE], said Adam Waterous, CEO of Waterous Energy Fund (WEF), which owns roughly 91% of Strathcona.
He added that the company walked away from some potential acquisition opportunities because the targets in question wanted shares in a public company to enjoy the potential upside. The Pipestone deal “gives us currency to consolidate,” he explained.
The company completed the Pipestone deal earlier this week and news reports said its shares were expected to begin trading on the TSE today. Strathcona was established by WEF in 2017 and remained its sole portfolio company. Since then, it has made 10 major acquisitions including Pipestone and ranks as Canada’s fifth-largest oil company, according to news reports.
Strathcona’s largest acquisition to date was the CAD 2.3bn takeover of Serafina Energy in August 2022. Waterous said the company’s sweet spot as far as future deal sizes is CAD 750m to CAD 1.5bn. That said, it will look at financially stressed businesses as well as healthy ones, he noted. Typically, companies in the space produce 40,000 to 60,000 BOE/day (barrel of oil equivalent).
Attractive targets would operate in any of its three core areas—Cold Lake Thermal, Lloydminster Heavy Oil and Montney—though Strathcona could also consider adding a fourth region, he said, as well as adjacent producing assets in existing areas.
Waterous said the dominant strategy in North America for the past 15 years has been to build “single play companies” – for example focusing on the northeast quadrant of the Delaware basin. The company, however, avoided that path as “it exposes you to single event risk” in a given region, he explained.
On average, the company has made acquisitions every nine months, said Waterous, noting that while it funded previous acquisitions with cash, it can now use shares as currency.
As a private equity fund, WEF will take some time to wait for the stock to price properly after its market debut “to build a following, so to speak,” said Waterous, adding that this goal could take two to three years. At that point, the private equity fund will make distributions to limited partners, via shares, he said.
Large, listed public oil and gas companies currently trade at a 10% to 13% free cash flow yield range. “This is the opposite of going public into a hot market. We are not excited about that valuation.”
“We think the majority of shareholders would like to own the stock over time,” he said, noting that right now, “the whole sector is out of favor.”
He predicted that over time, nine or 10 investment-grade businesses in Canada will produce more than 95% of Canada’s oil and gas production. This is a far cry from the early days of the industry when there were hundreds of junior producers. “We think we’re maybe in the fifth or sixth inning of a consolidation wave in Canada,” he added.
Future deals will be fueled by foreign acquirers exiting their positions in North America, he said.
Waterous said the Pipeline transaction was the first time in 23 years that a private company took over a large public company via a reverse takeover in Canada. The last such deal was Husky’s takeover of Renaissance Energy in January 2000.
The last IPO of a large-scale oil and gas player in Canada was Seven Generations [TSX:VII], in the fall of 2014, he noted.
Strathcona produces 185,000 barrels per day, 78% of which contains liquids, and boasts an ultra long reserve life index on a proved and probable basis of 38-plus years. On an approved and probable contingent basis, the figure is 53 years, Waterous said. With regard to both metrics, he said they are “the longest of a scaled business in Canada and in North America.”
Waterous started in the energy business in 1991, with Waterous & Co., an oil and gas M&A advisory boutique. He sold that business to Scotia Bank in 2005 and went on to run their global investment banking business for 10 years before leaving in 2017 to launch WEF.
CIBC Capital Markets, Scotiabank and Mizuho Securities USA acted as financial advisors to Strathcona on the Pipeline transaction. TD Securities, RBC Capital Markets, Scotiabank, CIBC Capital Markets, and BMO Capital Markets served as co-lead arrangers and joint bookrunners.
Blake, Cassels & Graydon was legal advisor to Strathcona and Stikeman Elliott advised WEF.