Strathcona Rerources Tucker thermal oil operation near Cold Lake, Alberta.Supplied
Strathcona Resources Ltd. is set to make its 10th major acquisition in less than seven years, picking up a rival energy company in a move that bucks market trends as it prepares to go public.
On Tuesday, Calgary-based Strathcona announced plans to acquire Pipestone Energy Corp. PIPE-T in an all-stock deal that will create Canada’s fifth-largest oil producer. The combined company will have a market capitalization of $11.5-billion, including debt.
Pipestone was formed in 2019 when privately owned Pipestone Oil Corp. merged with Blackbird Energy Inc. Its Wembley project is located just outside Grande Prairie, Alta., in the Montney basin, which accounts for about 45 per cent of Canada’s natural gas production.
Strathcona was formed in 2020 through the merger of two companies backed by Waterous Energy Fund – Strath and Cona. In 2021, it bought a large stake in producer Osum Oil Sands Corp. to help maintain access to capital through size, and last year it acquired private equity-backed Serafina Energy for $2.3-billion.
Canadian fossil fuel companies have generally been tightening their fiscal belts of late by reducing capital spending, focusing on debt repayment and, in some cases, shedding assets. For instance, last week TC Energy TRP-T sold 40 per cent of its two massive Columbia pipeline systems in the U.S. for $5.2-billion.
But Strathcona’s game plan is all about consolidation.
It has plays in the Cold Lake oil sands region of Alberta, the Lloydminster and North Battleford heavy oil regions of Saskatchewan and the Montney natural gas basin that spans west-central Alberta and northeastern British Columbia.
It has increased production by picking up a series of high-performing, long-life assets that complement its existing portfolio, allowing it to take advantage of economies of scale and access capital to further expand the business. That has also meant buying companies that have run out of funding options, such as its $28-million acquisition of debt-hobbled Pengrowth Energy Corp. in 2020.
Strathcona’s bullish strategy has allowed the company to increase production from 5,000 barrels of oil a day to 185,000.
Pipestone “fits hand in glove” with the company’s existing asset base, Strathcona’s board chair and the chief executive officer of Waterous Energy Fund, Adam Waterous, told The Globe and Mail on Tuesday. And it will provide natural gas and condensate to the company’s Cold Lake thermal and Lloydminster heavy oil operations.
Mr. Waterous acknowledged that Strathcona’s investment strategy has been vastly different than the prevailing thesis, which saw the energy sector generally fall out of favour with an investment community that believed it held little opportunity for growth.
“We were seen by many as running into the burning building,” he said.
“A lot of investors left the industry for dead. We thought that there’s a lot of life left in the industry – and in fact an opportunity to substantially grow it.
“We saw an opportunity for a large-scale business to have attractive economics and, at the same time, reduce emissions.”
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Indeed, Strathcona’s plans include building a carbon capture and sequestration project at its oil sands operation in Cold Lake, which produces about 80,000 barrels a day.
The project will hinge on an agreed fiscal framework and regulatory approvals from the Alberta and federal governments, but the unique geology of the region means the company can capture carbon and inject it deep underground at the site rather than having to pipe it somewhere else, as most oil sands companies do. In preparation, Strathcona has already started planning test wells for sequestration.
But because carbon capture projects can easily run to $1-billion, “you need to be a large-scale company to be able to finance, build and operate facilities,” Mr. Waterous said.
“That is why our objective has been to build a very large-scale business – so that we have the capital to grow production, but at the same time, improve the carbon intensity of the business.”
Mr. Waterous doesn’t see Strathcona’s strategy changing any time soon; the company still likes the energy sector’s buying environment.
That’s partly why the board and management want to take the company public.
“There are a number of assets that would fit with Strathcona where we have been given the indication that shareholders would actually like to stay along for the ride with us and receive shares in a publicly traded company,” Mr. Waterous said.
Gord Ritchie, the chairperson of Pipestone’s board, said in a statement that the deal with Strathcona is the culmination of a strategic review.
Directors concluded that it “created the strongest value creation opportunity for Pipestone shareholders versus both the status quo and other available alternatives,” he said.
But it will require the approval of more than 66 per cent of the votes cast by shareholders at a special meeting expected to be held late in the third quarter.
It will also require the approval of the Court of King’s Bench of Alberta, in accordance with the Competition Act and the rules of the Toronto Stock Exchange.