Strathcona Resources makes offer for MEG Energy

[Petroleum economist]

Calgary, Alberta (May 15, 2025) – Strathcona Resources Ltd. (“Strathcona“) announced today that it intends to commence a take-over bid for MEG Energy Corp. (TSX:MEG) (“MEG“), pursuant to which Strathcona will offer (the “Offer“) to acquire all of the issued and outstanding common shares of MEG (“MEG Shares“), not already owned by Strathcona or its affiliates, for 0.62 of a common share of Strathcona (“Strathcona Shares“) and $4.10 in cash per MEG Share. Based on the closing share price of the Strathcona Shares on the Toronto Stock Exchange (the “TSX“) on May 15, 2025, the Offer represents total consideration of $23.27 per MEG Share (82.4% Strathcona Shares and 17.6% cash), reflecting a 9.3% premium based on the closing price of the MEG Shares on the TSX on May 15, 2025.

The Offer will not be subject to any financing condition, with the cash consideration payable under the Offer expected to be funded pursuant to a bridge financing commitment from a syndicate of lenders (the “Bridge Financing Commitment“), subject to the terms and conditions of such financing. At the time the Offer is commenced, Waterous Energy Fund (“WEF“), currently the holder of 79.6% of the Strathcona Shares, intends to, through Waterous Energy Fund III (“WEF III“), commit to further increase its investment in Strathcona and subscribe for an additional 21.4 million Strathcona Shares through the use of subscription receipts.

Upon completion of the Offer, Strathcona expects to have approximately 379 million Strathcona Shares outstanding and approximately $1.5 billion in net debt[1]. The combined business is expected to be owned approximately 56.5% by existing holders of Strathcona Shares (“Strathcona Shareholders“), approximately 37.8% by existing holders of MEG Shares (“MEG Shareholders“) and approximately 5.6% by WEF III. WEF is expected to hold a combined approximately 51% ownership position, inclusive of its existing Strathcona Shares and those expected to be issued to WEF III pursuant to the WEF III Equity Investment (as defined below).

Background to the Offer
During the first and second quarters of 2025, Strathcona acquired approximately 23.4 million MEG Shares through open market purchases, representing approximately 9.20% of the issued and outstanding MEG Shares as of May 5, 2025 or approximately 9.98% assuming completion in full of MEG’s current normal course issuer bid.

On April 28, 2025, Strathcona made a formal written combination proposal to the board of directors of MEG (the “MEG Board“), with the same consideration as the Offer. On May 13, 2025, the chairman of the MEG Board responded and indicated that the MEG Board was not interested in pursuing a combination with Strathcona.

Strathcona respects the MEG Board’s right to dismiss any offer made for MEG, and it has no reason to believe that its decision to dismiss Strathcona’s proposal was not made in good faith based on its view of what is best for MEG Shareholders. However, Strathcona believes the benefits of a combination of Strathcona and MEG are significant enough that MEG Shareholders should have the opportunity to decide for themselves.

Strathcona expects to file the formal offer to purchase and take‐over bid circular for the Offer in the next two weeks.

[Petroleum economist]

Strathcona Divestments
Strathcona will receive in Q2/Q3 a lot of cash (C$ 2,445 M) from the divestment of:
• Montney Kakwa assets for C$ 1,695 M to ARC resources.
• Grand Prairie assets for C$ 850 M (C$ 750 M cash).

Strathcona also sold its Birchfield assets for C$ 291.5 M to Tourmaline. This was however paid in shares.
After the three divestments Strathcona will be a pure (=100%) heavy oil producer with a production of approx. 120 K BoE/d.
Strathcona moves up to the 8th position of my ranking

The Strathcona balance sheet will virtually debt free. thus opening Strathcona up to look for acquisitions.

Strathcona/MEG merger
MEG as of yesterday had a market value of approx. C$ 5.5 B. The Strathcona offer values MEG at $ 6.0 B, a 9% premium on the latest share price.

A 100% cash acquisition of C$ 6.0 B is beyond the cash available to Strathcona. This explains why the offer is 17.6% cash (C$ 1.06 B) and 82.4% in Strathcona shares (C$ 4.94 B).

Strathcona and MEG are very similar companies, operating in the same area:
• After the sale of its assets, both Strathcona and MEG are pure (100%) heavy oil producers.
• Both have ample reserve: Strathcona = 1,168 M bbl, MEG = 1,158 M bbl.
• Both have a healthy balance sheet: Strathcona equity ratio = 67.9%, MEG = 68%.
• Both have a decent production: Strathcona = 120 K bbl/d, MEG = 100 K bbl/s.

Strathcona (8th) and MEG (9th) have a similar high ranking in my oil and gas companies system.

Conclusion
I can see the logic for the merger. The reluctance of the NEG board can mean that they want a bit more cash and/or are holding out for a slightly higher offer.

With $175 M in annual synergy ($ 50 M in overhead reduction opportunities, $ 25 M interest savings, $ 75 M in capex, and $ 25 M in operating costs), I can see the attraction of the merger. Drawback will be the majority stake which WEF holds in the company, both before and after the merger, thus limiting the float of free shares.

This will be interesting to watch.

[Petroleum economist]

MEG Energy Responds to Strathcona Resources Ltd.'s Announcement of an Intention to Make an Unsolicited Offer. Fri, 16 May 2025 07:30:00 -0400

Shareholders Advised to Take No Action

CALGARY, AB, May 16, 2025 /CNW/ - MEG Energy Corp. ("MEG" or the "Corporation") (TSX: MEG) acknowledges the announcement by Strathcona Resources Ltd. ("Strathcona") that Strathcona intends to make an unsolicited offer to acquire all of the issued and outstanding common shares of MEG not already owned by Strathcona or its affiliates.

The MEG Board of Directors (the "Board") will consider and evaluate the Strathcona offer and related take-over bid circular, if and when received.

No formal offer has been made by Strathcona and MEG shareholders are advised to take no action with respect to any Strathcona offer until the Board has had an opportunity to fully review the offer, if and when received, and to make a recommendation as to its merits. Shareholders will be notified of any recommendation of the Board through a news release and circular in accordance with applicable securities laws.

MEG has engaged BMO Capital Markets as its financial advisor and Burnet, Duckworth & Palmer LLP as its legal advisor.

About MEG
MEG is the leading pure-play in situ thermal oil producer in Canada. Our purpose is to meet the growing demand for energy, produced safely and reliably, while generating long-term value for all our stakeholders. MEG produces, transports and sells our oil (AWB) to customers throughout North America and internationally. Our common shares are listed on the Toronto Stock Exchange under the symbol "MEG" (TSX: MEG).

Learn more at www.megenergy.com .

[ChuckGeb]

I really like Meg. Never heard of Strathcona. Need to learn more. I really liked Silver Bow and am still trying to get comfortable with Crescent. Meg has been buying back so much stock that at the rate they are going in a few more years my personal shares might be significant.

[Petroleum economist]

MEG jumped today more than 17% to C$ 27.50-28.00. This is well above the Strathcona offer.
The market must be expecting a higher offer.

[ChuckGeb]

https://x.com/ericnuttall/status/1923365731883721005?s=61

Eric Nuttall expresses opposition to offer.

[dan_s]

Let The Fun begin.