Waterous Energy
Waterous Energy to Stick With Its Stake in Strathcona Resources --
(Wall Street Journal) -- Waterous Energy Fund is paving the way for an exit of
its sole portfolio company, Strathcona Resources, after investing about $1.5
billion in the Canadian oil-and-gas producer over the past 6 1/2 years.
But the Canadian energy investor isn't ready to cash out of the business just
yet.
Calgary, Alberta-based Strathcona said in early August that it agreed to
acquire publicly traded peer Pipestone Energy in an all-stock deal valued at
about 8.6 billion Canadian dollars, equivalent to $6.34 billion. The so-called
reverse takeover would make Strathcona a public company listed on Toronto's
stock exchange and turn it into Canada's fifth-largest oil-and-gas company,
with a daily output of roughly 185,000 barrels of oil and equivalent volumes
of natural gas, Strathcona said.
The merger is pending approval by Pipestone's shareholders, who will vote on
the deal in late September.
Pipestone is Strathcona's 10th main acquisition since Waterous Energy started
the business in 2017 by buying oil-and-gas assets out of bankruptcy. The
private-equity firm has invested more than C$2 billion in the business,
including about C$1.4 billion it raised for a debut fund that closed in 2018.
It collected an additional C$700 million to finance specific acquisitions by
Strathcona.
If approved by shareholders, the merger with Pipestone will enable the
combined company to use its stock as currency to pursue new acquisitions, said
Adam Waterous, managing partner and chief executive at Waterous Energy.
"The only thing that we've been able to offer is cash and now, post the
transaction, we will be able to offer shares in a publicly traded company,"
Waterous said. "What that will do is expand the number of companies that can
combine with [Strathcona]."
Dustin Hoffman, Pipestone's interim CEO, said in a news release that the
company's shareholders will benefit from its integration into a larger
business.
Some analysts, however, believe that Strathcona's stock may not attract large
investors because listed shares after the deal would represent only about 9%
of the combined company's value, or nearly the roughly C$775 million valuation
that Pipestone already had before the merger was announced. Waterous Energy
would own about 91% of the business.
"Investors have to have a certain amount of liquidity in order to get a big
position in a stock," said Phil Skolnick, a managing director at the energy
equity research group of Canadian brokerage Eight Capital. He added that
listing 25% to 30% of Strathcona's shares, for example, would be more
appealing to pension funds and other large investors.
Even though the proposed merger values Waterous Energy's stake in the combined
company at nearly four times its investment in Strathcona, the private-equity
firm doesn't plan to sell additional shares in the near future because it
believes "the oil-and-gas sector is currently undervalued," Waterous said.
"What often happens is that an oil company goes public and its private-equity
sponsor sells a bunch of shares. We're not doing that," he said. Strathcona's
shares in the market will increase over time as the company makes new
acquisitions, according to Waterous.
He added that Strathcona doesn't need more private-equity capital and that his
firm's new investments will aim at building another oil-and-gas business in
Canada, targeting areas where Strathcona doesn't operate.
Strathcona owns oil-sands fields in Alberta's Cold Lake region and, similar to
Pipestone, has natural gas operations that extend into the neighboring
province of British Columbia. The company also operates heavy-oil assets
straddling the provinces of Saskatchewan and Alberta.
"Our strategy was to put all of our capital into a company until it gets
scale. Strathcona has achieved scale," Waterous said. "We plan on having at
least one other portfolio company over time [as] there are many areas in the
Canadian oil industry that we think still require consolidation."