It’s the oil play that won’t cool down.
Crescent Point is paying $1.1-billion to snap up Shelter Bay Energy Inc., a deal that will see it bring into its fold more land in Saskatchewan’s much-desired Bakken region. The company also announced a bought-deal financing worth $375-million.
The Bakken – and two formations like it, Saskatchewan’s Lower Shaunavon and Alberta’s Cardium – have rivalled the oil sands as a hotbed of deal making over the past year, bringing soaring prices for land in an area that has shown lucrative margins, thanks to the development of new extraction technologies.
The Shelter Bay buyout brings just the latest eye-popping number: $151,900 per flowing barrel of oil, roughly double the average paid in oil transactions last year, and equivalent to some of the prices paid at the top of the market in 2007 and 2008.
The deal hands a 17-per-cent annualized return to private equity firms Goldman Sachs, Riverstone Holdings LLC, Kelso & Co. and Trafelet & Co., who invested in Shelter Bay in early 2008, before markets and crude prices collapsed.
Shelter Baywas formed that year by Crescent Point, which at the time was a corporate income trust whose growth the federal government had constrained. Crescent Point took a 21-per-cent interest in Shelter Bay, whose assets it managed, and whose lands were purchased adjacent to its own.
“We owned it, we ran it,” said Crescent Point chief executive officer Scott Saxberg. “It’s about as easy, clean a deal as you could possibly ever have.”
Bringing the companies together will allow management to “allocate and direct capital more efficiently,” he said. “There’s really no duplicate of this. You couldn’t really compare it to another transaction of just going out and buying because there’s no available land in those areas.”
But the price paid has immediately drawn comparisons with other deals. Shareholders already began to express concerns when deals in the Bakken began to approach the $100,000-per-flowing-barrel mark; this far exceeds that figure.
Still, investment bankers point out that evaluating the Shelter Bay deal exclusively in flowing-barrel terms may be unfair, since that measure only takes into account current production on lands that Crescent Point intends to develop into something larger.
And, shareholders say, the Shelter Bay deal is financially sound, given how enamoured markets have grown of Crescent Point and the lands it has acquired.
“It doesn’t take rocket science to figure out that they can pay that much because of their cost of capital,” said Rafi Tahmazian, portfolio manager at RiverStream Asset Management Ltd. in Calgary. “Crescent Point is trading at $173,000 a flowing barrel of oil equivalent in 2010 average numbers. When you’re buying stuff at $151,000, then it’s accretive the day you buy it.”
Still, Mr. Tahmazian said, the past year has seen land values grow tenfold in the Cardium, and prices are now so high that they could affect the profitability of oil wells.
“Land has become so bloody expensive lately in some of these hot plays, it can materially affect your return,” he said.
Under the terms of the all-share Shelter Bay deal, shareholders will receive 0.037 Crescent Point shares for each Shelter Bay share they own. The bought deal will see a list of Canada’s top banks buy Crescent Point shares at $41, a penny above the company’s 15-day weighted average.
Crescent Point has been on an acquisition spree, spending nearly $2-billion on transactions since January, 2009, and still wants more, Mr. Saxberg said.
“We’re always looking to grow our business and expand,” he said.
About the Bakken
The Bakken formation lies beneath the southern part of Saskatchewan and southwest Manitoba, as well as Montana and North and South Dakota.
The U.S. Geological Survey estimates the U.S. portion of the Bakken field could contain as many as 5.5 billion barrels of oil.
New drilling techniques could greatly increase the available natural gas reserves.
The formation was first discovered in 1953.
It is named for Henry Bakken, on whose North Dakota farm the first well was drilled.
Source: Staff, Energy Information Administration