Delivers immediate 44% premium for MEG
shareholders
Husky Energy Inc. (TSX:HSE) (“Husky” or the “Company”) today
announced a proposal to acquire all of the outstanding shares of
MEG Energy Corp. (TSX:MEG) (“MEG”) for implied total equity
consideration of approximately $3.3 billion. This proposal values
MEG at an implied total enterprise value of $6.4 billion, including
the assumption of approximately $3.1 billion of net debt.
Under the terms of Husky’s proposal, each MEG
shareholder will have the option to choose to receive consideration
per MEG share of $11 in cash or 0.485 of a Husky share, subject to
maximum aggregate cash consideration of $1 billion and a maximum
aggregate number of Husky shares issued of approximately 107
million. The share exchange ratio has been calculated based on
Husky’s closing share price of $22.68 as of Friday, September 28,
2018, the last trading day prior to this proposal, implying a mix
of $3.21 in cash plus 0.344 of a Husky share per MEG share on a
fully pro-rated basis.
Husky’s proposal delivers an immediate 44
percent premium to the 10-day volume-weighted average MEG share
price of $7.62 as of Friday, September 28, 2018 and a 37 percent
premium to MEG’s closing price of $8.03 as of that date.
Together Husky and MEG will create a stronger
Canadian energy company, headquartered in Calgary, Alberta. The
transaction will be accretive to Husky’s free cash flow, funds from
operations, earnings and production on a per share basis.
The combined company will have total Upstream
production of more than 410,000 barrels of oil equivalent per day
(boe/day) and Downstream refining and upgrading capacity of
approximately 400,000 barrels per day (bbls/day), providing for
increased free cash flow per share, production growth and a basis
for potential future dividend increases.
“Husky is confident the proposed transaction is
in the best interests of Husky and MEG shareholders, employees and
stakeholders,” said CEO Rob Peabody. “However, to date, the MEG
Board of Directors has refused to engage in a discussion on the
merits of a transaction, giving us no option but to bring this
offer directly to MEG shareholders.”
While Husky remains prepared to engage in
discussions with MEG’s Board of Directors to complete the
transaction expeditiously for the benefit of MEG shareholders, it
intends to commence an offer directly to MEG shareholders by way of
a takeover bid so they can determine the future of their
investment.
“Husky continues to deliver on our five-year
plan – maintaining a strong balance sheet while reducing our cost
structure, increasing our production and margins and improving our
ability to generate free cash flow – we are uniquely positioned to
deliver strong value to MEG shareholders,” said Peabody.
“Along our Integrated Corridor business, the
physical integration of our Upstream and Downstream operations,
including our committed pipeline capacity, shield us from location
and quality differentials. In the Offshore business, our
fixed-price contracts in Asia and high-netback Atlantic production
provide for additional stability in funds from operations.”
Husky currently has more than 6,000 employees
and contractors, plus an additional 2,400 skilled tradespeople
working on maintenance and construction projects. The
transaction will result in a stronger combined technical and
operating team that can apply its expertise across a larger asset
base.
The combined company will be an innovation
leader in carbon capture and storage, energy efficiency, enhanced
SAGD and diluent reduction technology, with greater opportunities
to invest in advanced technologies that reduce CO2 emissions.
“We recognize the significant capabilities of
MEG’s talented team,” added Peabody. “We believe MEG and Husky
employees will benefit from substantial opportunities for growth
and development as part of a stronger, combined Canadian
company.”
In a time of increased market uncertainty, Husky
believes the combined company will have an improved opportunity to
accelerate new projects in Canada compared to two separate
entities.
Now in its 80th year, Husky maintains a strong
commitment to Alberta and to Canada, and the communities in which
it operates. Husky is one of Canada’s largest private sector
investors, with planned Canadian capital expenditures of more than
$12 billion over its existing five-year plan. Ongoing investments
include the West White Rose Project currently under construction in
Newfoundland and Labrador, and a growing thermal program in
Saskatchewan and Alberta.
STRATEGIC AND FINANCIAL BENEFITS
• Premium to Market Price
- 44% premium to the 10-day volume-weighted average share price
of MEG on Friday, September 28, 2018.
- 37% premium over MEG’s closing price of $8.03 on Friday,
September 28, 2018.
• Enhanced Shareholder Return Proposition With Lower
Risk
- Husky’s strong balance sheet will allow for more free cash flow
to be directed towards cash returns to shareholders and growth
investments.
- MEG shareholders will benefit from investment-grade credit
ratings and a lower cost of capital.
- MEG shareholders will participate in Husky’s dividend yield,
which is currently 2.2%, with potential for future increases as
free cash flow improves.
• Physical Integration, Expanded Market Access
and High-Netback Offshore Operations Provide Stability in Funds
From Operations
- MEG is currently highly exposed to discounted heavy oil
prices.
- Husky’s pipeline network and refineries in Canada and the U.S.
provide for more steady generation of funds from operations and
protection from location and quality differentials.
- MEG shareholders will gain exposure to Husky’s high-netback
Offshore business and fixed-price contracts, providing more
stability in funds from operations.
• $200 Million Per Year in Near-Term, Realizable
Synergies
- $100 million per year of expected financial synergies,
including debt refinancing with more favourable terms.
- $70 million per year of expected operational synergies,
including additional margin capture through Husky’s Midstream and
Downstream infrastructure and transportation commitments.
- $30 million per year in other expected synergies, including
reduction in combined corporate overhead and procurement
savings.
- Longer-term synergies include optimization of the combined
capital spending program, deployment of technologies across the
combined organization, combining best practices and operating
expertise across a much larger asset base, and future investments
to enhance Downstream integration.
• Immediately Achieves and Exceeds
MEG’s Announced 2020 Financial
Targets
- Optimize balance sheet: Expected 2019 net debt to EBITDA of
less than 1.0 times, vs. MEG target of 2-3 times by 2020.
- Advance technologies: A combined company can invest in a larger
portfolio of technologies that can be applied across a much larger
asset base.
- Enhance business sustainability: The combined company will have
a lower earnings break-even price of $40 per barrel US WTI and
provide greater stability of free cash flow.
- Maximize revenue per barrel: Husky’s integrated operations and
expanded market access results in greater value capture and reduced
exposure to differential volatility.
- Generate free cash flow: The combined company will immediately
generate free cash flow, which can be used for returns to
shareholders and growth investments.
• Significant Upside Through Stronger Combined Platform
for Shareholder Value Creation
- Despite having top quality assets and demonstrated production
growth, MEG has failed to deliver value to shareholders.
- The combined company will continue to create value as one of
the top three Canadian thermal bitumen producers as it continues to
advance its portfolio of high quality, high-netback thermal
projects. Additionally, it will have significant refining capacity,
pipeline transportation, storage and logistical assets, which help
to shield it from location and quality differentials and support
growth.
ACCRETIVE
TO HUSKY ON ALL METRICS AT STRIP PRICING
Metrics1 |
Combined2019F2 |
2019F Accretion/Share2 |
2020F+ Accretion/Share |
|
|
|
|
|
|
Funds from
operations (FFO)3 |
>$6
billion |
0-5% |
5-10% |
|
Free cash
flow3 |
>$1.5 billion |
0-5% |
10-15% |
|
Upstream
production |
>410 mboe/day |
15-20% |
15-20% |
|
Earnings
break-even |
$40/bbl |
|
|
|
Net debt to
FFO3 |
~1.0x |
|
|
|
1At Strip
as of September 25, 2018: In 2019, WTI of $70.50 US/bbl and WTI-WCS
differential of $26.26 US/bbl; In 2020, WTI of $66.45 US/bbl and
WTI-WCS differential of $25.43 US/bbl.2Includes transaction and
other one-time costs and assumes 50% of realizable annual synergies
in 2019.3Non-GAAP measures; refer to advisory. |
APPROVALS
The proposal has been unanimously approved by
Husky’s Board of Directors. It is not subject to any due diligence,
financing or Husky shareholder approval conditions. Husky expects
that the proposed transaction will be completed in the first
quarter of 2019, subject to receipt of all necessary regulatory
approvals, including under the Investment Canada Act and the
Competition Act.
OFFER DETAILS
Full details of the Offer will be set out in the
formal bid circular, which is expected to be filed on Tuesday,
October 2, 2018 with the Canadian securities regulators, a copy of
which will then be available at www.sedar.com. The Offer will be
open for acceptance until 5 p.m. Eastern Time (3 p.m. Mountain
Time) on Wednesday, January 16, 2019.
The Offer will be subject to certain conditions,
including that the MEG shares tendered under the Offer constitute
more than 66 2/3 percent of the shares of MEG then outstanding, on
a fully-diluted basis. The Offer will also be conditional upon
receipt of all necessary regulatory approvals, confirmation that
the MEG shareholder rights plan will not adversely affect the
Offer, no material adverse effect at MEG, and other customary
conditions. The Offer will not be subject to any financing
conditions, and the cash component of the Offer will be financed
through Husky’s existing cash resources.
Copies of the Offer, once filed, will be
available upon request made to Husky’s Senior Vice President,
General Counsel & Secretary at 707 8th Avenue S.W. Calgary,
Alberta, T2P 1H5, or telephone 403-298-6111.
ADVISORS
Goldman Sachs Canada Inc. is acting as financial advisor and Osler,
Hoskin & Harcourt LLP is acting as lead legal advisor to
Husky.
CONFERENCE CALL
Husky will host a conference call to discuss its
proposal on Monday, October 1, 2018 at 8 a.m. ET (6 a.m. MT).
To listen live: |
To listen to a
recording (after 9 a.m. ET on Monday, Oct. 1) |
Canada
and U.S. Toll Free: 1-800-319-4610 Outside Canada and
U.S.: 1-604-638-5340 |
Canada and U.S. Toll Free:
1-800-319-6413 Outside Canada and U.S.: 1-604-638-9010Passcode:
2633 Duration: Available until November 1, 2018Audio webcast:
Available for 90 days at huskyenergy.com
|
ADDITIONAL INFORMATION
Husky’s letter to MEG’s Board Chair and the MEG
Offer presentation will be posted at huskyenergy.com/bettertogether
on Monday, October 1, 2018 at 6 a.m. ET (4 a.m. MT).
D.F. King has been retained as Information Agent
for the Offer. Shareholders may contact D.F. King at:
Toll Free in North America:
1-800-761-6707Outside North America, Banks, Brokers and Collect
Calls: 1-212-771-1133Email: inquiries@dfking.com
Investor Relations Team:
Todd McBride587-774-5923
Jon Gorrie403-298-7436
Media
Inquiries:
Mel Duvall, Senior Manager, Media & Issues403-513-7602
NO OFFER OR SOLICITATION
This news release is for informational purposes
only and does not constitute an offer to buy or sell, or a
solicitation of an offer to sell or buy, any securities. The
offer to acquire MEG securities and to issue securities of the
Company will be made solely by, and subject to the terms and
conditions set out in, the formal offer to purchase and takeover
bid circular and accompanying letter of transmittal and notice of
guaranteed delivery.
NOTICE TO U.S. HOLDERS OF MEG
SHARES
The Company intends to make the offer
and sale of the Company’s shares in the acquisition subject to a
registration statement covering such offer and sale to be filed
with the United States Securities and Exchange Commission (the
“SEC”) under the U.S. Securities Act of 1933, as amended.
Such registration statement covering such offer and sale will
include various documents related to such offer and sale. THE
COMPANY URGES INVESTORS AND SHAREHOLDERS OF MEG TO READ SUCH
REGISTRATION STATEMENT AND ANY AND ALL OTHER RELEVANT DOCUMENTS
FILED OR TO BE FILED WITH THE SEC IN CONNECTION WITH SUCH OFFER AND
SALE OF THE COMPANY’S SHARES AS THOSE DOCUMENTS BECOME AVAILABLE,
AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS,
BECAUSE THEY CONTAIN OR WILL CONTAIN IMPORTANT INFORMATION.
You will be able to obtain a free copy of such registration
statement, as well as other relevant filings regarding the Company
or such transaction involving the issuance of the Company’s shares,
at the SEC’s website (www.sec.gov) under the issuer profile
for the Company, or on request without charge from the Senior
Vice President, General Counsel & Secretary of
the Company, at 707 8th Avenue S.W. Calgary, Alberta or by
telephone at 403-298-6111.
The Company is a foreign private issuer
and permitted to prepare the offer to purchase and takeover bid
circular and related documents in accordance with Canadian
disclosure requirements, which are different from those of the
United States. The Company prepares its
financial statements in accordance with Canadian generally accepted
accounting principles, and they may be subject to Canadian auditing
and auditor independence standards. They may not be
comparable to financial statements of United States
companies.
Shareholders of
MEG should be aware that owning the
Company’s shares may subject them to tax consequences both in the
United States and in Canada. The offer to purchase and
takeover bid circular may not describe these tax consequences
fully. MEG shareholders
should read any tax discussion in the offer to purchase and
takeover bid circular, and holders of MEG
shares are urged to consult their tax
advisors.
A MEG
shareholder’s ability to enforce civil liabilities under
the United States federal securities laws may be affected adversely
because the Company is incorporated in Alberta,
Canada, some or all of the Company’s officers and directors and
some or all of the experts named in the offering documents reside
outside of the United States, and all or a substantial portion of
the Company’s assets and of the assets of such persons are located
outside the United States. MEG
shareholders in the United States may not be able to sue
the Company or the Company’s officers or directors
in a non-U.S. court for violation of United States federal
securities laws. It may be difficult to compel such parties
to subject themselves to the jurisdiction of a court in the United
States or to enforce a judgment obtained from a court of the United
States.
NEITHER THE SECURITIES EXCHANCE
COMMISSION NOR ANY STATE SECURITIES REGULATOR HAS OR WILL HAVE
APPROVED OR DISAPPROVED THE COMPANY’S SHARES OFFERED IN THE
OFFERING DOCUMENTS, OR HAS OR WILL HAVE DETERMINED IF ANY OFFERING
DOCUMENTS ARE TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
MEG shareholders should
be aware that, during the period of the Offer, the Company or its
affiliates, directly or indirectly, may bid for or make purchases
of the securities to be distributed or to be exchanged, or certain
related securities, as permitted by applicable laws or regulations
of Canada or its provinces or territories.
FORWARD-LOOKING STATEMENTS
Certain statements in this news release are
forward-looking statements and information (collectively,
“forward-looking statements”) within the meaning of the applicable
Canadian securities legislation, Section 21E of the United States
Securities Exchange Act of 1934, as amended, and Section 27A of the
United States Securities Act of 1933, as amended. The
forward-looking statements contained in this news release are
forward-looking and not historical facts.
Some of the forward-looking statements may be
identified by statements that express, or involve discussions as
to, expectations, beliefs, plans, objectives, assumptions or future
events or performance (often, but not always, through the use of
words or phrases such as “will likely result”, “are expected to”,
“will continue”, “is anticipated”, “is targeting”, “is estimated”,
“intend”, “plan”, “projection”, “could”, “should”, “aim”, “vision”,
“goals”, “objective”, “target”, “scheduled” and “outlook”).
In particular, forward-looking statements in this news release
include, but are not limited to, references to: the Company’s
intention to commence a take-over bid in respect of the offer; the
anticipated strategic, operational and financial benefits of the
offer and that may result from a combination of the Company and
MEG; the expected timing of completion of the transaction;
potential future dividend increases; the expected timing of filing
the takeover bid circular; and the Company’s expected capital
expenditures over the five-year plan.
Although the Company believes that the
expectations reflected by the forward-looking statements presented
in this news release are reasonable, the Company’s forward-looking
statements have been based on assumptions and factors concerning
future events that may prove to be inaccurate, including the
ability to obtain regulatory approvals and meet other closing
conditions to any possible transaction, and the ability to
integrate the Company’s and MEG’s businesses and operations and
realize financial, operational and other synergies from the
proposed transaction. Those assumptions and factors are based
on information currently available to the Company about itself, MEG
and the businesses in which they operate. Information used in
developing forward-looking statements has been acquired from
various sources, including third-party consultants, suppliers and
regulators, among others.
Because actual results or outcomes could differ
materially from those expressed in any forward-looking statements,
investors should not place undue reliance on any such
forward-looking statements. By their nature, forward-looking
statements involve numerous assumptions, inherent risks and
uncertainties, both general and specific, which contribute to the
possibility that the predicted outcomes will not occur. Some of
these risks, uncertainties and other factors are similar to those
faced by other oil and gas companies and some are unique to the
Company.
The Company’s Annual Information Form for the
year ended December 31, 2017 and other documents filed with
securities regulatory authorities (accessible through the SEDAR
website www.sedar.com and the EDGAR website www.sec.gov) describe
risks, material assumptions and other factors that could influence
actual results and are incorporated herein by reference.
New factors emerge from time to time and it is
not possible for management to predict all of such factors and to
assess in advance the impact of each such factor on the Company’s
business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those
contained in any forward-looking statement. The impact of any
one factor on a particular forward-looking statement is not
determinable with certainty as such factors are dependent upon
other factors, and the Company’s course of action would depend upon
management’s assessment of the future considering all information
available to it at the relevant time. Any forward-looking
statement speaks only as of the date on which such statement is
made and, except as required by applicable securities laws, the
Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of
unanticipated events.
NON-GAAP MEASURES
This news release contains references to the
terms “total enterprise value”, “net debt”, “free cash flow”,
“funds from operations”, “net debt to EBITDA” and “net debt to
funds from operations”, which do not have standardized meanings
prescribed by International Financial Reporting Standards (“IFRS”)
and are therefore unlikely to be comparable to similar measures
presented by other issuers. None of these measures is used to
enhance reported financial performance or position. These
measures are useful complementary measures in assessing financial
performance, efficiency and liquidity.
Total enterprise value is a non-GAAP measure
which is calculated by aggregating the market value of common
shares and preferred shares at a specific date, adding total debt
and subtracting cash and cash equivalents. Management
believes that total enterprise value provides useful information to
investors to assess the overall market value of the Company and as
an input to calculate financial ratios.
Net debt is a non-GAAP measure that equals total
debt less cash and cash equivalents. Total debt is calculated
as long-term debt, long-term debt due within one year and
short-term debt. Net debt is considered to be a useful
measure in assisting management and investors to evaluate financial
strength.
Free cash flow is a non-GAAP measure, which
should not be considered an alternative to, or more meaningful
than, cash flow – operating activities as determined in
accordance with IFRS, as an indicator of financial
performance. Free cash flow is presented to assist management
and investors in analyzing operating performance by the business in
the stated period. Free cash flow equals funds from
operations less capital expenditures and investment in joint
ventures.
Funds from operations is a non-GAAP measure
which should not be considered an alternative to, or more
meaningful than, cash flow – operating activities as determined in
accordance with IFRS, as an indicator of financial
performance. Funds from operations is presented to assist
management and investors in analyzing operating performance of the
Company in the stated period. Funds from operations equals cash
flow – operating activities plus change in non-cash working
capital.
Net debt to EBITDA is a non-GAAP measure that
equals net debt divided by EBITDA. EBITDA equals net earnings
(loss) plus finance expenses (income), provisions for (recovery of)
income taxes, and depletion, depreciation and amortization.
Net debt to EBITDA is considered to be a useful measure in
assisting management and investors to evaluate the Company’s
financial strength.
Net debt to funds from operations is a non-GAAP
measure that equals net debt divided by funds from
operations. Net debt to funds from operations is considered
to be a useful measure in assisting management and investors to
evaluate the Company's financial strength.
DISCLOSURE OF OIL AND GAS
INFORMATION
The Company uses the term “barrels of oil
equivalent” (or “boe”), which is consistent with other oil and gas
companies’ disclosures, and is calculated on an energy equivalence
basis applicable at the burner tip whereby one barrel of crude oil
is equivalent to six thousand cubic feet of natural gas. The term
boe is used to express the sum of the total company products in one
unit that can be used for comparisons. Readers are cautioned that
the term boe may be misleading, particularly if used in isolation.
This measure is used for consistency with other oil and gas
companies and does not represent value equivalency at the
wellhead.
The Company uses the term "earnings break-even
oil price” in this news release. Earnings break-even oil price
reflects the estimated WTI oil price per barrel priced in US
dollars for 2019 required in order to generate a net income of Cdn
$0 over a 12-month period ending December 31. This estimate
is based on holding several variables constant throughout the
applicable 12-month period, including foreign exchange rate,
light-heavy oil differentials, realized refining margins, forecast
utilization of Downstream facilities, estimated production levels
and other factors consistent with normal oil and gas company
operations. Earnings break-even is used to assess the impact of
changes in WTI oil prices on the net income of the Company and
could impact future investment decisions. Actual results may differ
materially. See “Forward-Looking Statements” above.
All currency is expressed in this news release
in Canadian dollars unless otherwise indicated.
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