With the announcement that it had completed its anticipated merger with Exxon Mobil Corporation (NYSE:XOM)‘s Canadian subsidiary, Calgary-based Celtic Exploration has become a wholly-owned subsidiary of one of the world’s largest energy companies. In the process, Exxon now has at its disposal the considerable shale resources that Celtic once controlled.
About ExxonMobil and Celtic Exploration
Irving, Texas-based ExxonMobil is one of the world’s largest integrated oil and gas producers. The company owns a diverse basket of properties throughout the world and maintains particularly robust assets in the Gulf of Mexico, West Texas, Russia’s Black Sea region, various parts of Canada, offshore areas of South America, and various coastal and offshore areas in south-east Asia and Oceania. ExxonMobil operates nearly 40,000 wells and owns significant refining and transportation assets. It also makes and distributes various petroleum-based products. Exxon Mobil Corporation (NYSE:XOM) employs around 77,000 people and earned $44.9 billion on about $428.4 billion in gross 2012 revenues.
Celtic Exploration was a relatively new exploration and development concern that prospected for oil and natural gas in various areas of western Canada. At the time of the merger, Celtic owned or claimed properties estimated to hold 140 million barrel-equivalents of oil and gas in the aggregate. The company’s signature properties included tracts around the Grande Cache, Greater Resthaven and Greater Kaybob areas in northern and western Alberta as well as the Inga area in Northeastern British Columbia. In 2012, Celtic lost around $44 million on gross revenues of $192.1 million.
How the Deal Was Structured
In the final estimation, the deal between Exxon Canada and Celtic Exploration was worth just over $2.6 billion. Under its terms, Exxon Mobil Corporation (NYSE:XOM) issued cash payments in the amount of $24.50 per share to every former Celtic shareholder. Concurrently, the company issued one share of a newly created exploration spin-off known as Kelt Exploration (KEL) for every two shares that each former shareholder owned. This transaction valued Celtic at just over $27 per share and provided long-term shareholders with a premium of about 50 percent.
As part of the merger, Exxon Mobil Corporation (NYSE:XOM) also paid off holders of Celtic’s senior 5 percent debt notes by converting them into common shares and then exchanging them according to the formula described above. As an added bonus, these debt holders received accrued interest payments of $20.56. These payments included an extra month’s worth of interest.
Competitors in the Space
It is no secret that the North American shale space has been heating up for some time. According to seasoned industry observers, this particular deal indicates that oil and gas majors are willing to pay substantial premiums for companies that own prospects in two key Alberta shale fields.
As a result of this deal, several companies that operate in the Duvernay and Montney formations have become the focus of takeover speculation. These include NuVista Energy and Cequence Energy Ltd (TSX: CQE). Each company’s stock price jumped in the wake of the deal’s announcement and has remained elevated since that time. Although there have been no confirmed offers or deals, it seems likely that one or more of these companies will become a legitimate takeover prospect within the next few quarters. Cequence Energy Ltd (TSX: CQE) is still a small developing company but has growing volume and sales. Production is projected to increase in 2013 by over 10% to around 10,000 boepd, plus proved reserves increased by 32% from the previous year. The net present value of their proved plus present reserves is $3.97 vs their price in the market of $1.78. To the buyer, Cequence Energy Ltd (TSX: CQE) may be particularly attractive since it is currently trading at a price less than book value. Assuming that the price of oil remains high enough to support shale prospecting, these two attractive formations may simply offer too much promise for the majors to ignore.
What Happens Now
Although the companies named above should have a place on any energy speculator’s watch list, it is not particularly helpful to mull deals that have not yet been inked. On the other hand, Exxon stands to reap tangible benefits from its acquisition of Celtic Exploration.
It is important to note that more than three-quarters of Celtic’s most valuable proven reserves are comprised of shale gas. While it might seem perplexing that Exxon Mobil Corporation (NYSE:XOM) would be attracted to gas-rich reserves during a secular downturn in the value of the commodity, it seems likely that the company is betting on a medium-term resurgence in natural gas prices. If this bet pays off, the major will be left with a tremendously valuable portfolio of rich shale-gas assets in a stable first-world country. This could put it in a strong position relative to other integrated majors like TOTAL S.A. (ADR) (NYSE:TOT) that own significant gas interests in less-stable parts of the world. Total is the fourth largest natural gas producer in the world. Total faces challenges in locations such as Yemen, Iraq, parts of Africa, and, until 2010, Iran. Despite these difficult sites, Total has increased sales in the last twelve months by 5%. In 2010, Total expanded into shale gas and now has the Barrett shale gas project in the US, as well as other shale projects in low risk areas in Europe.
Ultimately, Exxon could choose to accumulate additional shale prospects in western Canada, wait until the price of natural gas rebounds significantly, and spin them off to create significant value for its shareholders. Even if it simply chooses to hold these assets indefinitely, it is likely that the company’s long-term shareholders will reap substantial rewards in the form of dividend increases and potential special dividends.
In sum, it is too late to profit directly from the Exxon-Celtic merger. However, other Canadian shale-gas players may represent attractive investments at their current levels. More merger news is available at ArbIdeas.com. More conservative investors who wish to take Exxon Mobil Corporation (NYSE:XOM)’s side of the trade might simply open a long position in the conglomerate and hope that a resurgence in natural gas prices makes it worthwhile.
The article This Company Is Capitalizing on the Shale Boom originally appeared on Fool.com and is written by Mike Thiessen.
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