Canadian Natural to take over Painted Pony Energy in $461 million deal

Canadian Natural Resources Ltd. has struck a $461-million deal to buy Painted Pony Energy Ltd. as it looks to grow its position in the liquids-rich Montney natural gas region of northeastern B.C.

“This acquisition further strengthens Canadian Natural's natural gas assets and production base in key operating areas and complements the company's diversified portfolio,” Canadian Natural president Tim McKay said in a statement.

“This transaction also allows us to further insulate against natural gas costs in our oilsands operations and has minimal impact on the company's low overall corporate decline rate.”

The acquisition of Calgary-based Painted Pony company for $111 million in cash and the assumption of $350 million in debt is expected to close later this year.

Canadian Natural is best known as one of Canada's largest oilsands and heavy oil producers, but it has been allocating funds to grow its natural gasoutput as well.

In a statement, Painted Pony said it is facing liquidity challenges caused by three years of weak natural gas prices and more recent declines in pricesfor the petroleum liquids produced with the gas.

It decided on a confidential process to enhance shareholder value, it said, and its board determined the corporate buyout offer of 69 cents per share by Canadian Natural was the best path forward.

Painted Pony's shares have traded between 20 cents and 90 cents in the past year. They rose by as much as 16.9% on Monday to match the offering price.

Separately, Canadian Natural said Painted Pony's lands in northeastern B.C. are located near its similar operations and offer potential synergies in infrastructure and pipelines.

It said the assets produce about 270 million cubic feet per day of natural gas and 4,600 barrels per day of petroleum liquids.

By comparison, Canadian Natural produced 1.46 billion cubic feet per day of gas and 922,000 barrels per day of crude oil and liquids in the second quarter.

Analysts said the transaction was good for both companies but better for Canadian Natural, whose shares were little changed on Monday.

“Although we would consider the acquisition as immaterial to base operations today (four% of total production), the purchase is consistent with Canadian Natural's history of opportunistic acquisitions along cyclical lows, adding significant future gas inventory,” National Bank analyst Travis Wood said in a report.

Analyst Chris MacCulloch of Desjardins pointed out the offer represents a 38% premium above his 50 cents per share target price for Painted Pony, but investors may have mixed feeling about the deal.

“The acquisition certainly marks a disappointing conclusion for PONY shareholders after languishing for years under the crippling weight of elevated debt levels and depressed natural gas prices,” he said.

Painted Pony will hold a special meeting in September to vote on the deal which will require support of two-thirds of the shares.

It said holders of about 25% of its shares, including its two largest shareholders, have agreed to support the transaction.