Exxon makes a land grab with $2.6-billion deal for Celtic

Share

Exxon Mobil Corp. is acquiring Celtic Exploration Ltd. for $2.6-billion, capping 10 years of growth for the Calgary company that has amassed large tracts of land that are rich with liquid hydrocarbons and natural gas that could one day be exported to Asia.

The sale, which must gain Investment Canada approval before it can proceed, marks the latest multibillion-dollar acquisition of domestic energy companies with big land holdings. For Exxon, the deal, worth $3.1-billion once debt is included, provides access to a pair of large natural gas plays that provide feedstock for the oil sands and a potential West Coast natural gas export terminal.

For Celtic, it is the end of a decade that has seen it increase production to 22,000 barrels of oil equivalent a day, 75 per cent of it gas – a difficult ratio in recent years. That output coincided with gas prices in the cellar.

But Celtic also built up a vast network of land for future production, with some 224,000 hectares in the Montney, a major gas field that straddles the Alberta-B.C. border that made it uniquely attractive.

"Our intent was to get as big, with as many opportunities, as we could," said Celtic president and chief executive officer David Wilson. "We weren't actively looking to sell it at any time. We were just going to keep building the company until someone came along and knocked on the door," he added.

Exxon arrived with a bid of $24.50 a share, a 35 per cent premium to Celtic's recent trading values, lured in part by the size of the land holdings. It's a handsome payday for Celtic's original investors, who have seen their shares soar more than 50-fold over the past 10 years.

The Exxon bid comes as the energy heavyweight and other global players, once preoccupied with expanding their Alberta oil sands holdings, further their interest in natural gas. In late 2009, for example, Exxon agreed to an all-share takeover of XTO Energy Inc. that was then valued at $31-billion (U.S.), plus $10-billion in debt.

Natural gas, down and out for years amid a supply glut, has rallied this year on hopes for better demand. The recent rise in prices – up from $2 to nearly $3.50 per thousand cubic feet – has eased the path for transactions among companies that now see markets better reflecting their value, Mr. Wilson said.

With Celtic agreeing to pay $90-million if it accepts another offer, it's a "low likelihood" that another company will step in, said Bob Fitzmartyn, an analyst with FirstEnergy Captial Corp., which provided Celtic a fairness opinion on the deal. Shareholders will also receive shares in a new spin-out company with several Celtic assets and its executive management.

Celtic gives Exxon "a resource-type acquisition with LNG optionality," Mr. Fitzmartyn said. The liquids contained in the natural gas are particularly attractive, he said. Not all such liquids are priced equally: Propane, for example, is not particularly valuable. But condensate, a very light oil that is used to thin heavy oil sands crude so it can flow through pipelines, is often worth more than oil. And Celtic has a lot of condensate.

In some of its plays, the company produces 75 to 100 barrels of liquids with each million cubic feet of gas (starting at 25 barrels per million, the liquids are worth more than the gas today). And "half to two-thirds of that is condensate," Mr. Fitzmartyn said.

The rise of plans to export LNG from the British Columbia coast is another important factor. Exxon Mobil, in part through its majority-owned subsidiary Imperial Oil Ltd., already has substantial land in northeastern B.C., and is pursuing plans for an export terminal on the province's West Coast.

Celtic could add important supply to that terminal: the Resthaven area of its Montney land contains some 13-trillion cubic feet of recoverable natural gas, according to an estimate by Raymond James analyst Luc Mageau. That's equal to nearly three years of Canada's entire gas output, and enough to supply a large LNG plant for 20 years.

"This is the beginning of the LNG train. You've seen it with the national oil companies. Now we're starting to see it with the majors," Mr. Mageau said.

Other large Canadian gas acquisitions in recent years have come from overseas giants like Petronas, Mitsubishi Corp. and Korea Gas Corp. Mr. Mageau said only a few smaller Canadian companies still have the size of assets that could attract foreign interest, including Tourmaline Oil Corp., Painted Pony Petroleum Ltd. and ARC Resources.