The race to purchase Canada Southern Petroleum Ltd. continues to heat up as the company said it still favors the amended offer from Canadian Oil Sands Ltd. over the amended offer from Canadian Superior Energy Inc. In its most recent offer, Canadian Superior’s CEO said Canada Southern’s board of directors — especially the chairman — “appear by their own actions to be incapable of evaluating Canada Southern’s own upside and assets.”
Just days after Canada Southern applauded Canadian Oil Sands’ amended acquisition offer, the company late Friday urged shareholders to reject Canadian Superior’s “largely noncash” amended offer and accept the cash US$13.10 per share offer from Canadian Oil Sands before the offer’s Aug. 18 expiration.
“With all of its unsupported claims and arcane financial engineering, Canadian Superior’s amended offer is a bridge to nowhere for Canada Southern shareholders,” said Richard C. McGinity, chairman of Canada Southern’s board. “Compared to the certainty of Canadian Oil Sands’ cash offer of US$13.10 per share, Canadian Superior is offering a largely non-cash, yet fully taxable transaction that contains substantially less value and more risk for our shareholders.”
The three Calgary-based producers have been trading barbs over the past three months as offers to purchase Canada Southern were made and then revised (see NGI, June 5; June 12). One of the significant sticking points of Canadian Oil Sands’ offer was cleared up during the week when the company reduced its minimum tender condition to 50.01% (as opposed to the previous 66.66%) of the common shares of Canada Southern.
Under Canadian Superior’s amended offer, Canada Southern shareholders could elect to receive either:
“Canadian Superior estimates that its amended offer is worth approximately C$17.10 per share (US$14.97),” said Canadian Superior CEO Greg Noval. “This compares to the competing bid by Canadian Oil Sands Limited of US $13.10 (approximately C$14.81). We are confident that Canada Southern shareholders will recognize the value, simplicity and upside of our offer for Canada Southern. The directors of Canada Southern, and particularly their chairman, appear by their own actions to be incapable of evaluating Canada Southern’s own upside and assets and they also appear to be inextricably tied at the hip to Canadian Oil Sands and Canadian Oil Sands’ recent offer for Canada Southern. We are confident Canada Southern shareholders will see through this and accept Canadian Superior’s bid.”
Explaining the premise of arctic royalty trust units, Canadian Superior said it will create a net profits interest in favor of the holders of the units equal to 25% (assuming all common shares are exchanged for special exchangeable shares) of the net profits received from the production of natural gas from Canada Southern’s interest in the Canadian Arctic. Canada Southern has stated that its best estimate of the size of its discovered marketable natural gas resource in the Canadian Arctic is 927 Bcfe, net to Canada Southern. as a result, Canadian Superior estimates the value of each arctic royalty trust unit to be approximately C$10.00 per Canada Southern share based on a value of approximately C$0.65/Mcf of natural gas in place.
“Canadian Superior is of the view that its amended offer provides Canada Southern shareholders, in addition to the cash component of the offer, with the unique opportunity to participate with Canadian Superior through a business combination that will result (assuming all of the Canada Southern common shares are acquired) in Canada Southern shareholders owning approximately 20% of the combined entity on an accretive basis that would have an expanded Western Canadian production base and at the same time would provide Canada Southern shareholders with the opportunity to participate with Canadian Superior in one of the largest natural gas plays in the world slated for multi-well drilling by Canadian Superior to commence later this year in Trinidad and Tobago with the additional upside created by the arctic royalty trust,” Canadian Superior said.
Based on the advice of its financial advisor, CIBC World Markets, and using independent third party estimates for the value of Arctic natural gas of $0.15/Mcf, Canada Southern said it believes Canadian Superior’s amended offer is worth approximately US$8.60 per share, while the company’s original offer was worth only US$8.18, as of Thursday’s market close.
“We can’t say this more plainly: based on our analysis, and with the advice we have received from our legal and financial advisors, we utterly reject Canadian Superior’s claim — which is unsupported by reasonable assumptions or transaction precedents for Arctic assets — that its offer is worth anything more than about US$8.60 per share,” said McGinity.
The big attraction of Canada Southern is its 39,000 net acres in the Canadian Arctic Islands. Canada Southern estimates its potential Arctic gas reserves at about a net 927 Bcfe, which is 68 times greater than its current 13.7 Bcfe of proved and probable reserves. The company also has producing assets in the Yukon Territory, in northeastern British Columbia and in southern Alberta.
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