On the Deal Q&A: Bringing it Home

Paramount pickup of Apache Canada and related merger show oilpatch repatriation is never dull
Paramount Resources was flush with cash and on the hunt. Houston-based Apache Corp. was selling off its Canadian subsidiary to focus on US shale production against the backdrop of a prolonged industry slump. The acquisition — which ultimately closed on August 16 — would add reserves, production and 1.6 million acres of landholdings, launching Paramount into intermediate producer status. At the same time, Paramount moved to recombine with Trilogy Energy Corp. in a unique all-share merger. Meanwhile, Apache was selling its other Canadian assets to two different buyers. For the lawyers working on the acquisition and related merger, things were about to get interesting.

LEXPERT: What was the experience of working on the acquisition deal?
Marcus Archer, Norton Rose Fulbright Canada LLP (for Paramount in its acquisition of Apache Canada): The acquisition transaction was complex and challenging and at times drawn out and tense, largely due to the fact that Paramount was acquiring the corporate entity, Apache Canada Ltd., which was undergoing a concurrent process to market and complete the sale of two significant asset packages that weren't part of the deal with Paramount.

LEXPERT: I understand that Paramount sold several important assets and a processing facility last year, and that because the company had cash on hand, no debt was assumed in the Apache deal.
Wayne Fedun, Norton Rose Fulbright (for Paramount in its acquisition of Apache Canada): Yes, that’s right. Paramount sold some of its producing assets for approximately $2.1 billion in August of last year and some midstream assets for approximately $600 million in April of last year — both large and transformative transactions for Paramount. Those transactions enabled Paramount to repay all of its indebtedness and have significant cash on hand for its go forward business strategy. This go forward business strategy resulted in Paramount's acquisition of Apache Canada for approximately $460 million, which Paramount was able to do with its remaining cash on hand from the prior year transactions.

LEXPERT: Did the legal teams for Paramount and Apache know each other going in?
Kevin Johnson, Norton Rose Fulbright (for Paramount and Trilogy on the merger): We have worked extensively with each of them in the past and our familiarity with each other was very helpful in making things go smoothly.
Fedun: As Paramount’s counsel, we worked with Paramount’s internal legal and business teams in negotiating the deal with Apache’s internal legal and business development group out of Houston and Oslers in Calgary, who was Apache’s Canadian counsel.

LEXPERT: I understand that the assets of Apache are in close proximity to the Paramount and Trilogy resource plays. Why was Apache an attractive target to Paramount?
Fedun:  We can confirm that the Apache Canada assets are in very close proximity to the Paramount and Trilogy resource plays. As Paramount’s President & CEO Jim Riddell said when the acquisition was announced, Paramount believes the 46,000 Montney acres acquired at Wapiti through the Apache Canada acquisition are a continuation of Paramount’s liquids rich resource play at Karr.  Apache Canada’s and Trilogy’s complementary land positions at Kaybob materially increase the size of Paramount’s resource plays. The assets are a great fit with those of Paramount and Trilogy.

LEXPERT: Why was the timing right to pursue a merger, as opposed to a third-party acquisition, for example?
Johnson: Paramount had been thinking about the possibility of a recombination for some time but there were no formal discussions prior to this transaction.

LEXPERT: I understand the merger was contingent on the completion of the acquisition of Apache Canada. Why was that important?
Leland Corbett, Stikeman Elliott LLP (for Trilogy’s Special Committee): Paramount communicated early on that it was important to them that both transactions be completed together. From Trilogy’s perspective, the contingency therefore became necessary so that Trilogy’s shareholders would know what capital structure and business they were voting themselves into. There was always a thought that if the Apache transaction fell apart, we could revisit the terms of the Paramount and Trilogy transaction and try to adjust terms.

LEXPERT: Was the contingency as stress-inducing as it sounds?
Johnson: While that did create an element of uncertainty for the merger, there was a high degree of confidence that the Apache Canada acquisition would be completed.
Corbett: It was certainly stress-inducing from Trilogy’s end to try to keep track of the transaction terms and diligence for the Apache deal, and the impact that transaction would have on Paramount, all while trying to complete an already complex transaction between Paramount and Trilogy. I can only imagine it was doubly so for Paramount’s counsel.
Jay Reid, Burnet, Duckworth & Palmer (for Paramount’s Special Committee): To be honest, we just had to dutifully go about our business on the assumption that the Apache Canada deal would take place.

LEXPERT: What kind of regulatory requirements came into play in the merger?
Corbett: Each side had to strike a special committee, retain an independent valuator and have the minority shareholders bless the deal. The real tension came from the fact that the Paramount minority shareholders could reject the deal if they felt that Trilogy got too good of a deal, and vice versa. That really put a spotlight on the independent valuator’s work and the role of the special committees. The Riddell family couldn’t be seen to favour one side or the other. The independent valuator and the special committees helped provide that separation.

LEXPERT: Was there concern about minority shareholder dissent?
Johnson: There is always some uncertainty about shareholder reaction but there was confidence in the fairness of the exchange ratio, the integrity of the process and that the shareholders of both companies would recognize that they would be better off with the merger than without.
Reid: I think the benefits and synergies to be realized by the transactions and the significant combined land positions made it relatively easy for shareholders on both sides — the analysts covering the companies and the proxy advisory firms — to see the value equation associated with the completion of the transactions. Having said that, it’s always possible that a particular shareholder may have a bee in their bonnet.

LEXPERT: Given the unique requirements, was the process particularly demanding?
Corbett: Prior to the transaction, I think many would have agreed that the Paramount and Trilogy shareholders would be better off if the two companies were to recombine. In getting to that point, though, the major players in the transaction had almost identical and diametrically opposed duties to the Paramount and Trilogy shareholders. It put them in a tough spot.
Reid: Certainly there were points in the negotiations where things did become stressful and required reflection, but all parties at the table were professional.

LEXPERT: Do these deals highlight a trend toward homegrown ownership?
Reid: I think you’ve hit the nail on the head. When commodity prices are down and governments, both Provincial and Federal, make operating in the Canadian energy business less attractive by way of regulatory and other initiatives, international companies, and particularly the larger ones, will leave our jurisdiction. Accordingly, we should expect, at least during this part of the “cycle,” that homegrown ownership in the Canadian energy sector will continue.
Corbett: My guess is that trend will continue. I think some stability in commodity prices will give players more confidence on which to make investment decisions. With the almost instantaneous supply response that tight oil and gas producers can provide, the industry is adjusting to prices that won’t get near $100 for a long time.

Click here for a full list of lawyers on the Apache Canada acquisition.