PrimeWest Middle-Eastern Takeover 'No Big Deal'

Oct. 5.07 | About: PrimeWest Energy (PWI)

PrimeWest Energy Trust’s (NASDAQ:PWI) deal to be taken over by Abu Dhabi National Energy Co. (aka: TAQA) has ruffled feathers in Canada, with politicians and the business community debating the dangers of Canadian oil and gas assets ending up in foreign hands.

Hogwash, says Dirk Lever, an analyst at RBC Dominion Securities Inc. PrimeWest wasn’t “Canadian” to begin with.

“Prior to TAQA’s announcement, PrimeWest was 75% foreign held,” Mr. Lever said. “A TAQA acquisition will make PrimeWest 100% foreign owned.” In other words: la-dee-da.

There’s more: “Crude from the Middle East looks much like Canadian crude,” Mr. Lever said in a research note. “Eastern Canada and the U.S. import crude from the Middle East (Alberta does not supply eastern Canada – some will be surprised). If we already buy crude from Abu Dhabi, is there any difference if we buy Canadian oil and natural gas from Abu Dhabi owners?”

He continues: “PrimeWest’s reserves are in the ground; changes in ownership will not change the location of the reserves. The assets will effectively remain under the same sovereign ‘control’ as before.”

Canadians (and Americans) will likely continue to run the PrimeWest show, too. There will not be a wave of Abu Dhabi immigrants learning to be roughnecks, and “visiting executives from Abu Dhabi from time to time cannot run PrimeWest’s operations (nor will they want that task!).”

TAQA already owns power generating assets in America, and the PrimeWest deal is the company’s third deal in Canada’s oilpatch in four months. It is offering C$26.75 for every PrimeWest unit, a 35% premium to its market close on Sept. 21. Mr. Lever estimates the aggregate purchase price will be C$4.8-billion. TAQA, he notes, is raising debt in North America to fund its acquisitions over here.

What about taxes? Will foreign takeovers be a drain on Canada’s coffers? TAQA will continue to pay royalties to the provinces, at the same rate PrimeWest pays. The income tax side, however, is a bit fuzzy. It will depend on how much cash TAQA reinvests into its Canadian businesses, versus how much it takes for itself. But keep in mind that oil and gas royalty trusts aren’t exactly known for paying tons of tax anyway.

In sum: “There’s nothing strategic, from a national security perspective, about PrimeWest’s assets. PrimeWest’s assets are similar to what any conventional Canadian producer might own, and represent a very small percentage of total Canadian production.”

Translation: Get over it.