Barrick bids for junior energy company to mitigate oil costs

Barrick Gold (ABX-T, ABX-N) is hedging against soaring oil prices with an all-cash offer for Albertan oil and gas junior Cadence Energy (CDS-T).

In a world where oil is trading at about US$145 per barrel, Barrick’s preemptive strike will ensure the gold major reserves of about 18.2 million barrels of oil equivalent at an acquisition cost of about C$20 per BOE.

Cadence, formerly known as Kereco Energy, produces the equivalent of 3,600 barrels of oil per day, about one-quarter of Barrick’s direct oil consumption and a “significant portion” of its direct natural gas consumption, the gold producer reports.

At an all-cash offer of C$6 per share, the C$354 million offer represents a 10% premium to Cadence’s closing price of $5.44 per share on July 11.

The junior oil and natural gas company’s key assets are in Alberta’s Peace River Arch and Sturgeon Lake areas.

“Barrick has always been one of the more creative, innovative, and well-managed gold-mining companies,” says Jeffrey Nichols, managing director of American Precious Metals Advisors.

“At first glance, the Barrick offer to acquire Cadence looks like a smart move that may be emulated by other companies wishing to hedge their energy costs — not only mining and other natural resource companies, but also other companies with high energy inputs.”

Barrick’s unsolicited bid comes eight days before Cadence shareholders are set to vote on a C$301 million cash-and-share offer the oil and gas junior received from Daylight Resources Trust in May.

Under that bid, Daylight was to pay 0.47 of a trust unit or $5.32 in cash for each Cadence share, with the cash portion capped at $30 million.

Cadence’s properties have a Reserve Life Index of about 13.8 yearsconsistent with the long life nature of Barrick’s core gold mining operations, the major says.

Cadence’s production consists of more than 70% light crude oil, which has historically tracked diesel prices. (One barrel of oil equivalent is calculated on the basis of 1 BOE to 6,000 cubic feet of natural gas.)

The acquisition would give Barrick exposure to oil at lower rates than available in the forward market and is anticipated to have “break-even cash flow at oil prices that are less than one-half of current market prices,” the company states in a press release.

News of the proposed acquisition sent Barrick’s shares up 43 a piece to close at $50.43 on a trading volume of 3.4 million shares. Cadence Energy was trading up 72 a share or 13.24% at $6.16 per share on a trading volume of 2 million shares.

Barrick has a 52-week trading range of $31.09-$54.11, while Cadence has traded in a band of $3.37-$5.98 per share.

Barrick has also invested in a natural gas power plant in Nevada to secure long-term energy supplies and will invest about US$70 million for a 36-megawatt wind farm in Chile.