Barrick plans to buy oil and gas junior

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, CDSFF-O).

At a time when oil is trading at more than US$140 per barrel, Barrick’s pre-emptive strike will ensure the gold major reserves of about 18.2 million barrels of oil equivalent (BOE) at an acquisition cost of about $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 says.

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

“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 $301-million cash-and-share offer the oil and gas junior received from Daylight Resources Trust in May.

In 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.

Raymond Goldie, an analyst at Salman Partners in Toronto, says Barrick’s move may be part of a trend that dates to 2005 when Teck Cominco (TCK. B-T, TCK-N) entered its first oilsands investment, acquiring a 15% limited partnership interest in the Forest Hills oilsands project, about 90 km north of Fort McMurray, Alta. At that time, the mining giant committed to an aggregate subscription price of $475 million in the partnership, with UTS Energy(UTS-T, UEYCF-O)holding 30% and national oil giant Petro-Canada (PCA-T, PCZ-N), 55%.

But it’s also something the industry witnessed as early as the 1970s, Goldie points out, the last time there was a serious spike in oil prices and mining companies like Denison Mines bought into the oil sector. At that time, Denison, which was built on the uranium mines at Elliot Lake, diversified into oil production in Greece, Italy, Egypt, Spain, Ecuador, the U. S. and Canada.

And with surging oil prices today and a “growing electricity crisis” in regions such as Western Australia, southern swaths of Africa and in countries like Chile and China, Goldie says he wouldn’t be surprised to see more companies — particularly base metal companies, which tend to be larger energy consumers, following Barrick’s lead.

Cadence Energy’s key assets are in Alberta’s Peace River Arch and Sturgeon Lake areas.

The oil junior’s properties have a reserve life index of about 13.8 years — consistent with the long-life nature of Barrick’s core gold mining operations, the gold 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 apiece 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 window of $3.37-5.98 per share.

Barrick has also invested in a natural gas power plant in Nevada to