Whitecap Pays Up For Kicking Horse In $300 Million Cash And Stock Deal

Summary

• Whitecap acquisition looks accretive on reported metrics.
• Those metrics are forward-looking and require effective development of the asset.
• The acquisition is more expensive than other recent deals but may still work out well for Whitecap if the follow-on is well executed.

Photo by lindsay_imagery/E+ via Getty Images

The trend of consolidation in North American oil and gas assets continues, as Whitecap Resources (WCP) announced yesterday that they are acquiring privately-held Kicking Horse Oil & Gas for an aggregate consideration of $300 million, consisting of 34.5 million Whitecap common shares, $56 million in cash and the assumption of $54 million net debt. The acquired assets are in the condensate-rich Kakwa Montney. The 92 additional sections (60 net) of land will effectively double Whitecap's overall Montney acreage.

Deal

The Kicking Horse assets add current production of 8,000 boe/d, but Whitecap plans to grow this to 18,000-19,000 boe/d in the next 12-15 months to generate annualized free cash flow of $72 mm. The transaction adds 575 (362 net) drilling locations (12% booked), 10.5 MMBoe PDP, 59.4 MMBoe 1P, and 89.0 MMBoe 2P reserves. Some more implied transaction metrics shown below:

(source: Whitecap Resources, Stifel)

Rationale/Strategy

The strategic rationale for Whitecap’s acquisition is that they are making an accretive acquisition, growing free cash flow, and growing size with quality acreage while retaining a flexible balance sheet. Whitecap believes the assets will require $75M to grow production, and the targeted production of 18-19 Mboe/d will require ~$80 mm maintenance capital annually, driving $152 mm of FFO, or $72 mm FCF each year.

Management also believes these assets are acquired for 2.5x FFO, $19,000 per flowing boe and ~$9.50/boe on a 2P reserve basis. The company’s net debt/EBITDA remains at 1.2x in 2021 and forecasted to fall to 1.0x in 2022. Under management’s assumptions, the numbers confirm an accretive deal to 2022 CFPS, FCFPS, and PPS. This looks like a solid move, however we’d like to stack this against other comparable transactions for more context so we’ve included the below table from our database:

(source: Bison Interests)

Recent Comparable Transactions

One recent transaction comp is Crescent Point’s (CPG) February 2021 acquisition of Shell’s (RDS.A) Kaybob Duvernay assets, which brought production of about 30,000 boe/d (57% condensate) for $30,000 per flowing boe and $12.87 per boe of 2P reserves at 107.4 MMboe. Comparatively, Whitecaps most recent acquisition paid 30% less per flowing barrel and 26% less for 2P reserves, at $19,000/boe and ~$9.50/boe for 2P reserves.

Another comp is Whitecap’s December 2020 acquisition of TORC Oil for $900 million added 25,000 boe/d of very oily (88% oil) production and 140,000 Mboe of 2P reserves to the company, at $36,000 per flowing boe of production. The WCP-Kicking Horse deal is at a 90% discount for per flowing boe compared to their TORC deal. The current WCP-KH deal most resembles Enerplus’s (ERF) acquisition of Bruin E&P HoldCo for $465 million cash, which added 24,000 boe/d of production (72% oil) and 84,100 Mboe of 2P reserves, at $19,300 per flowing boe of production.

Market Response

The market had a favorable response to this deal, with Whitecap stock up over a 5 day period before and after the deal announcement, versus peer Crescent Point and an oil and gas producer ETF (XOP):

Data by YCharts

Our Assessment

Looking at the comparable transactions, this deal passes the eye-test, seemingly well priced and accretive – however it’s important to keep in mind that Whitecap’s quoted transaction metrics are calculated assuming fully grown production, which is 225+% of current production levels. For this reason we’ve included the current production profile in our table, to better outline the transaction metrics on the current asset profile.

We see the same potential that Whitecap does, but if the pro-forma company comes up short of projected production/revenue or incurs more capex, it could turn into a dud. The assets require a lot of growth and we are yet to see how attractive this deal is until the assets are integrated and operation results are reported. We look forward to keeping track of this deal’s performance, the market’s response, and staying on top of the continuing oil and gas M&A trend.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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