TORC Oil & Gas Ltd. VREYD

TD

[retiredcf]

TORC Oil & Gas Ltd.

(TOG-T) C$2.80

Combination with Whitecap Resources In All-Share Transaction Event

TORC announced a proposed combination with Whitecap Resources on December 8. With this note, Dustin Besaw is assuming primary coverage.

Impact: POSITIVE

• Under the proposed agreement, TORC shareholders will receive 0.57 Whitecap shares implying a price of $2.48 per TORC share, or a 4% discount to the closing price on December 8. Although the implied price per TORC share was slightly below the prior closing price, the transaction is an all-stock exchange, which enables TORC shareholders to participate in what we believe is a stronger pro forma entity with enhanced scale and an improved FCF profile (see our recently published Whitecap note that further highlights the transaction merits).

• In our view, the most important aspects of the transaction are the increased scale and enhanced FCF profile of the new entity, which is expected to have pro forma production of ~100 mBOE/d in 2021 and an enterprise value of > $4 bln. We believe investors have continued to gravitate away from smaller, less- capitalized, E&Ps in favor of larger, potential consolidators and this transaction provides TORC shareholders with access to one of the largest light/medium oil producers in the peer group. Overall, we see this as a "win-win" with Whitecap gaining a solid, complementary asset base that we believe will result in more shareholder interest and future upside.

• We see the risk of the transaction not going ahead as proposed as relatively low given the strategic fit and the fact that 33% of TORC shareholders (29% CPPIB, 4% TORC insiders) have agreed to support the transaction. Furthermore, we believe that a competing proposal is unlikely given the asset overlap/strategic merit and required scale to execute.

  TD Investment Conclusion

  In our view, the proposed transaction is step in the right direction for TORC shareholders who now become part of a much larger entity with the scale to continue to execute on potentially accretive acquisitions. Furthermore, we believe that Whitecap will garner more investor interest due to scale and an enhanced FCF profile. Our estimates are unchanged as a result of the proposed transaction, and we are changing our recommendation to TENDER (from Buy), while our target price moves to $3.14 based on the proposed exchange ratio of 0.57 Whitecap shares and our revised Whitecap target price of $5.50.