5% dividend increase on the back of Deep Basin Acquisition
Transaction brings new core area and increased sustainability
Last night, Long Run announced the acquisition of 7,000 boe/d (25% liquids) of Deep Basin, liquids rich, gas assets. On top of the current low decline, the move signifies a step into a new core area that offers multi-zone potential and 220 net drilling locations. Total consideration is pegged at $225 million and includes Long Run exchanging 400 bbls/d of heavy oil in the greater Lloydminster area. Acquisition metrics equate to $32,140/boe/d and 4.0x cash flow, making the acquisition accretive on 2015 metrics, we estimate the transaction is marginally dilutive when we account for the $120 million equity financing. Overall, we view the transaction as positive given it adds a much needed new core area offering drilling upside with a low base decline. In the end, we believe Long Run has become a more sustainable company.
To be partially funded through $120 million equity issue
To partially finance the deal, the company entered into a bought deal financing, issuing 23.53 million subscription receipts at a price of $5.10/share, for gross proceeds of $120 million. The remainder of the acquisition will be financed through existing credit facilities and, upon closing of the transaction, the company anticipates increasing its credit facility by $100 million, to $575 million. Accounting for the acquisition, we see the company exiting 2014 carrying $510 million in net debt, equating to a 1.6x trailing 2014 D/CF.
Deal brings increase to dividend and improved sustainability
In our view, a key aspect of this deal is its impact on corporate declines, inventory expansion and ultimately the company’s sustainability. Long Run estimates their corporate decline will fall from 31% to 29.5% pro forma, and sustainability is further bolstered by the addition of an estimated 220 net low-risk drilling locations across a multi zone asset base. In combination with the deal, Long Run has announced a 5% increase to its dividend, to $0.42/share per annum.
Maintaining BUY rating and $7.25 target price
We are maintaining our BUY rating and $7.25 target price as we believe the acquisition furthers the company’s ability to distribute cash flow to shareholders over the long-term. Based on the current share price, Long Run’s pro forma yield sits at 7.4%, couple this with the estimated 2% debt adjusted per share production growth and the company is positioned to deliver an all-in return nearing 10%. Our target is based on a combination of our Risked NAV and a 4.5x 2015 EV/DACF multiple.
Link below will provide PDF of report
https://www.investorvillage.com/uploads/8056/files/LRE-04-10-14-GMP-MC.pdf