Target $13.50: Desjardins Capital Market (Nov 2nd 2012):
Legacy Oil + Gas Inc. (LEG C$7.15, TSX)
Rating Buy–Average Risk Target C$13.50
CPP extends US$200m term note to Legacy; creates more stable source of long-term financing
Impact: Positive
Legacy announced that it has entered into an agreement with CPPIB Credit Investments (subsidiary of the CPP
Investment Board) for a US$200m unsecured, five-year term note bearing a coupon of 7.5%. The agreement contains an option for another US$100m of notes, subject to approval by both CPPIB and Legacy. In addition, the bank line was renewed at C$525m, with the next review date on or before April 30, 2013. We are not surprised by the note offering, as we had previously presented this as an option for the company in view of its tight balance sheet. As the full amount of the offering will be applied to Legacy’s bank facility, we now forecast an undrawn bank line of ~C$260m at year-end 2012. Although our cash flow estimates will be reduced marginally due to the additional interest payments, we note that this is not material to our long-term forecast for the company or our investment thesis.
On a comparative basis, we highlight that PetroBakken Energy Ltd. (PBN, TSX, Buy–Average Risk, C$17.50 target) paid 8.625% for its US$900m unsecured, eight-year term note offering in January of this year; the stock reacted positively, gaining 9% in the following week. We would not expect as large of a price appreciation for Legacy following this news, given that its overall balance sheet is in much better shape than PetroBakken’s was at the time. We view Legacy’s term note very positively as it effectively removes balance sheet risk and gives the company considerable flexibility to ramp up drilling activity levels if warranted. Although the note offering will have a slightly negative effect on our go-forward cash flow estimates, we believe this is more than outweighed by the positive implications of a more stable source of long-term financing.
We maintain our Buy–Average Risk rating and 12-month target price of C$13.50.