Desjardins Securities Desjardins Securities analyst Chris MacCulloch thinks the likelihood for an offer to compete with Whitecap Resources Inc.’s (WCP-T) all-stock acquisition of TORC Oil & Gas Ltd. (TOG-T) is low, citing “the friendly nature of the deal and the significant asset overlap between the companies.”
“We also believe the transaction was a shareholder-friendly ending for TOG by providing it with exposure to a largerscale entity offering operational synergies and an attractive dividend payout,” he said.
Accordingly, Mr. MacCulloch moved his rating for TORC to “tender” from “buy” and said “there’s no room for entrenchment in the trench warfare for investor mindshare.”
“The two companies have significant asset overlap, which will be enhanced by the upcoming closing of the NAL Resources acquisition by WCP in early January. Consequently, they should be natural partners in creating a more scalable investment vehicle in the Canadian conventional light oil space. From our perspective, by combining with another strong company on shareholder-friendly terms, WCP has now clearly pulled away from the pack as one of the few ‘must own’ stocks in the Canadian E&P landscape outside of the large caps, which should inevitably benefit TOG shareholders. In our view, by setting personal ambitions aside and fulfilling their fiduciary duty, the TOG board and management team led by example and have played a key role in executing a shareholder-friendly transaction. We can only hope that others will eventually follow suit, as this sector desperately needs to bulk up to create leaner, meaner companies to compete for investor mindshare.”
Mr. MacCulloch moved his target for TORC shares to $3.15 from $2.75 to reflect the exchange ratio laid out in the deal. The average is $2.79.
Concurrently, he raised his target for Whitecap shares to $5.50 from $3.75 with a “buy” recommendation, seeing it “bulking up to create a Canadian conventional light oil champion.” The average is $4.53.
“Through the combination with another strong light oil producer with a comparable corporate decline rate, operating netback and balance sheet, WCP has solidified its position as one of the few ‘must own’ stocks in the Canadian E&P landscape outside of the large caps, in our view,” he said. “The asset overlap between the two companies is compelling and should drive real operational synergies, particularly when combined with the upcoming closing of the NAL Resources acquisition on January 4.
“After layering in the acquisition and preliminary 2021 guidance of 99,000–101,000 boe/d [barrels of oil equivalent per day] based on a $280–300-million capital program, we see a modest 3-per-cent increase in our 2021 CFPS estimate,” he said. “However, the improvement to pro forma 2021 free cash flow metrics is considerably more impressive at 35 per cent, expanding to $340-million (from $250-million) based on current strip prices, which supports the enhanced dividend payout. Furthermore, we believe that management has set conservative targets with respect to production and operational synergies stemming from both the NAL and TORC transactions.”
Elsewhere, CIBC analyst David Popowich raised his target for Whitecap to $6 from $3.50 with an “outperformer” rating.
CIBC’s Jamie Kubik increased his target for TORC to $3.42 from $2.25, maintaining an “outperformer” rating.