PrairieSky Royalty Ltd.
(PSK-T) C$13.20
Acquisition Increases Liquids Exposure and Fee Title Footprint Event
We are resuming coverage of PSK following the closing of the equity offering used to financing the acquisition of assets from Heritage Royalty on November 29.
Impact: POSITIVE
On November 29, PrairieSky announced the acquisition of assets from Heritage Royalty for $728 million. The assets include royalty production of 2,700 BOE/d (92% liquids) and ~1.9 million royalty acres (1.7 million fee simple) across AB, SK, and MB [Exhibit 1]. The transaction was funded with a new $500 million term loan and a recently closed equity financing (17.2 million PSK shares issued at a price of $13.40 for total gross proceeds of $230.1 million).
PSK estimates that the assets will contribute 2022E royalty revenue of $65 million, which we estimate to be 16/17% accretive to our 2022/2023E CFPS forecasts. In addition, PSK will capture $728 million of tax pools (including $23 million related to seismic), which will be used to reduce 2021 cash taxes by $20 million and will provide incremental cash-tax reduction well into the future. The assets are anchored by large, higher-quality producers, including CNQ, CPG, ERF, WCP, and Strathcona Resources (private) and are focused in large OOIP plays with upside potential through implementation of EOR initiatives and multi-lateral development.
Our View
-
We estimate that the transaction was completed at ~11.5x 2022E cash flow and adds meaningful near-term financial leverage.
-
The significant FCF generation afforded by the royalty model should provide for a relatively quick payback. We forecast modest D/CF of 1.2x at YE-2022E and 0.6x at YE-2023E.
-
CFPS accretion should increase over time as the interest expense associated with the transaction's debt financing is reduced and PSK continues to benefit from the cash tax savings associated with the acquired tax pools.
TD Investment Conclusion
We look forward to following activity on these acquired assets as we believe (but have not modelled) that: 1) there will be incremental value associated with new parties being attracted to drilling opportunities identified on the land and 2) potentially incremental compliance revenue not factored into the transaction's accretion metrics.