PrairieSky Royalty Ltd. Bulking up the core
Our view: We view the Heritage asset acquisition favourably given overlap with existing holdings and high weighting to fee title, though valuation was toward the high end of our expectations. While the addition of debt may be viewed as a departure from prior messaging, we believe the strategic nature of the asset, tax benefits, and accretion to key metrics offset what we view as manageable financial leverage.
Key points:
Adding fee title to the core. PrairieSky acquired 1.9 million royalty acres (1.7 million acres of fee title) concentrated in Alberta around core holdings, adding 2,700 boe/d (92% liquids) of production. The package was acquired for $728 million, funded with a $230.1 million bought-deal equity financing ($13.40/share) and a $500 million 2-year term loan. The package included $728 million in tax pools ($705 million COGPE, $23 million CEE), which management estimates will reduce PSK's 2021 tax liability by roughly $20 million in addition to future deductions.
Deal metrics consistent with fee transactions; Accretive to PPS/CFPS.
Headline metrics of $270k/boe/d and ~11x cash flow are generally consistent with historical fee title transactions, though toward the upper end, which we believe underscores strategic fit (Exhibit 2). Incorporating the deal, our PPS estimates increase 3.5% in 2022E and are roughly flat in 2023E. CFPS increases by 3%/20% in 2022E/23E, though this includes the impact of our recent commodity price deck revision.
Activity set to ramp up. At our current outlook, we expect activity to continue to ramp through 2022, underpinning incremental organic growth potential from legacy and newly acquired assets. In addition, we believe management is likely able to reinvigorate producer activity on acquired land (royalty concessions, seismic/geologic data, etc.) and see the implementation of conventional multi-lateral drilling as likely given broad success in the Clearwater.
Taking on debt; timely repayment likely to be a key focus. Incorporating the deal, we believe PSK will carry roughly $410/$125 million in net debt by year-end 2022E/23E, mapping to a conservative D/CF ratio of 1.2x/0.3x (peers 0.7x/0.6x). While this may be perceived as a slight departure from historical messaging on debt, we believe the strategic nature of the acquired assets and improved cash flow profile underpin the decision.
Sector Perform recommendation. We have left our Sector Perform recommendation and $18/share target price unchanged but view increased exposure to oil/liquids constructively and believe the company will likely be more active in encouraging payors to ramp activity on their newly acquired land. We continue to believe a premium valuation multiple is warranted by the company’s perpetual resource exposure/optionality and solid balance sheet, though we think the current spread sufficiently accounts for these factors