CIBC UpgradeEQUITY RESEARCH
December 16, 2021 Earnings Update
PRAIRIESKY ROYALTY LTD.
Resuming Coverage: Heritage Acquisition Accretive On Multiple Fronts
Our Conclusion
We see this acquisition as an attractive one, enhancing PSK’s oil weighting, significantly increasing its mineral title, and driving strong per-share accretion to our estimates. Although we are not used to seeing PSK take on much leverage, the amount of debt used to finance the acquisition drives the accretion per share, and given the company has minimal capital requirements, we expect free cash flow will see debt levels moderate considerably in the coming years. Our price target increases to $20 from $19, based on 15.6x 2022E EV/DACF on recent strip. We maintain our Neutral rating.
Key Points
Acquisition accretive to our forward estimates. After incorporating the
acquisition and concurrent equity financing, our cash flow per share estimate increases by 20% in 2022. The strong accretion is due to the acquisition being 70% financed with debt and 30% financed with a concurrent equity issuance. While PSK will carry a higher debt level following the acquisition, we expect debt will moderate substantially through 2022 and into 2023 given PSK’s lean dividend payout ratio (~25% in 2022). Our current estimates see PSK exiting 2022 with a D/CF ratio of approximately 1.0x, which further moderates to 0.4x by 2023 year-end.
Acquisition metrics screen reasonable and offer synergies to PrairieSky’s existing footprint and business model. The $728MM purchase price for 2,700 Boe/d (92% liquids) computes to $269,630/Boe/d. While this is above PSK’s trading metric at $165,000/Boe/d, it is comparable to recent royalty deals, despite carrying a higher oil weighting. The quoted cash flow value of the assets at $65MM in 2022 computes to 11.2x, which is in line to our pre-deal trading metrics for PSK in 2022.
While the cash flow impact to PSK is reduced by additional interest charges, it is also favorably impacted by tax pool additions, which reduces cash taxes in the near and medium term. We have also increased our estimate of lease bonus issuance and compliance revenues, which are likely to come with the assets.
Netback enhancement and strong counter-party exposure accompany
the new acreage. The company’s Bakken exposure increases with this
acquisition, which we see as being beneficial for netbacks owing to the light oil nature of the pool. Most of the production, however, is heavy-oil weighted, with volumes in west central and south east Alberta.
Free cash flow allocation will primarily be dedicated towards debt
reduction in the near term. We expect PrairieSky will look to allocate much of its free cash flow towards debt reduction over 2022 and 2023; however, we would not rule out the possibility for small dividend increases at current commodity prices.