TD commentEvent
WCP to buy XTO Canada for $1.9Bn ($1.7Bn after net working capital)
Impact: NEUTRAL
Transaction Summary:
Whitecap will fund the acquisition with cash. This will be partially funded by a new four-year term loan of $1.1Bn, that brings the company's total available credit capacity to $3.1Bn (with expected net debt of $2.1Bn upon closing by the end of Q3/22).
The acquired assets include current production of ~32 mBOE/d (30% liquids). Of this amount ~11 mBOE/d is from the Montney and ~21 mBOE/d is from the Duvernay. The assets carry 2P reserves of 403.2 mmBOE (35% liquids) and total net land of 639,000 acres with 484 Tier 1 locations.
Based on US$85/bbl WTI and C$4.50/GJ AECO, the company anticipates the assets to generate NOI of ~$500 million in 2023E.
We calculate transaction metrics of 3.3x 2023E NOI and $4.22/2PBOE. Relative to the existing portfolio, the acquired assets are higher-growth and carry significant undeveloped (and unbooked) inventory potential. Looking ahead, Whitecap expects the acquired assets to contribute 36 mBOE/d to production in 2023E and plans to grow the assets to 50-60 mBOE/d over the next 3-5 years.
We understand that the bulk of the growth will come from the Montney portion of the portfolio, but given recent competitor results, the Duvernay has become increasingly interesting.
WCP's return of capital framework was revised on the back of the deal including an immediate bump to the base dividend which will be increased by 22% to $0.0367/ share monthly (from $0.03) beginning in Q3/22. While this will likely result in the deferral of our previously-forecast 2023 NCIB participation while transaction-debt is repaid, the company did provide a refreshed strategy around future dividend increases once debt hurdles are reached.
TD Investment Conclusion
This transaction adds significant production, CF, and running room. Furthermore, WCP is able to complete this sizable transaction without issuing equity or stretching leverage metrics
Revised 2022 and 2023 Guidance Whitecap updated 2022E production guidance to a range of 138-140 mBOE/d (from 130-132 mBOE/d) based on a capex budget of $620mm (from $570mm). The company's preliminary 2023 production outlook increases to 168-174 mBOE/d (from 135 mBOE/d) on capex of $900mm-$1.1Bn (from $740mm).
Revisions to TD Estimates Cloud the Accretion Picture The company estimates the transaction is 27% accretive to CFPS and 20% accretive to FCF/share. Despite the company-stated deal accretion metrics, we have increased our 2023 CF estimate by 12% and our CFPS estimate only slightly. This does not reflect our view of the acquisition itself, but rather Whitecap's newly disclosed pre-transaction 2023 CFPS estimate of $2.66. This figure was comfortably below both TD ($3.16) and prior Consensus ($3.28). Based on FactSet data, the consensus estimate was predicated on ~US$85/bbl WTI (which aligns with WCP's outlook). Net of a series of tweaks to the existing model, including eliminating forecast share repurchases through 2023, we have increased our 2023 CFPS forecast by 1% (to $3.17). Although this is below WCP's preliminary 2023 forecast of $3.37, our estimate is predicated on US$10/bbl lower WTI and $1/mcf lower AECO than WCP's internal modeling. Under comparable pricing scenarios, our forecast would be modestly higher than WCP's outlook (Exhibit 8). Rather than simply adding the acquired CF to our previous estimates, we have used this opportunity to recalibrate our CF outlook