ON STRATEGY SALE CHIPS AWAY AT DEBT. WHAT COULD BE NEXT?
THE TD COWEN INSIGHT
Non-core asset sales progress CPG's strategy of focusing on its high-impact Montney and Duvernay assets. Potential further dispositions could accelerate debt reduction and help the company achieve a Canadian IG credit rating, in our view.
Impact: POSITIVE
Saskatchewan Non-Core Asset Sales Further Streamline Asset Base: CPG announced the disposition of its non-core Saskatchewan assets at Flat Lake and Battrum to Saturn Oil & Gas Inc. for cash consideration of $600mm (expected close late-Q2/24). These assets were expected to average 13.5 mBOE/d and generate NOI of $210mm (strip) over the next year, implying transaction metrics of $44,444/BOE/d and 2.9x CF.
Pro Forma Guidance: With a closing date near mid-year 2024, the disposition is expected to impact CPG's average 2024E volumes by ~7 mBOE/d. FY24 production guidance has been updated to 191-199 mBOE/d (from 198-206 mBOE/d prior). Given the company was planning minimal capex on the disposed assets, 2024E E&D capex guidance remains unchanged at $1.4-1.5bln.
Potential Infrastructure Asset Sale Could Lead To IG Credit Rating: The company has previously highlighted the possibility of divesting certain infrastructure interests - specifically the infrastructure acquired with the corporate acquisition of Hammerhead last year.
Our View:
While relatively minor from a volume standpoint, the announced upstream asset sales
improve our D/CF forecast to 1.2x in 2024E (from 1.3x), reduce corporate opex, and continue to narrow CPG's overall focus to high-impact plays (Montney/Duvernay). Given natural declines that were likely to occur on these assets, the impact on volumes and CF will be reduced in 2025+. The sales also shed meaningful ARO ($130mm or ~16% of the undiscounted corporate total).
A potential future infrastructure sale could accelerate the path towards an investment- grade credit rating, which could: i) reduce interest cost associated with refinancing LT notes and ii) likely offer more flexible terms than the public high yield market.
If we assume Hammerhead infrastructure assets could fetch $500mm (approximate construction cost) and generate $50mm of annual cash flow to a buyer (10x multiple), this would impact CPG's annual opex by ~$0.67/BOE. If such a sale comes by mid-year, we estimate it could reduce YE-2024E net debt to $2.2 bln. - essentially in line with CPG's net debt target of <$2.2 bln (YE-2024E Net Debt 0.9x H2/24E Annualized CF).