Citing recent share price weakness, iA Capital Markets analyst Elias Foscolos raised his rating for Prairiesky Royalty Ltd. to “strong buy” from “buy.”
The upgrade following the closing of its $230-million equity financing with proceeds being used to help acquire $728-million in royalty production and fee simple lands from Heritage Royalty Trust, which Mr. Foscolos called “an ideal fit.”
“As this is an asset transaction, $728-million of additional tax pools will be added to PSK which will reduce future taxes,” he said. “In 2021, the Company will save $20-million in cash taxes (approximately 3 per cent of deal value immediately). This transaction will also add top-tier royalty payors and create a more contiguous block of royalty lands, which should strengthen PSK’s value proposition to oil and gas producers.”
“The acquisition has a number of positive attributes including increasing production per share, increasing oil weighting, providing a substantial increase in tax pools, and additionally adding 1.9 million acres of predominantly fee simple lands. Although the acquisition is largely financed with debt, we believe that de-leveraging will be rapid and by year-end 2022 debt/EBITDA will migrate to slightly over 1.1 times. Along with modelling the acquisition, we have lowered our commodity price forecast for 2022.”
Concurrently, Mr. Foscolos lowered his commodity price outlook for 2022 by almost 5 per cent due to weaker oil and gas prices brought on by the emergence of the Omicron variant.
However, he maintained a $19 target for PrairieSky shares, which is 2 cents below the consensus on the Street.
“Relatively conservative investors that are seeking to either maintain or increase exposure to the oil and gas sector, but that may be intimidated by the volatility seen in commodity markets over the past several years, should consider investing in PrairieSky,” said Mr. Foscolos. “Unlike conventional oil and gas producers, royalty companies, including PSK, offer diversification across multiple E&P companies and multiple plays at a much lower risk than an individual oil and gas company. Additionally, PrairieSky differentiates itself from the rest of the Canadian royalty peers by having the highest quality royalty lands, fee simple lands that have the potential to create royalty revenues in perpetuity without capital outlays.”
Others making target changes include:
* Canaccord Genuity’s Anthony Petrucci to $20 from $19 with a “buy” rating.
“The acquisition is highly accretive for PSK, increasing our CFPS [cash flow per share] estimates by 14 per cent in 2022,” Mr. Petrucci said. “The bulk of the acreage acquired (1.7 million acres) was fee simple land, bringing corporate fee simple acreage to nearly 10 million acres, with over 18 million royalty acres in total. In our view, the company’s dominant land position should continue to reward shareholders long into the future.”
* Raymond James’ Jeremy McCrea to $22.50 from $22 with an “outperform” rating.
“The acquisition of 1.9 million royalty acres (90-per-cent mineral title) from Heritage Royalty strengthens the PrairieSky business in almost all respects,” he said. “Not only is the acquisition 17-per-cent accretive to FFO per share, but it adds multiple decades of inventory that we believe has not been actively licensed over the past several years. With this acquisition we believe the risk/reward for PSK shares becomes even more compelling, especially in the context of a muted share price reaction so far and the organic production growth likely to emerge on the assets.”