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OUR TAKE: Positive. The nuts and bolts of Q1/25 reporting were largely positive, with most of our coverage names beating consensus expectations for Adjusted Funds Flow (AFF) and trading up following their releases. Capital budgets and guidance were also generally confirmed. We have updated estimates for our remaining outstanding names (primarily quarter actualization and minor housekeeping tweaks), with the bigger changes for EQT and KEL discussed in this note. The biggest news during the reporting cycle came from a wave of M&A that saw a few of our biggest names announce bolt-on deals for total consideration of ~$5.0B. We see the Montney acquisitions by ARX and TOU as particularly important. Despite weaker oil prices and market volatility, Montney consolidation continues at a rapid pace, with solid deal metrics. With fewer and fewer high quality assets left to be consolidated, we believe the market should increase its attention on the remaining Montney focused SMid-cap producers. Based on the metrics from the most recent Montney transactions, we believe AAV and BIR among gas-weighted names and KEL and LGN among the oil-focus names have the biggest equity market valuation disconnect versus the M&A market.
KEY POINTS
M&A took center stage during the reporting cycle. Our coverage names announced ~$5.0B (~US$3.5B) in acquisitions during the Q1/25 reporting period. EQT’s ~US$1.8B consolidation of Olympus Energy (~0.5 Bcf/d of production and ~225 gross Marcellus and Utica locations) was the largest of the deals. In Canada, Montney consolidation continued, with ARX and TOU scooping up assets adjacent to current operations. TOU will issue ~13M shares (~$825M) for a pair of acquisitions expected to close in Q2/25, including the remaining 50% WI in Saguaro Resources (Private) for ~$533M, and what was later disclosed as Strathcona Resource’s (SCR-T; R; Kevin Fisk covered) Groundbirch Montney package (plus nine sections of Deep Basin rights) for ~$292M. ARX picked up ~40 mboe/d and ~93,000 acres in Kakwa (also from SCR) directly adjacent to its current development for ~$1.6B in cash. See Exhibit 1 for select transaction metrics and Exhibit 3 for the share price reactions to the announced acquisitions and earnings releases.
Recent deals provide compelling read-throughs for SMid-Cap Montney producers. We view the ARX and TOU acquisitions, as well as the Q4/24 Ovintiv [OVV-N; SO; Kevin Fisk Covered] Karr and Wapiti Montney acquisition ($3.325B plus assumption of the Zama ARO for ~70 mboe/d [50% liquids] and ~109,000 net acres) as important data points for the market value of Montney assets. We have applied the production and land/inventory metrics from these transactions to our SMid-cap Montney names (net of estimated haircuts to account for asset differences) and see up to ~40% upside for AAV and BIR based on the TOU transaction metrics and >100% upside for LGN based on a combination of the TOU and ARX transaction metrics (see Exhibit 2).
The earlier OVV acquisition metrics suggest >100% upside for both KEL and LGN, and up to ~35% upside for NVA. With Montney assets rapidly consolidating into the hands of a few large companies, we believe the remaining SMid-cap names with high quality assets represent compelling value opportunities. In our view, AAV and BIR are materially undervalued relative to prevailing M&A metrics in the gas-weighted group, while LGN and KEL screen as the most attractive opportunities in the Montney oil-weighted group.
Canadian SMid-Cap capital deployment remains resilient. In our pre-Q1/25 reporting update (Q2/25 Natural Gas Price Deck Update) we speculated that producers like KEL, SDE, and potentially even TOU could look to reduce their 2025 capital budgets in the wake of the oil price weakness that followed Liberation Day and the OPEC production increase. We went as far as reducing our capex forecasts for KEL (minus seven wells) and SDE (minus six wells). However, our expectations proved overly conservative, with KEL removing just four wells (and increasing infrastructure spending, resulting in just a ~$3M reduction to its 2025 capital program) and SDE reiterating its 2025 program during the quarter. The smallest name in our coverage group, LGN, also reiterated its 2025 capital program, but management noted that they will review the company’s planned activity for the next ~12 months in light of weaker oil prices. Given that WTI prices appear to have stabilized around US$60/bbl and much of the sector has strong balance sheets, the lack of capex reductions make sense. Nevertheless, spring break-up provides a built-in opportunity for Canadian producers to review their capital plans, and we believe activity levels could come down if WTI prices fall below US$60/bbl over the next couple of months.
Post-reporting share price performance. NVA led our coverage in post-release share price performance, up ~14% in the following three trading days. POU and LGN followed, up ~10% and ~8% after their respective releases. Notably, ARX’s acquisition of Strathcona Resource’s (SCR-T; R; Kevin Fisk covered) Kakwa assets was very well-received by the market, giving the stock a bigger boost than its Q1/25 earnings release
Pertinent Data and Revisions
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