Canada Strikes Largest E&P Deal Of 2015, But Megadeals Elusive

In the largest North American E&P deal so far in 2015, Canada’s Whitecap Resources Inc. (TSE: WCP) said March 18 it will purchase private light oil company Beaumont Energy Inc. in a primarily stock transaction.

Based on an agreed upon Whitecap share price of $14.05, the transaction is valued at $587.5 million, including debt.

North America has yet to see a megadeal—a transaction of at least $1 billion—in 2015. In 2014, E&Ps in the U.S. and Canada racked up at least 21 such deals, with an average $2.6 billion value, according to A-Dcenter.com.

Whitecap continues to actively consolidate in the Viking oil asset in the Kerrobert area of west central Saskatchewan. It ranks as one of the most economic oil plays in Canada.

Since the transaction is largely funded with new shares, Whitecap will preserve its balance sheet strength while providing modest accretion, said Grant Hofer, an analyst with Barclays. Based on the deal’s price tag, Whitecap paid $115,200 per barrel of oil equivalent per day (boe/d).

Beaumont’s acreage offsets Whitecap’s lands and production in the Viking core. Whitecap said its average 2015 production after the acquisition will increase 10% to 39,700 boe/d.

“The assets are near Whitecap’s existing core Viking assets and have delivered exceptional growth over the past 2.5 years,” Hofer said.

While the deal adds 5,100 boe/d in production, 97% oil and NGLs, it comes at higher decline rates, Hofer said.

“Although we are mindful of the steep declines on the new assets, the company’s financial metrics are all neutral/ improving while the depth of the drilling inventory is meaningfully enhanced,” Hofer said.

Whitecap said the current base decline for Beaumont’s assets is 45%, due to the recent growth phase in the property. Whitecap’s more moderate capital pace puts declines at less than 30% by late 2016, the company said.

The deal adds 699.6 net locations with development opportunities and waterflood implementation. Whitecap plans to drill 70 wells per year on the new lands, giving them roughly a 10-year inventory that should support the company’s 3-5% growth target, Hofer said.

In 2015, the company said it expects cash flow to increase by 15% to $473 million from $410 million. By 2016, volumes could grow by 5,700 boe/d, up 12%. The growth would be funded with reinvesting about $107 million, or 62% of Whitecap cash flow through 2016.

Financing

Whitecap will acquire Beaumont shareholders’ shares in exchange for 0.40 of a Whitecap common share, with an option to take a portion of the consideration in cash up to a maximum of $103.4 million. Whitecap will also assume Beaumont’s net debt, estimated at $70.5 million as at Feb. 28. The deal will use $103 million in cash supported by $110 million bought-deal equity financing.

The $110 million equity financing is based on about 8.1 million subscription receipts being sold at $13.50 each. A subscription receipt is a share carrying the right to be exchange for common stock.

The transaction is expected to close by May 8.