Varcoe: Whitecap Resources Completes Biggest Acquisition in History

As the industry pumps out record amounts of cash and higher profits, we expect more consolidation to happen this year, predicted Rafi Tahmazian, a senior portfolio manager at Canoe Financial.

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Whitecap Resources continues its acquisitive ways in the slick, closing the largest deal to date in its 14-year history by acquiring XTO Energy Canada for $1.9 billion.

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Calgary-based Whitecap announced late Tuesday that it has entered into an agreement to buy XTO from joint owners Imperial Oil and ExxonMobil in a cash transaction, the largest purchase in the Canadian oil and gas industry this year.

The acquisition gives Whitecap, a mid-sized petroleum producer, a significant footprint in the productive Duvernay and Montney games, to go along with its nuclear oil assets in Saskatchewan and Alberta.

It also marks the company’s fifth major purchase since the start of the pandemic, a “truly transformational acquisition” of long-lived assets, CEO Grant Fagerheim said.

“These types – we call them once-in-a-lifetime opportunities – do not occur (often). XTO Canada did not spend any money on their conventional assets in Canada,” Fagerheim said in an interview on Wednesday.

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“I am so convinced that energy will be needed, will be used, from an energy security perspective… moving forward. Those who have a good inventory of opportunities for the future should be rewarded.”

With oil and gas prices soaring this year following the Russian invasion of Ukraine, mergers and acquisitions activity in the Canadian slick has been relatively calm, although it has picked up steam recently.

According to data from Sayer Energy Advisors, the XTO deal is the largest acquisition of the year. It has brought the total value of mergers and acquisitions in Canada’s industry to an estimated $4.5 billion, down from $11.1 billion in the first half of 2021.

Earlier this month, Cenovus Energy agreed to buy BP’s stake in the Sunrise oilands assets for $600 million in cash — and a contingent variable payment of up to $600 million — while Vermilion Energy announced in March that it would buy Leucrotta Exploration. buy for $530 million.

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As global energy prices escalate, it has been difficult for bidders and sellers to agree on valuations and close deals, said Eight Capital analyst Phil Skolnick. “But this shows that there are still willing buyers,” he said.

As the industry pumps out record amounts of cash and higher profits, we expect more consolidation to happen this year, predicted Rafi Tahmazian, a senior portfolio manager at Canoe Financial.

“The system is hugely cashed in and these producers are going to use their money to buy assets,” he said.

With Whitecap’s latest deal, the company will significantly expand its natural gas portfolio. The XTO properties produce approximately 32,000 barrels of oil equivalent (boe) per day, more than two-thirds of which comes from natural gas volumes.

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The deal includes 567,000 net acres in the Montney shale and 72,000 net acres in the Duvernay shale, as well as additional acreage in Alberta, according to Imperial Oil.

Industry players noted that interest in the XTO sale was high and the deal in the Canadian sector was closely watched.

Once the transaction closes, likely in late September, Whitecap’s net debt will increase to $2.1 billion. The company said that number is expected to drop to $1.5 billion by the end of this year.

Whitecap also increases its monthly dividend by 22 percent. Further dividend hikes are expected once net debt reaches $1.8 billion, and then again when it drops to $1.3 billion, which is expected to happen in the first half of 2023.

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Imperial and Exxon announced in January that they would be listing XTO Energy for sale. Skolnick initially expected it to bring in bids of about $1.1 billion, but rising commodity prices pushed its value up through the year.

Imperial, which will raise $940 million from its ownership stake in XTO, said the deal was in line with its broader strategy to focus on the oil sands.

For Whitecap, it marks a new acquisition in a consolidation phase with production nearly doubling from an average of 69,000 boe per day in 2020 to nearly 133,000 boe per day in the first quarter.

Over the past two years, Whitecap has used its strong balance sheet to acquire NAL Resources, TORC Oil & Gas, Kicking Horse Oil & Gas, before acquiring TimberRock Energy Corp. took over in January.

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Analyst Jeremy McCrea with Raymond James praised the long-term potential of the XTO properties, noting that Whitecap is expected to grow asset production from 50,000 to 60,000 boo per day within three to five years.

“The value won’t really come alive for a few years,” he said.

Whitecap’s stock fell 63 cents, closing at $9.12 on the Toronto Stock Exchange Wednesday.

Eric Nuttall, a senior portfolio manager at Ninepoint Partners, who owns shares in Whitecap, sees the value for the Canadian producer to buy high-quality properties in Montney and Duvernay.

But in a competitive bidding process, “they wouldn’t get the deal of the century” by acquiring XTO.

“With the benefit of time, this will look like a good asset to them,” he said.

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“But relative to what they paid, I can buy assets of comparable or higher quality at a cheaper price tag, if only because of the poor prices of Canadian small-cap and mid-cap energy stocks.”

Whitecap is expected to increase its total development capital expenditures by 35 percent to approximately $1 billion next year, while increasing total corporate production to 168,000 to 174,000 boes per day.

With companies’ continued focus on paying off debt and returning money to shareholders, much less emphasis has been placed on increasing production in the industry this year than during previous energy price spikes.

Fagerheim said Whitecap is committed to deleveraging and returning more money to investors, but also sees the need to pursue measured growth for the longer term.

“We will always have to grow a little bit,” he added.

“And this is where modest growth matters. If you’re just producing stuff and taking your business out of it, I don’t think you’ll have a sustainable business for the long term.”

Chris Varcoe is a columnist for Calgary Herald.

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