Cathedral Energy Rallies After Announcing US$100 Million Acquisition Of US-Based Drilling Firm

Cathedral Energy Services Ltd. (TSX: CET) announced on Monday the agreement to acquire US-based directional drilling firm Altitude Energy Partners. The transaction is reportedly for a total cash consideration of US$100 million.

The acquisition is set to be satisfied in a cash and stock deal: composed of US$62.7 million in cash and around 67.0 million shares at $0.71 per share–a 12.3% premium to the 5-day average price. The amount of shares represents 45.4% equity in Cathedral.

The transaction values the pro forma merger at $216 million in enterprise value and $118 million in market capitalization.

“This transaction with Altitude represents a transformative step forward by Cathedral, with a combined US market share of approximately 7%,” Cathedral CEO Tom Connors.

Connors added that the cash flow the Calagary-based company would generate from acquiring Altitude would be expected to pay back the transaction cost in under three years.

“Effectively, if you would look at the 7% market share, and if you drive that through the business, it would almost double our free cash flow. We’re forecasted to get US$25 million. And if you play out three years–divided by US$100-million acquisition–and what that [means] for free cash flow, it’s a substantial increase from where we stand today,” Connors said in a BNN Bloomberg interview.

Following the announcement, the company’s share price spiked by 32% on the day.

The move comes just days after announcing the acquisition of fellow Calgary-based LEXA Drilling Technologies in an all-stock deal and Canadian directional drilling business Compass Directional Services for $9.5 million.

Altitude CEO Lee Harns is expected to be employed under Cathedral to still lead the Altitude business unit. Following the acquisition, Harns will own 6.2% of the company. Meanwhile, Altitude founder J.R. Boyles will be given a seat on the Cathedral board and would own 9.1% equity of the company following the transaction.

The company said that the acquisition is set to be satisfied through cash on hand and credit financing. Cathedral inked a three-year $99 million credit facility with Canadian Western Bank to partly satisfy the cash consideration of the acquisition.

The transaction is expected to close by early July 2022. Since the acquisition would effect a substantial equity shift exceeding the 25% limit, the company needed to secure shareholder approval for the transaction. However, it opted to obtain written consent instead from shareholders that collectively hold greater than 50% of the float.

Cathedral Energy last traded at $0.66 on the TSX, up 32% on the day.

Information for this briefing was found via Sedar, BNN Bloomberg, and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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