Crescent Point Energy (TSX: CPG) has announced a significant development in the form of an agreement to acquire Hammerhead Energy (TSX: HHRS), a producer focused on oil and liquids-rich assets in Alberta’s Montney region. This acquisition comes with a total price tag of approximately $2.55 billion, inclusive of assumed net debt of around $455 million, to be paid in cash and common shares of Crescent Point.
Craig Bryksa, President and CEO of Crescent Point, highlighted the strategic importance of this move, stating, “Upon completion, Crescent Point will hold a dominant position in both the Alberta Montney and Kaybob Duvernay plays, complementing our low-decline, long-cycle assets in Saskatchewan.”
Key highlights of this acquisition include the addition of approximately 800 net Montney drilling locations, increasing the estimated corporate premium inventory to over 20 years, an over 15 percent increase in excess cash flow per share over the next five years on average, and a plan to raise the base dividend by 15 percent to $0.46 per share annually.
The acquisition also puts an anticipated leverage ratio of 1.1 times net debt to adjusted funds flow by the end of 2024, with WTI oil prices at $80/bbl.
Crescent Point’s revised 2024 preliminary guidance, now incorporating the transaction, foresees an estimated annual production of 200,000 to 208,000 barrels of oil equivalent per day (65% oil and liquids). This is based on development capital expenditures ranging from $1.45 to $1.55 billion. This budget is projected to generate over $1.2 billion of excess cash flow at a WTI oil price of $80/bbl.
Around 80% of Crescent Point’s 2024 budget is expected to be allocated to its Alberta Montney and Kaybob Duvernay plays, with the remaining capital directed toward the company’s low-decline, long-cycle assets in Saskatchewan.
The revised capital expenditures budget now incorporates approximately $400 million of development capital for the newly acquired assets, which are expected to grow from about 56,000 barrels of oil equivalent per day in 2024 to approximately 80,000 barrels of oil equivalent per day within the company’s five-year business plan. Additionally, capital expenditures for these acquired assets are expected to moderate after 2024, leading to significant excess cash flow generation.
The transaction metrics, based on estimated production for the acquired assets of around 56,000 barrels of oil equivalent per day in 2024 and assuming WTI at $80/bbl, $3.50/mcf AECO, and a $0.73 US$/CDN exchange rate, are as follows:
- 3.4 times annual net operating income.
- $45,500 per flowing barrel of oil equivalent.
- $8.25 per barrel of Proven plus Probable (2P) reserves of 308.7 million barrels of oil equivalent. Including approximately $2.7 billion of undiscounted future development capital, the transaction equates to $16.93 per barrel of 2P reserves, resulting in a recycle ratio of approximately 2.2 times.
- The net present value of the Proven and 2P reserves of the acquired assets totals approximately $2.1 billion and $3.4 billion, respectively.
The total consideration for the transaction is approximately $2.55 billion, including approximately $455 million of Hammerhead’s net debt. Hammerhead shareholders will receive $21.00 per fully diluted common share of Hammerhead, with a combination of approximately $1.5 billion in cash and 53.2 million common shares of Crescent Point, totaling approximately $548 million.
The cash portion of the transaction will be funded through Crescent Point’s existing credit facilities, a new three-year term loan of $750 million, and approximately $500 million in gross cash proceeds from a separately announced equity offering.
The transaction has received unanimous approval from the boards of directors of both Crescent Point and Hammerhead. However, it is subject to court approval, as well as approvals from the Toronto Stock Exchange and other stock exchanges, along with regulatory clearances and other customary closing conditions.
The agreement includes provisions for mutual non-completion fees of $85 million should the transaction not be completed or is terminated under specific circumstances. However, approximately 82% of Hammerhead shares outstanding, including those held by certain directors and all officers, have entered into voting support agreements with Crescent Point in favor of the transaction and against any alternative or competing offers.
The acquisition comes only months after Crescent Point acquired Spartan Delta’s Montney assets in a $1.7 billion all-cash deal. That transaction was said to add 600 Montney locations in Alberta to Crescent Point’s inventory, providing what is said to be 20 years worth of drilling opportunities. The purchase is said to be immediately accretive, and is expected to increase excess cash flow per share by 20%, while the deal is slated to add 38,000 boe/d to the firms operation.
Crescent Point Energy last traded at $10.94 on the TSX.
Information for this briefing was found via Sedar and the sources 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.