CPG:CC - Crescent Point Energy Makes A Good Strategic Move In Acquiring Hammerhead Energy

2023-11-08 08:08:05 ET

Summary

• Crescent Point Energy agreed to acquire Hammerhead Energy in a stock and cash transaction valued at CDN$2.55 billion.
• Crescent Point Energy is paying a premium over what its shares are going for, but the deal does seem to make sense.
• The combined company will have 350,000 net acres in the Alberta Montney patch and be the 7th largest exploration and production company in Canada.

November 6th ended up being a really interesting day for shareholders of both Crescent Point Energy (CPG) and Hammerhead Energy (HHRS). After the market closed, news broke that the former had decided to acquire the latter in a stock and cash transaction valued at CDN$2.55 billion . Initially, shares of Crescent Point Energy declined in after-hours trading while units of Hammerhead Energy moved higher. This is common in the market. However, when you dig into the actual data, I would argue that Crescent Point Energy, a company I have been bullish about in the past, is actually getting a pretty decent deal here. Although uncertainties do still exist, absent something material and negative coming out of the woodwork, I would say that shareholders of Crescent Point Energy should be happy with this maneuver, though it's clear that Hammerhead Energy's investors are walking away with the better terms.

A necessary note

Both Crescent Point Energy and Hammerhead Energy are companies that are based out of Canada. As such, their financial results utilize Canadian dollars as opposed to U.S. dollars. Because of this, we do have some complications associated with this transaction. For the purpose of clarity, all references to dollars in this article are references to U.S. dollars unless otherwise stated. The conversion in question is based on the current exchange rate between the two companies as of the time of the writing of this article.

A good deal

According to the press release issued by Crescent Point Energy on November 6th, the company had agreed to acquire Hammerhead Energy in a cash and stock deal valued at CDN$2.55 billion. This translates to about $1.86 billion. There are actually three components to this deal that need to be discussed. First and foremost, we have the fact that the transaction will involve Crescent Point Energy absorbing all of the net debt that is on Hammerhead Energy's books. That implies approximately CDN$455 million, or $332.2 million. Second and third, of the CDN$21 per share purchase price, which works out to $15.33 per unit, $1.10 billion will be in the form of cash, while the remaining $425 million will be in the form of shares of Crescent Point Energy. If these numbers seem a bit different from the press release, it's because I'm using closing prices on November 6th. For instance, the $425 million worth of shares that I listed was valued in the press release at $400 million after factoring in currency differences.

In order to fund the purchase, the management team at Crescent Point Energy is borrowing $547.5 million under a three-year term loan program from an existing credit facility. It's also issuing additional shares. The goal is to get $365 million of gross proceeds from the issuance of 48.55 million shares at a price of $7.52 per share. But underwriters have an option to buy another 7.28 million shares in exchange for another $54.8 million. This should bring proceeds up to $418.8 million in all. When combined with the 53.20 million shares that shareholders of Hammerhead Energy will receive, that translates to 109 million shares, effectively diluting current shareholders of Crescent Point Energy by 16.9%.

In some respects, this deal makes a lot of sense. For starters, Hammerhead Energy and Crescent Point Energy have a significant amount of acreage that is very close together in the Alberta Montney patch. At present, Hammerhead Energy has 105,000 net acres located in the oil fairway in that area, with about 50% of the 56,000 boe (barrels of oil equivalent) per day of output expected for 2024 coming in the form of liquids. When added to Crescent Point Energy's footprint, the combined company will have 350,000 net acres in that region. In fact, upon completion of this deal, the combined company will be the 7th largest exploration and production company by production volume in Canada. And approximately 65% of its output will be in the form of liquids.

As you will see shortly, the purchase price of Hammerhead Energy is actually quite high relative to what Crescent Point Energy is trading for. And it's because of that premium that the market reacted the way that it did. However, management is not making a bet on the present day. Rather, they are making a bet on the future. This is because, with the current plan for capital expenditures, they expect the assets that are being acquired to grow to roughly 80,000 boe per day worth of output over the next five years. That is a significant ramping up on top of the 38,000 boe per day of output forecasted for Crescent Point Energy on its own for 2024.

Of course, this does cost money. That is why, in order for the combined firm to generate between 200,000 and 208,000 boe per day of output next year, management intends to spend between CDN$1.45 billion and CDN$1.55 billion on capital projects. Of that, about CDN$400 million will be dedicated to the assets that are being acquired in this deal. Even after spending all that money, however, the expectation is for the company to generate more than CDN$1.2 billion in excess free cash flow next year so long as WTI crude prices average around $80 per barrel. It's also worth noting that Crescent Point Energy is forecasting up to CDN$1.3 billion of tax benefits over time and it has some value protection thanks to an estimated CDN$500 million of infrastructure assets that it can capitalize on.

In terms of the price today, the purchase is not exactly cheap for shareholders of Crescent Point Energy. Based on closing prices on November 6th, Crescent Point Energy is trading at an enterprise value to operating cash flow multiple of about 3.8. That compares to the 5.3 implied buyout price for Hammerhead Energy. Clearly, the market is upset about that disparity even though both companies look attractive at those prices. But to put matters another way, Crescent Point Energy is bringing in 82.7% of the cash flow to the combined company while its shareholders are only getting 77.5% of the value of the transaction. While this may be disappointing for investors, there is the prospect of synergies from the deal. Management called the synergies 'significant', but did not go beyond that to provide specific estimates. Add on top of that the prospect of growth over the next few years, and I would argue that any meaningful drop in the share price of Crescent Point Energy would be an overreaction.

Takeaway

Based on the data provided, I must say that this purchase is an intriguing one. It certainly makes sense when you consider the asset overlap between the two companies. It would have been nice for management to provide details in regards to synergies. But even without factoring these in, achieving decent growth could create a lot of value for investors down the road. I do believe that investors in Hammerhead Energy got the better end of this transaction. But I would consider both companies to be winners in this case.

For further details see: