Whitecap to combine with Torc in the latest in a string of oilfield mergers

Two of Saskatchewan’s intermediate oil producers announced on Dec. 8 they will be combining.

Whitecap Resources Inc. and Torc Oil & Gas Ltd. announced a business combination of “two strong energy franchises resulting in a well-capitalized, low decline, light oil weighted company with an attractive free funds flow profile,” according to their joint release. 

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Upon closure of the deal, at around 100,000 barrels of oil equivalent per day (boepd), the combined company will be close in scale to the size of Crescent Point Energy Corp, after that company spent the last several years shedding one-third of its assets.

The two intermediate producers have agreed to combine their businesses in an at-market, all-stock transaction valued at approximately $900 million, including Torc's net debt, estimated at $335 million as of Dec. 31. Under the terms of the agreement, shareholders of Torc will receive 0.57 Whitecap common shares in exchange for each TORC common share held.

The at-market exchange ratio was determined using 10-day volume weighted average share prices of the Whitecap Shares and the Torc Shares on the Toronto Stock Exchange prior to the signing of the agreement.

The move is part of a recent string of mergers in the Saskatchewan oilpatch involving Whitecap. On Aug. 31, Whitecap announced that it had entered into an agreement in an all-stock transaction valued at approximately $155 million with NAL Resources Limited and a privately held wholly owned subsidiary of Manulife Financial Corporation. With that integration progressing, Whitecap continues to anticipate the close of the NAL Transaction on Jan. 4, 2021.

Whitecap's stand-alone forecasted base case for 2021 (including the completion of the NAL transaction), is average production of 81,000–83,000 boepd on capital investments of $250-$270 million as press released on Oct. 29. The pro forma entity is expected to have average production in 2021 of 99,000–101,000 boepd (assuming a closing date of Feb. 25, 2021) on capital investments of $280 to $300 million. Based on this spending and production profile, Whitecap anticipates generating funds flow of approximately $602 million with free funds flow of approximately $312 million and a total payout ratio of 66 per cent based on commodity prices of US$45/bbl for West Texas Intermediate and C$2.50/gigajoule AECO. A detailed 2021 budget will be provided on close of the business combination.

The combinations of Whitecap with NAL, the private entity, then TORC, will result in a company with over 100,000 boepd (78 per cent oil and natural gas liquids) of corporate production, much of that in Saskatchewan. The combined entity will have an enterprise value of approximately $4 billion and has paid $1.4 billion in cumulative dividends to shareholders since inception.

The combined entity of Whitecap and TORC will be headed by the existing Whitecap executive team and will “continue to advance a total return model combining modest production growth with meaningful cash dividends,” the release said.

The business combination has been unanimously approved by the boards of directors of both Whitecap and TORC and is expected to close on or before Feb. 25, 2021, subject to customary conditions, including the receipt of necessary regulatory and shareholder approvals.

TORC's current production is approximately 25,000 boepd and its production in 2021 is expected to average 22,000 boepd due to a moderated capital program, resulting in a production decline rate of less than 19 per cent. The lower production profile is designed to enhance the combined entity's ability to generate significant free funds flow to increase cash returns to shareholders. The combined entity is expected to have over $300 million of free funds flow supported by a base production decline rate of approximately 17 per cent.

Tangible cost savings and inventory optimization opportunities are expected to result in incremental free funds flow of approximately $15 million in year one from corporate and operational synergies in the near term. There is significant overlap in Whitecap's and Torc's asset bases providing for meaningful operational synergies and inventory optimization opportunities.

The combined business will have 67 per cent of its production under waterflood recovery, and a base production decline rate of 17 per cent.

Grant Fagerheim, Whitecap's president and CEO, said in a release, “We are combining two strong Canadian energy producers to form a leading large-cap, light oil company geared towards generating sustainable long-term returns for shareholders while prioritizing responsible Canadian energy development.

“Despite the challenging conditions and significant volatility throughout the year, we have become an even stronger and more resilient energy producer entering 2021 with the combination with Torc as well as the NAL transaction announced on August 31, 2020. We would like to thank our employees for their continued exemplary efforts and our shareholders for their ongoing support. We look forward to advancing returns to our shareholders into the future.”

Brett Herman, Torc's president and CEO, stated, “On behalf of Torc's management and board of directors, we would like to thank our shareholders for their ongoing support over the past 10 years.

“We believe our corporate values are closely aligned with Whitecap's management team and the announced business combination will create an exceptionally resilient energy producer that is positioned for growth, while delivering a sustainable dividend to shareholders.

“In a market environment that is increasingly favouring size and scale, a business combination with Whitecap exposes Torc shareholders to a larger platform while remaining consistent with our existing philosophy of balancing growth with financial discipline along with prudent capital allocation. We are pleased to become shareholders of Whitecap.”

Canada Pension Plan Investment Board has been a Torc shareholder since 2013 and has entered into a support agreement whereby it will vote in favour of the transaction under the terms of the agreement.

The agreement provides for non-solicitation covenants on behalf of Torc which are subject to the fiduciary duty obligations of the Torc board and provides Whitecap with the right to match any superior proposal received by Torc. The agreement also provides for mutual non-completion fees of $20 million in the event the business combination is not completed or is terminated by either party in certain circumstances. 

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