Kevin Van Paassen
PrairieSky Royalty Ltd.'s deal to acquire royalty assets from Canadian Natural Resources Ltd. follows the company's playbook: Avoid debt and issue new shares whenever possible.
PrairieSky, one of the few members of the S&P/TSX capped energy sector to be in a net cash position – i.e., more cash than debt – will borrow nothing to get its $1.8-billion deal done.
The first chunk of the payment is 44 million shares, worth about $1.1-billion, issued to Canadian Natural, making it a 19 per cent holder of PrairieSky. Canadian Natural says it will find a way to knock that percentage below 10 per cent by next spring, possibly by distributing PrairieSky shares directly to its shareholders.
PrairieSky will also send $680-million in cash to Canadian Natural. Rather than borrow, though, PrairieSky will do a private placement of 27 million "subscription receipts" that will entitle holders to one common share per receipt, distributed when the Canadian Natural deal closes, presumably by year-end.
The issuances come on top of a $198-million "bought deal" in July.
PrairieSky chief executive officer Andrew Phillips says the deal's structure will keep the company in a position of holding $200-million in cash and no debt when the transaction closes.
At the same time, though, the company will dramatically boost its share count: PrairieSky had 156 million shares at the end of the third quarter; absent any other share issuances, it will have around 228 million shares on the market as 2015 comes to a close.
The good news is that PrairieSky estimates the deal will be accretive to its free cash flow numbers, meaning that it adds more than enough free cash to offset the potential dilution of issuing so many shares. Mr. Phillips said PrairieSky expects it will be accretive to free cash by 6 per cent in 2016 and 7 per cent in 2017. "PrairieSky will continue to focus on per-share free-cash-flow growth over the long term," he told investors on a conference call Monday.
Investors should keep an eye, however, on the cash requirements of PrairieSky's dividend. With a monthly payout of just over 10.8 cents, the annual payment requirement jumps from about $203-million to about $296-million. PrairieSky instituted a dividend reinvestment plan earlier this year to mitigate the cash outlay, but the company's disclosures say roughly 80 per cent of the dividend payments are made in cash, not shares.
Analysts had figured that PrairieSky wouldn't generate the cash sufficient to cover the dividend in 2015, but that the company would adjust in 2016 if conditions don't improve. The company's cash balance "provid[es] a cushion for the dividend when exceeding cash flow and provides dry powder to capitalize on potential future acquisitions," says analyst Chad Ellison of Dundee Capital Markets.
David Milstead