Whitecap Resources Inc. is buying Torc Oil & Gas Ltd. in a $565-million all-stock deal that investors are greeting as an important signal that consolidation in the hard-hit energy industry is well under way.
The two oil producers, which both have operations in Alberta and Saskatchewan, are seen as skillful operators in the sector, which is struggling to win back interest from major institutional investors following the oil price crash that accompanied the onset of the pandemic in the spring. For Whitecap, it marks its second takeover in less than four months.
The company’s shares rose 8 per cent on the Toronto Stock Exchange on Wednesday, while Torc gained 0.8 per cent. Before the deal was announced on Tuesday evening, Whitecap shares were down 21 per cent from the start of the year, though they had made sharp gains as oil prices rose through November. Torc had been down 42 per cent year-to-date.
As numerous oil and gas companies seek buyers owing to their heavy debt loads and constrained investment capital, the market is rewarding oil patch mergers bringing together well-run companies in no need of rescue, said Jeremy McCrea, analyst at Raymond James. The key is being big enough to interest major investors.
“In order to get more eyeballs so you can access outside equity capital, you need to be more [large enough] to these institutional investors that have access to that capital,” Mr. McCrea said.
It is the latest big deal aimed at bringing scale and efficiency to the Canadian oil patch, following Cenovus Energy Inc.’s $3.8-billion agreement to buy Husky Energy Inc., announced in October. It too is an all-stock offer.
Under the deal, Torc stockholders will get 0.57 of a Whitecap share for each Torc share. Whitecap will also assume $335-million of Torc debt, for a total value of $900-million.
Torc’s oil-producing operations, located in southeastern Saskatchewan and west-central Alberta, have 92 per cent overlap with Whitecap’s.
Like other recent deals in the energy and mining industries, Torc shareholders are being offered a stake in a larger company with more financial wherewithal, rather than a premium over the current value of their stock. The offer follows Whitecap’s deal to acquire NAL Resources Management Ltd. from Manulife Financial Corp. for $155-million in Whitecap stock.
Torc’s major shareholder is the Canadian Pension Plan Investment Board, with a 29-per-cent stake. CPPIB has agreed to support the merger, meaning it will join Manulife as a large shareholder of Whitecap when both deals are completed.
“The announcement of this series of strategic combinations, including NAL and now Torc, positions our combined shareholders for significant returns when the world economy recovers from the pandemic,” Grant Fagerheim, chief executive officer of Whitecap, said Wednesday on a conference call. “Our combined entity will provide our collective shareholders with the size and scale to better withstand commodity-price volatility.”
Whitecap executives will run the combined operation, which will produce about 100,000 barrels of mostly light-grade oil a day in 2021, based on capital spending of up to $300-million, they said. That compares with Whitecap’s standalone forecast of about 82,000 barrels a day. It is targeting annual cost savings of $15-million by merging the operations.
As part of the deal, Whitecap said it plans to boost its dividend by 6 per cent starting with the April payout.
The transaction is slated to close by Feb. 25. To proceed, two-thirds of Torc shareholders must vote in favour.
National Bank Financial Inc. and Burnet, Duckworth & Palmer LLP are Whitecap’s financial and legal advisers. RBC Dominion Securities and McCarthy Tétrault LLP advised Torc.
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Jeffrey Jones