- The transaction is a continuation of Whitecap’s long-term strategy of consolidating assets in its core operating areas. NAL’s production and lands overlap more than 80% of Whitecap’s current asset base and provides for meaningful operational synergies and inventory optimization opportunities in west central Alberta, west central Saskatchewan and southeast Saskatchewan, enhancing our exposure to economically compelling plays which we currently operate.
- All-stock transaction further improves upon Whitecap’s strong financial position. The Transaction is expected to decrease Whitecap’s leverage ratio by 25% in 2021.
- Significantly enhances our ability to grow production per share within funds flow, increases free funds flow and our ability to return capital to shareholders.
- Manulife will own approximately 12.5% of the combined entity. Manulife has entered into a lock-up agreement for periods of 12, 15, and 18 months from the closing date of the Transaction; one-third to be released from the lock-up after each period.
- The transaction is expected to be accretive to key 2021 per share metrics including funds flow, production, reserves and net asset value.
Summary of NAL
- Current production is approximately 27,000 boe/d and production in 2021 is expected to average 22,000 boe/d (55% oil and NGLs) with a stable production decline rate of 19%.
- 2021 net operating income is estimated to be $100 million based on a net operating netback of $12.50 per boe and a WTI price assumption of US$45.00 per barrel and AECO at $2.50/GJ.
- Proved developed producing (“PDP”) reserves of 51.6 MMboe, total proved (“TP”) reserves of 54.4 MMboe and total proved plus probable (“TPP”) reserves of 68.5 MMboe based on Whitecap’s internal evaluation.
- PDP future net revenue discounted at 10 percent (“NPV10”) of $254 million, TP NPV10 of $271 million and TPP NPV10 of $379 million, inclusive of $67 million (NPV10) of asset retirement obligations based on Whitecap’s internal evaluation.
Pro Forma Benefits of the Combination
- Enhances Size and Scale. Whitecap’s stand-alone forecasted base case for 2021 is average production of 60,000 boe/d on capital investments of $200 – 250 million. Pro forma the Transaction, our base case increases to 81,000 – 83,000 boe/d on capital investments of $250 – 300 million and we anticipate maintaining our peer leading G&A/boe structure of less than $1.00/boe.
- Strengthens Balance Sheet and Financial Flexibility. 2021 estimated debt to EBITDA decreases 25% to 1.9x based on a WTI price of US$45 per barrel. Whitecap will elect to maintain its credit capacity at $1.77 billion pro forma the Transaction and, with expected net debt of $1.1 billion, this will provide ample liquidity to manage commodity price volatility. Whitecap’s increased scale and financial strength is expected to enhance its credit profile and reduce its cost of capital.
- Increase Free Funds Flow Profile and Long-Term Sustainability. The Transaction is significantly accretive to free funds flow and free funds flow per share. Based on US$45 per barrel WTI, the pro forma entity is expected to generate over $196 million in free funds flow in 2021, more than sufficient to support pro forma dividend obligations of $80 million ($0.171 per share). The remaining free funds flow provides flexibility for balance sheet enhancement, return of incremental capital to shareholders, increasing organic growth or to pursue additional accretive transactions with the objective of enhancing total shareholder returns.
The combination between the two companies will position Whitecap to further advance our internal opportunities, as well as our ability to selectively consolidate high-quality assets in our core areas of operation. Our competitive advantages include a strong balance sheet, high funds flow netback assets, a shallow production decline rate and a high-quality drilling inventory to support our fully funded income and growth model. We remain committed to growing our business for the long term in combination with providing our shareholders with meaningful cash dividends.
The transaction is expected to close on January 4, 2021, subject to customary conditions, including the receipt of necessary regulatory approvals, including the approval of the Toronto Stock Exchange. Whitecap has also granted Manulife participation rights in future equity issuances and at closing, the parties will also enter into an investor rights agreement and a registrations rights agreement which will provide Manulife with certain board observer rights, continued pro rata participation rights in future equity issuances and future registration rights.
On behalf of our Management team and Board of Directors, we would like to thank our shareholders for their ongoing support as we continue to pursue value added opportunities organically and through consolidation. We look forward to updating our shareholders as we progress through the year and in 2021.