Whitecap and TORC have entered into a business combination agreement (the “Agreement”) under which the companies 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 December 31, 2020. Under the terms of the Agreement, shareholders of TORC (“TORC Shareholders”) will receive 0.57 Whitecap common shares (the “Whitecap Shares”) in exchange for each TORC common share held (the “TORC Shares”). The at market exchange ratio was determined using ten-day volume weighted average share prices of the Whitecap Shares and the TORC Shares on the Toronto Stock Exchange (“TSX”) prior to the signing of the Agreement.
The combined entity will be stewarded by the existing Whitecap executive team and will continue to advance a total return model combining modest production growth with meaningful cash dividends. 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 February 25, 2021, subject to customary conditions, including the receipt of necessary regulatory and shareholder approvals.
Strategic and Financial Benefits of the Business Combination
- Material Size and Scale. Significantly increases Whitecap’s scale and core area dominance as TORC’s asset base fits directly into Whitecap’s current core areas creating one of the largest pure play conventional light oil producers in Canada with over 100,000 boe/d (78% oil and NGLs) of corporate production. 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.
- Improved Free Funds Flow Profile. TORC’s current production is approximately 25,000 boe/d and its production in 2021 is expected to average 22,000 boe/d due to a moderated capital program resulting in a production decline rate of less than 19%. 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%.
- Enhanced Long-Term Shareholder Returns. Return of capital to shareholders continues to be a priority for Whitecap and is an important component of its total return strategy. The combined entity will be able to generate significantly more free funds flow which supports a 6% increase to the monthly dividend from $0.01425 per share to $0.01508 per share ($0.18096 per share annualized). The dividend increase is expected to be effective with the March 2021 dividend payable in April 2021. The pro forma 2021 total payout ratio is expected to be 66% at a crude oil price of US$45/bbl WTI.
- Significant Synergies. 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.
- Top Tier Balance Sheet. The combined business will maintain its strong credit profile and will have ample liquidity to manage commodity price volatility. Whitecap’s credit facilities are covenant based and are not subject to yearly credit determinations. The combined business is expected to benefit from approximately $6 million in lower interest expense and is expected to reduce net debt by over $200 million in 2021, resulting in a pro forma debt to EBITDA ratio of 1.8x at US$45/bbl WTI.
- Sustainable Development. Whitecap remains committed to best-in-class environment, social and governance (“ESG”) practices and continuously improving its ESG profile. Whitecap is the operator of the Weyburn Unit, one of the largest carbon capture and utilization storage projects in the world, currently sequestering more than 2 million tonnes of CO2 annually and providing the Company with its net negative emitter status.
- Disciplined Leadership and Governance. The combined business will continue to be led by the Whitecap executive team and Board of Directors. Pursuant to the Agreement and subject to receipt of approval by the shareholders of Whitecap (“Whitecap Shareholders”) of the resolution to amend the articles of Whitecap (the “Article Amendment Resolution”) at the Whitecap Meeting (as defined below), Whitecap has agreed to appoint a designated director from TORC to its Board of Directors on closing.
Market Leading Light Oil Player
The strategic business combination of Whitecap and TORC creates a leading oil weighted producer in Western Canada with a focused asset base exhibiting lower production declines, high operating netbacks and strong capital efficiencies.
Grant Fagerheim, Whitecap’s President & CEO, stated: “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.”
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% of its production under waterflood recovery, supporting its industry leading base production decline rate of 17%.
Brett Herman, TORC’s President & 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 ten 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 (“CPP Investments”) 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.
“As a long-standing investor in TORC, we’re pleased to support this transaction, which has compelling economic merits for both companies and builds a stronger business of scale that can continue to participate in industry consolidation. We would also like to thank TORC’s management team and the Board for their work in building a strong energy franchise,” says Michael Koen, Managing Director, Head of Relationship Investments, CPP Investments.
Preliminary Pro Forma 2021 Outlook
Following the Business Combination, Whitecap remains well positioned to continue to advance internal development opportunities and selectively consolidate high-quality assets. Whitecap’s competitive advantages include a strong balance sheet, high funds flow netback assets, shallow production decline profile and depth and quality of inventory to support Whitecap’s fully funded model. Whitecap remains committed to growing its business over the long-term in combination with providing Whitecap Shareholders with meaningful cash returns.
Whitecap’s stand-alone forecasted base case for 2021 (including the completion of the NAL Transaction, as defined below), is average production of 81,000 – 83,000 boe/d on capital investments of $250 – $270 million as press released on October 29, 2020. The pro forma entity is expected to have average production in 2021 of 99,000 – 101,000 boe/d (assuming a closing date of February 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% based on commodity prices of US$45/bbl WTI and C$2.50/GJ AECO. A detailed 2021 budget will be provided on close of the Business Combination.
On August 31, 2020, 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 (the “NAL Transaction”). With integration progressing, Whitecap continues to anticipate the close of the NAL Transaction on January 4, 2021.
Recommendations of the Whitecap and TORC Board of Directors
The Whitecap Board of Directors has unanimously determined that the Business Combination and the execution of the Agreement is in the best interests of Whitecap, that the consideration to be paid by Whitecap pursuant to the Business Combination is fair, from a financial point of view, to Whitecap and has unanimously recommended that the Whitecap Shareholders vote in favour of the resolution approving the issuance of the Whitecap Shares pursuant to the Business Combination (the “Issuance Resolution”) at the Whitecap Meeting. National Bank Financial Inc. has provided the Whitecap Board with a fairness opinion stating that, as of the date thereof and subject to the assumptions, limitations, and qualifications set forth therein, the consideration to be paid to the TORC Shareholders is fair, from a financial point of view, to Whitecap. All of the directors and officers of Whitecap have entered into agreements with TORC pursuant to which they have agreed to vote their Whitecap Shares in favour of the Issuance Resolution and the Article Amendment Resolution and otherwise support the Business Combination.
The TORC Board of Directors has unanimously determined that the Business Combination and the execution of the Agreement is in the best interests of TORC, that the Business Combination is fair to TORC Shareholders and has unanimously recommended that the TORC Shareholders vote in favour of the resolution approving the Business Combination (the “Business Combination Resolution”) at the TORC Meeting (as defined below). RBC Capital Markets has provided an opinion to the Board of Directors of TORC that, as of the date thereof and subject to the assumptions, limitations and qualifications set forth therein, the consideration to be received under the Transaction is fair from a financial point of view to the holders of the TORC Shares. TORC’s management team and Board of Directors (“TORC Insiders”) and CPP Investments have all entered into support agreements with Whitecap and have agreed to vote their TORC Shares in favour of the Business Combination Resolution and otherwise support the Business Combination.
Combination Structure Details
Whitecap and TORC have entered into the Agreement to effect the Business Combination through a plan of arrangement under the Business Corporations Act (Alberta). Under the terms of the Business Combination, Whitecap will acquire all of the issued and outstanding shares of TORC for share consideration. TORC Shareholders will receive 0.57 Whitecap Shares for each TORC Share owned. The exchange ratio was determined based on the volume weighted average trading price of the Whitecap Shares and TORC Shares on the TSX for the preceding ten trading days prior to the signing of the Agreement. As part of the Agreement, Whitecap will assume TORC’s net debt of $335 million estimated as at December 31, 2020.
TORC Insiders have agreed to enter into hold period agreements (“Hold Period Agreements”) with Whitecap on the completion of the Business Combination. The Hold Period Agreements will provide that, subject to certain exceptions, the TORC Insiders will not be entitled to transfer or otherwise dispose of the Whitecap Shares they acquire pursuant to the Business Combination for periods of three (3), six (6) and nine (9) months from the closing date of the Business Combination; one-third of the Whitecap Shares held by the TORC Insiders to be released after each period.
The Business Combination requires approval by at least 66⅔% of the votes cast by TORC Shareholders present in person or represented by proxy at a special meeting of TORC Shareholders to be called to consider the Business Combination (the “TORC Meeting”) and a majority of the votes cast by TORC Shareholders after excluding the votes cast by those persons whose votes may not be included under Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions.
The issuance of the Whitecap Shares pursuant to the Business Combination requires approval by at least 50% of the votes cast by Whitecap Shareholders represented in person or by proxy at a special meeting of Whitecap Shareholders (the “Whitecap Meeting”) to be called to consider the Issuance Resolution, as required by the rules of the TSX. In addition, Whitecap Shareholders will be asked to consider the Article Amendment Resolution to increase its maximum number of directors so that Whitecap can appoint a designated director from the TORC Board of Directors to the Whitecap Board of Directors on closing.
The Agreement contemplates that the Whitecap Meeting and TORC Meeting will be held in February 2021. It is expected that a joint management information circular will be sent to the shareholders of each of Whitecap and TORC in January 2021. Closing of the Business Combination is expected to occur on or before February 25, 2021.
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.
The Agreement provides that completion of the Business Combination is subject to certain conditions, including the receipt of all required regulatory approvals, the approval of the TSX, the approval of the shareholders of Whitecap and TORC (as described above), the approval of the Court of Queen’s Bench of Alberta and approval under the Competition Act (Canada).
National Bank Financial Inc. acted as exclusive financial advisor to Whitecap. Burnet, Duckworth & Palmer LLP is acting as Whitecap’s legal advisor.
RBC Capital Markets acted as exclusive financial advisor to TORC. McCarthy Tétrault LLP is acting as TORC’s legal advisor.
Conference Call and Webcast
Whitecap has scheduled a conference call and webcast to begin promptly at 10:00 am MT (12:00 noon ET) on December 9, 2020.
The conference call dial-in number is: 1-888-390-0605 or (587) 880-2175 or (416) 764-8609
A live webcast of the conference call will be accessible on Whitecap’s website at www.wcap.ca by selecting “Investors”, then “Presentations & Events”. Shortly after the live webcast, an archived version will be available for approximately 14 days.