Crescent Point solidifies its Saskatchewan play
$1.5B Legacy takeover set to close on Tuesday
• Scott Saxberg has every confidence that his company’s $1.53-billion takeover of Legacy Oil and Gas Ltd. will go through as expected on Tuesday, and Crescent Point Energy Corp. will cement its position as the dominant oil and gas producer and largest landholder in Saskatchewan.
“Based on the responses and the comments that we’ve heard back from the major shareholders, and the majority shareholders, this deal will close,” Saxberg, president and CEO of Calgary-based Crescent Point, said in an interview.
Saxberg is confident despite opposition from FrontFour Capital, a U.S. hedge fund that targeted Legacy for its underperformance in the months leading up to the May 26 announcement. FrontFour manager Zachary George has said he plans to vote against the deal, calling it one-sided. He told the Calgary Herald it was “a phenomenal deal” for Crescent Point.
When done, the deal will provide Crescent Point with 1,000 new drilling locations, primarily in Saskatchewan, adding to an inventory of more than 7,500 potential drill sites.
Most analysts covering Crescent Point were also pleased with the acquisition because those drill sites provide the Calgary-based company with access to new light-oil plays, including the emerging Midale formation — a low-cost, high-return formation — and consolidate its position in a number of others.
As AltaCorp Capital ’s Thomas Matthews said in a research note, the company “is paying for a portion of the upside inherent in the Midale formation while increasing exposure in the Bakken, Three Forks and Spearfish.”
That was also part of the attraction for Saxberg. “From our perspective,” he said, “it’s a very low-risk consolidation opportunity that fits in with our asset base.”
The deal, for which Crescent Point paid using its own shares and assumed $967 million of Legacy’s debt, adds 525 net sections of land in southeast Saskatchewan to the company’s portfolio, and 200 of those sections are in the Midale play.
“The Midale pool is still early, early days of drilling up that play,” Saxberg said. Eventually, he added, Crescent Point would be able to use its expertise in water-flooding, in which water is pumped underground to force more oil to the surface, to continue producing oil from older wells drilled there over the longer term.
“Secondary recovery, or water-flooding, is what we believe is a low-risk upside to the value of Legacy that we will unlock over the longer term,” Saxberg said.
Crescent Point is currently using a water flood in the Bakken formation in Saskatchewan, where it says the technique has reduced the decline in oil production there by 10 per cent. The company is currently producing 15,000 barrels per day from its water flood in that play, according to its investor presentation.
All told, the acquisition of Legacy will immediately add 22,000 barrels of oil equivalent per day to Crescent Point’s production. As a result, the company upped its guid- ance for the second half of 2015, saying it now expects to produce an average of 162,500 bpd by the end of the year.
At the same time, at least one analyst has raised the question of whether Crescent Point’s dividend is sustainable. The company paid its monthly dividend of 23 cents per share on June 15.
CIBC Capital Markets analyst Jeremy Kaliel said in a research note that “if current spot prices were to prevail at year-end, we think CPG should and would choose to reduce its dividend at that time (but we think the company has a strong enough balance sheet and hedging to take a waitand-see approach until then).”
To that, Saxberg said there was no imminent danger of a reduction in the dividend.
“We feel very comfortable in this price environment maintaining our dividend,” Saxberg said. “We have a strong five-year plan in this price environment that allows us to grow production, grow the company and maintain our dividend.”
The company, he said, would continue to grow and protect its dividend even if oil prices continued to hover in the US$50 to US$60 per barrel range. The benchmark oil price closed Friday at US$59.63, down roughly US$40 from a year ago.
The collapse in oil prices motivated debt-heavy Legacy to look for a deal. Indeed, Saxberg said that more heavily indebted companies would likely put themselves up for sale in the coming months.
Saxberg has also noted that more Alberta bargains might be had in the wake of the new provincial government’s royalty review. But for now, he says, his focus is on Saskatchewan.
It’s a very low-risk ... opportunity that fits in with our asset base