According to the company’s website press release on March 28, 2023, Crescent Point Energy Corp. ("Crescent Point" or the "Company") (TSX and NYSE: CPG) is pleased to announce that it has entered into an agreement (the “Agreement”) with Spartan Delta Corp. (“Spartan”) to acquire Spartan’s oil and liquids-rich Montney assets in Alberta for $1.7 billion in cash (the “Transaction” or “Acquisition”).
“Over the past five years, we have fundamentally rebuilt and strengthened Crescent Point,” said Craig Bryksa, President and CEO of Crescent Point. “As a result of our efforts, and after closing this transaction, our asset base will include significant inventory depth in both the Kaybob Duvernay and the Montney, while also maintaining significant low-decline assets in Saskatchewan that provide additional excess cash flow. The Montney acquisition is immediately accretive to our per share metrics, enhances our return of capital to shareholders, and is aligned with our long-term strategy to focus on high quality, scalable resource plays that meet our defined asset criteria. These assets include over 20 years of drilling locations and increase our total corporate inventory of premium locations to 15 years. The acquired lands are also situated in the volatile oil fairway with similar resource characteristics to our adjacent Kaybob Duvernay play, where we have demonstrated significant operational excellence.”
KEY HIGHLIGHTS
• Acquisition adds 600 Montney locations in Alberta, or over 20 years of premium drilling inventory.
• Immediately accretive to excess cash flow per share by 20 percent, resulting in a higher return of capital for shareholders.
• Maintaining commitment to return approximately 60 percent of excess cash flow to shareholders, including the base dividend.
• Pro-forma leverage ratio of 1.3 times adjusted funds flow at closing and 1.0 times at year-end 2023.
• Targeting additional non-core asset dispositions over time to further optimize portfolio
STRATEGIC RATIONALE AND ASSET OVERVIEW
Key attributes of the acquired assets include the following:
• Approximately 38,000 boe/d (55% oil and liquids) with attractive netbacks generating significant excess cash flow;
• Total drilling inventory of 600 net Montney locations, providing over 20 years of inventory to sustain current production levels;
• Approximately 235,000 net acres of contiguous land with Montney rights in Alberta within the Gold Creek and Karr area;
• Consolidated land base that is primarily Crown with a high average working interest of 96 percent;
• Situated in the volatile oil fairway with attractive reservoir characteristics, including pay thickness and permeability;
• Key infrastructure and well licenses in place to support future development plans;
• Adjacent to Crescent Point’s Kaybob Duvernay assets, providing opportunity for operational efficiencies;
• $1.7 billion of tax pools to further enhance long-term excess cash flow generation; and
• Low Scope 1 emissions intensity of less than 0.01 tCO2e/boe.
Type wells for the acquired assets are expected to payout in approximately 10 months from the initial on-stream date, based on wells booked by the independent engineers and assuming current commodity prices. These wells are also economic at low commodity prices with break-evens below US$40/bbl WTI. Returns and economics from these wells rank in the top quartile within the Company’s portfolio, along with the Kaybob Duvernay asset, providing additional flexibility within its capital allocation framework. Crescent Point will seek to further enhance these returns over time, as it has done when entering other resource plays.
Upon closing, the Company's pro-forma decline rate is expected to remain below 30 percent. Crescent Point plans to manage the acquired Montney assets in a disciplined manner, maintaining a conservative production profile and targeting a low decline rate to maximize long-term excess cash flow generation and return of capital for shareholders.
Pro-forma this Acquisition, the Company’s total inventory of premium locations will increase to 15 years, based on the long-term development plans for its assets.
The Transaction is anticipated to close during second quarter 2023, subject to regulatory approvals and customary closing conditions.
ACCRETION AND RETURN OF CAPITAL TO SHAREHOLDERS
The Acquisition is expected to be immediately accretive on all per share metrics. In the 12-month period following the closing of the Acquisition, adjusted funds flow and excess cash flow per share are expected to increase by approximately 20 percent.
Based on this expected accretion, this Acquisition is also immediately accretive to the Company’s total return of capital offering. The Company’s long-term return of capital profile has also been enhanced through this Acquisition with a significant addition of new premium drilling locations.
In addition to its base dividend, Crescent Point will continue to return 50 percent of its discretionary excess cash flow to its shareholders, or approximately 60 percent of its excess cash flow.
Crescent Point’s goal is to increase its base dividend over time, as part of its framework that targets dividend sustainability at lower commodity prices. The Company expects to revisit its base dividend as it continues to strengthen its balance sheet. Share repurchases remain Crescent Point’s current preferred method for additional return of capital, after its base dividend.
This Transaction is also accretive to Crescent Point’s Proved plus Probable (“2P”) net asset value per share by approximately seven percent, based on year-end 2022 independent engineering pricing.
TRANSACTION METRICS
Based on production of approximately 38,000 boe/d and assuming US$70/bbl to US$75/bbl WTI and $3.50/mcf AECO, the Transaction metrics are as follows:
• 3.2 to 3.4 times annual net operating income;
• $44,740 per flowing boe; and
• $8.23 per boe of 2P reserves of 206.7 MMboe, as assigned by the independent evaluator McDaniel & Associates Consultants Ltd. Including approximately $1.7 billion of undiscounted future development capital, the Acquisition equates to $16.47 per boe of 2P reserves, resulting in a recycle ratio of approximately 2.2 to 2.3 times.
The net present value (“NPV”) of the Proved (“1P”) and 2P reserves of the acquired assets total approximately $1.6 billion and $2.4 billion respectively, based on year-end 2022 independent engineering pricing. The reserves attributed to the acquired assets are based on 163 net booked locations, or approximately 25 percent of the total 600 internally identified net locations.
BALANCE SHEET AND FINANCIAL FLEXIBILITY
The $1.7 billion purchase price for the Acquisition will be paid in cash, which is expected to be funded through the Company’s existing credit facilities. To provide additional liquidity, Crescent Point has also implemented a new two-year revolving credit facility for $400 million. At closing, the Company’s unutilized credit capacity is expected to total approximately $850 million.
Crescent Point’s pro-forma leverage ratio is expected to be approximately 1.3 times adjusted funds flow at closing and 1.0 times at year end 2023, based on US$75/bbl WTI. Under a lower price scenario of US$65/bbl WTI, the Company expects to exit 2023 with a leverage ratio of less than 1.3 times.
In addition to the significant excess cash flow generation that the Company will utilize to pay down debt, Crescent Point will also seek to further strengthen its balance sheet through a disciplined disposition strategy. Under this strategy, the Company will pursue the potential sale of one or more of its assets. In aggregate, Crescent Point is looking to reduce its net debt by approximately $1.0 billion over the next 12 months. Crescent Point’s long-term goal is to maintain significant balance sheet strength, targeting a leverage ratio of less than 1.0 times in a low commodity price environment.
Based on current commodity contracts in place, Crescent Point has hedged over 10 percent of its pro-forma production for the remainder of 2023 with additional hedges extending into 2024. The Company will remain disciplined in its approach to layering on additional protection in the context of commodity prices.
UPDATED 2023 GUIDANCE AND FIVE-YEAR OUTLOOK
Crescent Point’s revised 2023 annual guidance, which incorporates the impact of the Acquisition following the closing date, includes annual average production of 160,000 to 166,000 boe/d and development capital expenditures of $1.15 to $1.25 billion. This budget, including the base dividend, continues to be fully funded at approximately US$50/bbl WTI for the remainder of the year.
The revised 2023 capital expenditures budget incorporates approximately $150 million of development capital expenditures associated with the newly acquired assets. Crescent Point plans to manage the Montney assets by drilling approximately 25 wells per year, which requires approximately $250 million of annual capital expenditures, inclusive of facilities and infrastructure spending.
The Company’s production forecast in its five-year plan is now expected to grow to 195,000 boe/d by 2027. This forecast is expected to generate approximately $3.6 billion to $5.2 billion of cumulative excess cash flow ($6.53 to $9.57 per share), at US$65/bbl to US$75/bbl WTI, representing an increase of approximately 20 percent in comparison to its prior outlook. Crescent Point’s Kaybob Duvernay and Montney assets are expected to represent approximately 45 percent of the Company’s pro-forma total production at closing and increasing to approximately 60 percent within its five-year plan. This plan remains disciplined with a continued focus on returns and long-term sustainability.
FINANCIAL ADVISORS RBC
Capital Markets is acting as financial advisor to Crescent Point on the Transaction and has provided a verbal opinion to Crescent Point's Board of Directors to the effect that, as of the date of such opinion and based upon and subject to the assumptions, limitations and qualifications set forth therein, the consideration to be paid by Crescent Point pursuant to the Transaction is fair from a financial point of view to Crescent Point. BMO Capital Markets and Scotiabank are acting as strategic advisors to Crescent Point.
The Bank of Nova Scotia and Royal Bank of Canada are acting as Co-lead Arrangers and Joint Bookrunners on the Company’s new revolving credit facility.
CONFERENCE CALL DETAILS
Crescent Point management will host a conference call on Tuesday, March 28, 2023 at 6:30 a.m. MT (8:30 a.m. ET) to discuss the announced Acquisition. A slide deck will accompany the conference call and can be found on Crescent Point’s website.
Participants can listen to this event online via webcast. The conference call can be accessed without operator assistance by registering online to receive an instant automated call back. Alternatively, the conference call can be accessed with operator assistance by dialing 1‑888‑390‑0605. The webcast will be archived for replay and can be accessed on Crescent Point’s conference calls and webcasts webpage. The replay will be available approximately one hour following completion of the call.
Shareholders and investors can also find the Company's most recent investor presentation on Crescent Point's website.
