Pinecrest Energy and Spartan Oil Form New Dividend E&P

Pinecrest Energy and Spartan Oil’s “merger of equals” took the market by surprise. The new Pinecrest Energy will be a $1-billion dollar oil weighted dividend paying company. With Rick McHardy on the board (STO CEO) and Wade Becker at the helm we are witnessing the rise of “CPG Junior”.

For those who are not very familiar with Crescent Point (CPG), they are a premier dividend paying light oil weighted company. They are a market darling and they use their premium valuation at will to raise money for accretive acquisitions. Crescent Point will be crossing the senior production threshold of 100,000 boepd this year.

How does the new company look like?

  • 513.4 million shares basic (to be be consolidated on a 3:1 basis upon closing)
  • Combined exit 2012 production is estimated at 9,600 boe/d (91% light oil)
  • Exit 2013 production expected to be flat at 9,600 boe/d (91% light oil)
  • One of the highest netbacks per barrel among its peers
  • Based on $85 Edmonton Par and $3/mcf gas
    • Basic payout ratio of 39% and total payout ratio of 104%
    • Debt to cash flow multiple of 0.2x based on $35 million of debt

The Assets

Pinecrest has 250 net sections in in the greater red Earth area with about 435 drilling locations. Spartan Oil’s core area is in the Cardium where it holds 48 net sections with about 200 to 350 drilling locations.

Basically the combined entity has many years of drilling ahead of itself.

Spartan Oil comes with a large undeveloped land base in Saskatchewan, more than 49,000 net acres prospective for Bakken/Mississippian targets. However, the acreage is more exploratory in nature so I don’t think it will see much in terms of capital exposure.

When the merger news hit the wire, Pinecrest’s stock shot to $2.16 then drifted lower below $1.80 per share. What was the market thinking? On one hand it might have gotten to excited when the news came as flashbacks of CPG came to mind. On the other, the market quickly came back to its senses as it dawned on it the growth model is gone and the company has to prove the new model is working. Basically, the yield reflects the perceived risk.

The market works in mysterious ways!

In my opinion, this is one of the best income vehicles in the energy sector, as good if not better than Crescent Point itself! (That’s why I dubbed it CPG junior). But the market needs to get comfortable with the new PRY before it rewards the stock with a higher price.

For one their total payout ratio excluding DRIP is one of the lowest and will fall every year as their production declines moderate.

  • 40% decline on exit 2012 production.
  • 33% decline on 2014 production
  • 27% decline on 2015 production

That means the capex required to maintain production will be falling year over year. Obviously, I expect the company to go into acquisition mode of more oil weighted assets funded by a healthy line of credit.

But let’s visualize what lower production declines mean.

Using the company’s guidance of 9,600 boepd (91% oil) let’s take a look at the cash flow sensitivity table assuming the company will keep the same production profile of 9,600 boepd:

Maintenance Capex 

40%

33%

27%

$130M

-$8M

$107M

+$15M

 

$88M

 

+$34M

 Cash flow Sensitivity table to the corporate production decline rate

That looks like a very healthy dividend (assuming no acquisitions or a collapse in the price of oil). Speaking of the price of oil, the company is budgeting $85 Canadian Par, let’s see what the total payout ratio looks like if the price goes lower or higher:

 Total Payout Ratio

$75/bbl

$80/bbl

$85/bbl

$90/bbl

121%

-$37M

 

 

 

112%

 

-$22M

 

 

104%

 

 

-$8M

 

97%

 

 

 

+$7M

 2013 CF sensitivity table to the price of oil (Canadian Par)

At $75 Canadian Par, the payout ratio is still lower than many domestic dividend paying companies. The deficit can be easily absorbed if the company believes this is a short term bump in the price of oil. At $90 Canadian, the total payout ratio drops below 100% spinning off more than $7M in free cash flow.

All of these numbers were generated using my oil and gas analysis software which also allows me to compare PRY to its peers. Right now, Pinecrest has the highest netbacks per barrel among oil weighted dividend paying domestic peers. At $1.79, it’s currently trading around 4.5x CFPS multiple with THE lowest D/CF ratio among its peers.

I like the new company, the assets and the management team. I am thinking of replacing my Eagle Energy Trust with the new Pinecrest for income. The only advantage Eagle has is selling its Texas oil at a premium to WTI while Canadian oil sells at a discount to WTI every now then.  In the near term, Pinecrest needs to get its 5,000 bopd hedges in for 2013 at a decent price. For the rest, Pinecrest enjoys an enviable balance sheet and in my opinion should have no problem replicating the CPG model in the future.

What do you think of the new Pinecrest?

27 comments to Pinecrest Energy and Spartan Oil Form New Dividend E&P

  • john

    hey, mitch. what type of boe/d growth do you think we’re looking at beyond 2013 without acquisitions? and what type of growth do you think is reasonable with acquisitions and without blowing out entirely their credit facilities?

    this looks good to me too. i just bought rpl earlier this week though and I’m not sure I want to own both renegade and pinecrest. pinecrest looks much better to me.

    • Mich

      Hey John,

      They mentioned 3-5%, very low growth. At 5% it’s adding less than 500 boepd which requires a little bit over 16 million in capex. That’s right in line with the 2014 lower decline rate which frees 15 million in CF.

      As for acquisitions, it will all depend on the play and the number of barrels they’re acquiring. They have almost $200M of credit capacity, they can afford some decent assets.

      I prefer PRY to RPL as well…

  • Jacq

    Hi Mich – I’m shopping for a place to put some cash to work in the next couple of weeks. Thanks for the heads up on these guys. Question is – where to put the money and when?

    PS – I’ve been watching CPG for a very, very long time with never enough of a dip for me to put the toe in. :-(

    • Mich

      Jacq,

      PRY is CPG at a grass-roots level in my opinion. I would not buy CPG either at this price.

      When it comes to timing the purchase, the right time is anybody’s guess. Remember the headwinds (fiscal cliff, Europe etc.)

      That is something you will have to decide upon depending on your risk tolerance, investment time frame, etc…

  • Great write-up Mich. Thanks.

    FYI, a Keith Schaeffer article made it to Zero Hedge. http://www.zerohedge.com/news/2012-11-23/guest-post-canadas-junior-oil-companies-swap-growth-income

    He talks about difficulties of junior oil companies changing the model to dividend-growth companies.

    • Mich

      Thanks PWD,

      I like the new yield model, juniors go up to a certain size and just maintain production spinning off a dividend. No more high growth for no recognition!

      Nice article from Keith, it’s a turning point al-right!

      Cheers,

  • Jacq

    I agree on the timing being anybody’s guess. I dipped the toe in on 2600 shares at $1.79 of PRY yesterday from the takeover cash-out of C&C Energia that I had.
    Other things I’ve dipped into this week are Poseidon on the “tank” and a bit more PGF. I can’t see more than one divvie cut/year for PGF – I’m trying to convert to a dividend portfolio vs. gains in anticipation of retirement next year.
    As always, thanks for your analysis.

    • Mich

      Poseidon just before retirement? I don’t know Jacq, I don’t follow Poseidon closely, but I personally would have gone with a more diversified oilfield services company. Sure the dividend would be lower but so would the risk.

      Good luck to us with PRY!

      Cheers,

  • Lee Roth

    The main problem of PRY is its very low RESERVES.
    PRY has the highest ratio per MbOE valuation.
    PRY trades for $46/Mboe !

    The new entity (PRY-STO) trades for almost $30/Mboe which is a very high ratio!

    Not to forget, the fact that STO has a lot of land which has to be de-risked.

    Cheers,
    Lee

    • Mich

      Hey Lee,

      $30/barrel is excellent for the netbacks they have. Regarding STO, it seems you do not know the company at all.

      Since you like to focus on 2P reserves, I suggest you load up on the NG weighted producers. There are many on sale for $5 a barrel or less :)

      Cheers,

  • Sam

    What I like about the large companies such as Cpg and bte ,is they have options on them so you can easily boost your pay. The biggest unknow is the price of oil. Nobody knows where it’s going.

    • Mich

      Indeed Sam, nobody knows where the price of oil is going. If it collapses, the US can kiss all the rosy forecasts of overtaking Saudi Arabia goodbye. The shale revolution will stop dead in its tracks.

  • Steve Jaycob

    Mitch, Have you looked at Painted Pony Energy? Seems to be on the right track.

  • [...] Our Canadian submitters, whose schedules saved this from being a thin carnival indeed. Mich at Beating the Index is back with a detailed analysis of the merger of 2 energy semi-titans: Spartan Oil and Pinecrest [...]

  • bjdubbs

    PRY could buy some acreage from LPR, LPR needs the cash! That might have even been a motivation for the deal, open up the balance sheet to buy some assets at Evi.

  • The Money Mail Carnival – Fifth Edition

    [...] Mich @ BeatingTheIndex writes Pinecrest Energy and Spartan Oil Form New Dividend E&P - Top Canadian light oil junior producers merge to form a $1-billion dollar oil weighted dividend paying company. [...]

  • [...] @ BeatingTheIndex writes Pinecrest Energy and Spartan Oil Form New Dividend E&P – Top Canadian light oil junior producers merge to form a $1-billion dollar oil weighted [...]

  • Picked up some PRY today at $1.37.

  • Whatsup

    What is your take on PRY now that the deal with Spartan is off? Fidelity unloaded 9+M shs. Stock continues to decline. But operations report (waterflood) sounds very encouraging.

    • Mich

      Fundamentals have not changed, the company hit its exit rate guidance and is still capable of putting together a meaningful 2013 budget. However, if the market is no longer interested in resource plays, we won’t see a recovery in the share price. Waiting for 2013 guidance on Feb 6 to make take a final decision.

  • [...] Texas has been producing oil since the 1880’s; the assets acquired are mostly legacy conventional oil production with a low decline profile.  The annual production decline rate is at around~18%, that’s an amazing rate compared to some resource plays- recall Pinecrest Energy had estimated its decline rate at 40% in the first year of production following its now defunct combination with Spartan Oil. [...]

  • Hey Mich, any news on the dividend? The merger with Spartan took place but I see no evidence that a dividend is forthcoming.

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