A tale of two transactions
Also: Why AltaGas is still a buy - even at these levels
When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at firstname.lastname@example.org
by Max Fawcett
AltaCorp Capital came out today with its take on two recent transactions in the energy sector’s midcap space, Alexander Energy’s takeover of Renegade Petroleum (and subsequent re-branding as Spartan Energy) and Surge Energy’s (TSE:SGY) purchase of Longview Oil. But while it likes the sum of the parts in the first case, it’s not so bullish on the second.
With respect to the Alexander-Renegade-Spartan dance, it noted that Spartan (TSE:SPE) will have a $74 million capital program for 2014 that will be funded entirely by internally generated cash flow. The company expects average production on the year to be around 5,100 barrels per day, with 93 per cent of that production coming in the form of oil and liquids. More interesting, perhaps, is that it forecast exit production of 7,300 barrels per day, with a slight increase in the oil/liquids weighting. That’s ahead of AltaCorp’s expectations, and explains its bullish $4.00 per share price target.
Surge’s takeover of Longview, on the other hand, caused AltaCorp to reduce its price target by 50 cents and chop its rating to sector perform. Why? They’re not sure the assets they paid $429 million for (mostly through the exchange and issuance of SGY shares, along with the assumption of some debt) will be all that accretive. “Because LNV has a relatively spread out asset base, with higher operating cost properties, it is difficult to see this as a strategic ‘must have’ for SGY,” Don Rawson wrote. “Growth improves slightly on a per share basis, although we believe there is a cost in terms of asset quality. While the numbers may work, our concern is that SGY may weigh too heavily the financial impact of its acquisitions over the assets (free cash flow/payout ratio).”
Meanwhile, despite its impressive run over the last couple of years, Gordon Pape still likes AltaGas (TSE:ALA) shares. “The reason why I like AltaGas is the disciplined but aggressive management. You get a real feeling of activity and initiative, something that is likely to pay off as the pipeline industry adjusts and comes to terms with a changing environment. At the same time, the company’s growing power generation and distribution operations provide a solid earnings base to support acquisitions and dividend distributions. Most important, AltaGas has the only natural gas pipeline currently in place to serve the energy export industry taking shape on Canada’s west coast.”
The fact that the company has a robust dividend with room to grow doesn’t hurt, Pape wrote. And while it’s enjoyed an almost uninterrupted rally from the mid-$20 range, he thinks there could be more to come. “Summing up, I expect to see earnings of about $1.75 a share in 2014 with a sharp increase to $2.25 next year. The company’s lower risk regulated business provides a solid platform while the west coast projects offer significant potential. One forecaster has described the AltaGas Asian export program as transformational for the company.”