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Transaction Tuesday

Deals by Kelt Exploration and Long Run Exploration that will expand their holdings in their core areas have analysts - and investors - excited

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 mfawcett@albertaventure.com

Jun 17, 2014

by Max Fawcett

Everyone loves a takeover – well, shareholders of the company being bought, at the very least – but sometimes it’s the less dramatic transactions that are the truly transformational ones. That certainly seems to be the case with Kelt Exploration’s latest deal in which it paid approximately $165 million – the bulk of which came in the form of cash, with $58 million worth of Kelt shares rounding things out – to acquire 2,300 boe/d of oil-weighted assets in its own backyard. AltaCorp Capital’s Jeremy McCrea liked the deal, noting that it will bump Kelt’s production by 10 per cent to 12,150 boe/d this year and an additional 11 per cent in 2015 to 16,760 boe/d. He doesn’t think the company is done making tuck-in acquisitions like this, either. “With the company’s cost of capital advantage, leverage still only at 1.0x in 2015, and the ability (and history) of making accretive acquisitions, we believe more opportunities will present themselves,” he wrote. “With production per share looking to grow 33 per cent into 2015 (with cash flow per share also increasing by 20 per cent), and improving asset economics in its core plays, we believe investors will continue to pay premium multiples for Kelt’s share price. As a result, we are increasing our target price to $17.00.”

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Then again, whole-hog takeovers are fun too. Witness Long Run Exploration’s all-stock acquisition of Crocotta Energy (TSE:CTA) in which it picked up $242 million worth of Cardium assets (along with $115 in debt) in a deal that consolidates a new core area for Long Run. It also got high marks, this time from FirstEnergy’s Katrina Karkkainen. “Strategically we see this as a strong deal for Long Run, clearly establishing a solid third core area with control over infrastructure and an inventory of 300 net drilling locations with exploration upside,” she wrote in a June 13 note. “While we recognize that cash use to cash flow has climbed over previous levels, overall sustainability ratio remains well under 100 per cent in 2015e. With minimal changes to our valuation metrics we have elected to maintain our top pick ranking and $8.50 per share target price, continuing to believe that our 2015e target multiple of 4.2x is far too low relative to our mid cap peer group.” Karkkainen followed that up with a note today after she and her team met with management and liked what they heard from them. “We continue to like this story and believe that execution of the business strategy will warrant multiple expansion while also resulting in yield contraction.”

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