Whitecap strikes deal to add TORC Oil & Gas in an effort to grow production

A key indicator of future oil and gas drilling activity in Alberta has fallen to a record low. Jeff McIntosh / The Canadian Press

Calgary-based Whitecap Resources Inc. is cementing its position as a consolidator of conventional oil and gas producers in Western Canada with a friendly $550-million all-stock deal to buy rival TORC Oil & Gas Ltd.

“This strong-on-strong combination will create one of the largest pure-play Canadian conventional light oil producers and the ninth largest publicly traded oil and gas company in Canada,” said Whitecap CEO Grant Fagerheim on a Wednesday conference call to discuss the deal.

“The enhanced size and scale will allow us to more effectively navigate commodity price volatility through a significantly enhanced free funds flow profile. We are expecting an improving commodity price environment over the next 12 months.”

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Shares in both companies soared on Wednesday as analysts applauded the deal, with Whitecap gaining as much as 61 cents or 14 per cent at $4.96 and TORC jumping 26 cents or 10 per cent to as much as $2.85.

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“We see the transaction as a strategic home run,” said Desjardins analyst Chris MacCulloch in a report.

“This is exactly the type of M&A we think investors are looking for,” chimed in analysts from Tudor Pickering & Holt.

The merger of the two companies comes as Whitecap awaits the close of its $155-million all-stock deal to buy private oil and gas producer NAL Resources Ltd. expected in early January.

Under the agreement announced after markets closed Tuesday, each TORC share can be exchanged for 0.57 of a Whitecap share, valuing it at $550 million based on closing stock prices Tuesday. Whitecap is to assume TORC’s net debt of about $335 million.

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The deal is expected to close in late February. It must win approval by holders of two-thirds of TORC’s shares and a simple majority vote by Whitecap’s shareholders.

Whitecap said it will increase its monthly dividend by six per cent to 1.508 cents per share after the acquisition closes.

The deal is attractive because of the companies’ geographically overlapping major assets in southeast Saskatchewan and central Alberta, including some jointly held production units, permitting the potential for $15 million in administrative and cost synergies in the first year, said Fagerheim on the call.

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In response to a question, he said some TORC assets in Alberta and Saskatchewan that don’t fit as well in the portfolio may be sold.

Whitecap says its average production will be about 82,000 boe/d with a capital budget of about $260 million if the NAL deal is closed, but it will grow to about 100,000 boe/d and a budget of about $290 million if the TORC acquisition is completed.

Whitecap said the Canada Pension Plan Investment Board has committed to vote its TORC shares in favour of the transaction.

Desjardins’ MacCulloch pointed out CPPIB stands to own about six per cent of Whitecap if the deal is completed, while NAL owner Manulife Financial Corp. will end up with about 10 per cent of the shares.