Crescent Point Energy (ticker: CPG) is expanding its presence in Alberta as the result of a stock for stock merger.
On July 2, 2015, the Calgary-based exploration and production company announced the purchase of Coral Hill Energy Ltd. for C$258 million (approximately US$204 million), including the assumption of C$132 million in net debt (approximately US$104 million). CPG was engaged with Coral Hill for the past five years as part of a joint venture on the Swan Hills Beaverhill Lake resource play of Western Alberta.
Coral Hill’s net production was about 3,200 BOEPD (94% oil), the majority of which were sourced from the Swan Hills asset. Overall, the company holds more than 500 net sections of land with proved reserves of 10 MMBOE, including approximately 100 net internally identified drilling locations. Three waterflood tests were completed and described as “encouraging results to date in terms of reduced overall decline rates and increased expected recovery factors.”
Pro forma the transaction, CPG becomes the sole operator of the Swan Hills asset and has full control of the pace of future development. Well type curves are established at 150 to 250 MBOE apiece. The transaction is expected to close no later than August 14, 2015.
Crescent Point’s Stake in Coral Hill
CPG already owned about 8.7% of Coral Hill’s outstanding shares, and will acquire the remainder by issuing 4.28 million of its own shares. Coral Hill stockholders will receive 0.0567 CPG shares for each Coral Hill share, allowing them to be a part of Crescent Point and its ongoing operations.
Per the terms of the transaction, CPG is paying roughly C$81,000 per producing BOE and C$25.41 per proved BOE (1.5x recycle ratio). The estimated cash flow multiple is 5.8x including a netback of approximately C$38.00/BOE.
Pro forma, Crescent Point will hold roughly 730 net sections of land and 185 net identified drilling locations in Swan Hills alone. In connection with the purchase, CPG upwardly revised its guidance by 1.0 MBOEPD and now expects 2015 volumes to averaged 163.5 MBOEPD. Dividends and capital expenditures remain unchanged.
Upping the Ante in Waterfloods
The latest acquisition comes on the heels of its Legacy Oil + Gas purchase, which closed on June 30, 2015. Legacy was also acquired by means of a stock for stock merger, with total value of CN$1.53 billion.
The characteristics of both acquisitions are similar in regards to the assets themselves, consisting mainly of light oil plays with low recovery factors and in the early stages of development. Management said both assets have a large inventory with significant waterflood upside.
“The Legacy acquisition was very beneficial from an accretion standpoint, while Coral Hill is financially accretive, it is also a strategic acquisition that allows us to control the pace of development in the Swan Hills area,” said Scott Saxberg, President and Chief Executive Officer of Crescent Point, in a press release.
Completion methods were a popular topic in the company’s Q1’15 conference call, and the use of waterfloods and sliding sleeve technologies were credited as driving the volume growth in the quarter. “Waterflood will reduce our corporate declines and optimize our free cash flow,” said Saxberg in the call. “This advancement, in combination with our new closable sliding sleeve technology, have the potential to significantly increase recoveries.”
Increasing waterflood efficiencies are leading to higher volumes and estimated ultimate recoveries alike. In the call, Saxberg pointed out that recovery factors increased 16% on a year-over-year basis in 2013 and then jumped by an additional 26% in 2014. “These are big numbers, hundreds of millions of barrels of added reserves through pretty inexpensive capital… So, the next leg of our growth as a company on the reserve side are very cheap, long-term reserve adds that’ll show up in our lower decline as a company and add several, several years with lower F&D.”