Peyto Announces Strategic Acquisition and Concurrent Bought Deal Offering

Source Company Press Release
Company Peyto Exploration & Development Corp., Repsol, Repsol Oil & Gas Canada Inc.
Tags Corporate: Overview/Strategy, Country: Canada, Financing Activities: Debt Financing, Equity Financing, Financing News, M&A: Asset Deal, Deals, Upstream: Upstream News
Date September 06, 2023

Peyto Exploration & Development Corp. ("Peyto" or the "Company") (TSX: PEY) is pleased to announce it has entered into a partnership interest purchase agreement to acquire  Repsol Canada Energy Partnership, which holds the Canadian upstream oil and gas business of  Repsol Exploración, S.A.U., including all related midstream facilities and infrastructure located predominantly in the Deep Basin (collectively the "Assets"), for cash consideration of US$468 million (CDN$636 million) ("the Acquisition") subject to closing adjustments. The Acquisition is expected to close in mid-October, subject to customary closing conditions, including the receipt of necessary regulatory approvals.

The Acquisition will be funded through an upsizing of the Company’s existing revolving credit facility, a new two-year amortizing term loan and net proceeds from a $125 million equity offering as discussed in more detail below.

Jean-Paul Lachance, President and CEO of Peyto commenting on the Acquisition, "This acquisition marks a very important milestone for Peyto. We have coveted these lands for many years and this asset checks all the boxes for us. Peyto has a history of being very selective when it comes to acquisitions but is also very successful in realizing value from them. The Repsol assets fit perfectly with Peyto's existing Deep Basin acreage and offer a significant number of top-tier undeveloped locations that will immediately compete for capital within our portfolio. Furthermore, we have identified many opportunities to leverage our low-cost, operational expertise on these Assets which we expect will yield significant annual cost savings. Together, at current strip pricing and under our proposed development plan, the combined assets are forecast to generate sufficient cumulative free cash flow over the next three years to support long term sustainable returns to shareholders in the form of reduced debt and increasing dividends."

Key Asset Highlights Include:

  • Extension of Core Lands: The Assets expand Peyto’s Deep Basin land position by adding 455,000 net acres (average 65% WI) in the greater Edson area which directly overlay the Company’s current geological plays, infrastructure, and lands.
  • Material Scale with Low Decline: The Assets add ~23,000 boe/d (~75% natural gas production and ~25% NGL production) with an estimated ~12% annual base production decline rate.
  • Significant Upside Potential: The Assets have not been drilled over the last several years and are at a point of development where Peyto was on its adjacent lands ten years ago. Peyto has internally identified over 800 gross locations1 (of which the independent reserves evaluator, GLJ Ltd ("GLJ"), has booked 297) that provide multiple years of high-quality drilling inventory providing a path to 100,000 boe/d for the Assets.
  • Complementary Infrastructure: The Acquisition includes five operated natural gas plants (one suspended) with combined net natural gas processing capacity of ~400 MMcf/d, ~2,200 km of operated pipelines, and a 12 MW cogeneration power plant. Included with these assets is the Edson Gas Plant and the Central Foothills Gas Gathering System with its extensive 350 km, large diameter pipeline infrastructure that extends in both directions from the plant.
  • Meaningful Operational Synergies: Peyto’s current presence in the area allows for immediate and long-term savings which can be achieved through the optimization of production using adjacent facilities and pipelines, common road and land use, and enhanced economies of scale.
  • Capital Efficiency: Peyto estimates development capital efficiency for the acquired Assets to be approximately $9,500 per boe/d2, representing a ~25% efficiency gain over the Company’s current base business of $12,500 per boe/d.
  • Attractive Purchase Price and Timing: The total consideration is substantially equivalent to the before tax net present value of just the Proved Developed Producing ("PDP") reserves of the Assets at a 5% discount rate as evaluated by GLJ pursuant to the GLJ Report (as defined below). Peyto’s development and growth plans for the Assets are expected to be well-timed with anticipated expansions to LNG projects in both the U.S. and Canada in 2025.

Acquisition Reserves

GLJ has evaluated 100% of the producing reserves associated with the Assets and has also scheduled an aggregate of 297 proved and probable gross drilling locations associated with the Assets. This forecast of drilling locations is by no means a complete assessment of what Peyto has identified for total drilling opportunities. The GLJ report was dated effective June 1, 2023, was prepared in accordance with the standards contained in the COGE Handbook and the reserve definitions contained in National Instrument 51-101 (the “GLJ Report”), and using the 3CA April 1, 2023 price forecast3, and is summarized in the table below.

  Before Tax Net Present Value4

($millions) Discounted at 
Reserve

Category 
Gas

(BCF) 
Oil and NGLs

(MMstb) 
Total MMboe

(6:1) 
0%  5%  10% 
Proved Developed Producing ("PDP")  409.4  21.6  89.9  $792  $654  $516 
Total Proved plus Probable ("P+P")  1,544.0  49.3  306.7  $5,793  $3,598  $2,469 

Reserves values are inclusive of all estimated future abandonment and retirement obligations including inactive wells. These are estimated at $115 million discounted at 10% in the PDP category. The net present value of the P+P reserves includes $1.1 billion of undiscounted future development capital.

Complementary Acquisition Footprint

The following graphic shows the Assets in relation to Peyto's current assets and operations in the Greater Sundance/Edson Area

Complementary Acquisition Footprinthttps://www.globenewswire.com/news-release/2023/09/06/2738883/0/en/Peyto-Announces-Strategic-Acquisition-and-Concurrent-Bought-Deal-Offering.html

Pro Forma Highlights Include:

  • Dominant Deep Basin Position: Pro forma asset base solidifies Peyto as a premier operator in the heart of the Deep Basin with 1.2 million net acres of highly delineated lands.
  • Extensive Inventory: After giving effect to the Acquisition, drilling inventory includes over 1,592 gross booked locations and a total of 3,400 gross identified locations which can support future development for years to come.
  • Significant Operated Infrastructure: Combined, Peyto’s gas plants will have 1.5 Bcf/d gross (1.4 net Bcf/d) of gas processing capacity that will be only 52% utilized. Extensive overlap of gathering systems and field compression will allow for production and operating cost optimization.    

Three Year Development Plan

Peyto has been developing its lands in the Greater Sundance Area, immediately surrounding and adjacent to the acquired lands, for 25 years and has drilled over 1,500 wells in the area. As a result, the Company has extensive experience with the geologic play types in the area and has specifically mapped multiple locations across these lands to begin drilling immediately after closing. The under-developed lands acquired contain a horizontal drilling density similar to Peyto's land position 10 years ago. The Company has a history of rare but selective tuck-in acquisitions and has demonstrated the ability to profitably expand production by multiple times such as in Cecilia and Brazeau, most recently. Peyto believes this Acquisition represents a similar opportunity, but on a much larger scale, with sufficient inventory to grow production from these Assets up to 100,000 boe/d.

Subject to the completion of the Acquisition, Peyto has developed a three-year plan with total capital spending ranging between $450–$500 million per year, which is expected to grow production from the current pro-forma production level of 123,000 boe/d to over 160,000 boe/d by the end of 2026. The Company expects the pro forma corporate base decline to decrease to 25% (from 29%) in 2024 and beyond. Peyto is planning a balanced development drilling program and expects to deploy two to three rigs on the newly acquired lands over the next three years to complement the Company’s existing high return locations. Production from the Asset is expected to grow throughout 2024 and average approximately 33,000 boe/d reflecting a 50% growth over current levels. The combined capital efficiency of the pro forma program is expected to range between $10,000 and $11,000/boed, representing a 16% improvement as compared to Peyto's stand-alone forecasted estimates over the same period of $12,500/boe/d. The acquired midstream infrastructure, combined with Peyto's own firm transportation on the NGTL system, has adequate excess capacity for the planned production growth. As always, Peyto’s capital plans will remain nimble to adjust to changing market conditions.

Peyto will continue to employ its risk management strategy of mechanistically hedging production over time using both financial and physical fixed price contracts. Currently, Peyto has approximately 280,000 mcf/d of gas price fixed at $4.19/mcf for 2024 and approximately 176,000 mcf/d at $4.24/mcf for 2025. The Company's fixed price contracts combined with its diversification to the Cascade power plant and other market hubs in North America allow for revenue security, exposure to premium seasonal markets, and support continued shareholder returns through dividends and debt reduction. Under current pricing assumptions5, Peyto expects to reduce its leverage to under 1.0 x Debt to EBITDA4 before the end of 2025 utilizing this three-year growth plan. The Company estimates that the optimized pro forma asset base is capable of funding a production maintenance capital program and sustaining the current dividend down to prices below $US2.00/MMbtu NYMEX in conjunction with Peyto's disciplined hedging program.

As a prudent and responsible operator Peyto will continue to be proactive with abandonment and reclamation spending of approximately 2% of the capital each year which will exceed the minimum requirements dictated by the Albera Energy Regulator and other jurisdictions.

Transaction Financing

In connection with the Acquisition, Peyto has entered into a debt commitment letter with the Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada acting as underwriters, to provide aggregate debt commitments of $1.3 billion, which are expected to be comprised of an upsized $1 billion revolving credit facility to replace its existing $800 million revolving credit facility and a new $300 million two-year amortizing term loan.

Further, Peyto has entered into an agreement with a syndicate of underwriters (the "Underwriters") led by BMO Capital Markets, CIBC Capital Markets and National Bank Financial, for the issuance of 10,510,000 subscription receipts (the "Subscription Receipts") on a bought deal basis, at an issue price of $11.90 per Subscription Receipt (the "Offering Price") for total gross proceeds of approximately $125 million (the "Equity Offering"). Peyto has also granted the Underwriters an option, exercisable, in whole or in part, at any time up to the earlier of 30 days following the closing of the Equity Offering and the occurrence of certain termination events with respect to the Subscription Receipts, to purchase up to an additional 15% of the number of Subscription Receipts purchased by the Underwriters under the Equity Offering at the Offering Price to cover over-allotments, if any, and for market stabilization purposes (the "Over-Allotment Option"). The gross proceeds from the Equity Offering, less the portion of the underwriters’ fee that is payable on the closing of the Equity Offering, will be held in escrow and are intended to be used by Peyto to fund a portion of the purchase price for the Acquisition.

Each Subscription Receipt will entitle the holder to receive, without payment of additional consideration and without further action, one common share of Peyto (a "Common Share") upon the closing of the Acquisition.

Holders of the Subscription Receipts will be entitled to receive payments per Subscription Receipt equal to the cash dividends paid on Peyto's common shares (the "Dividend Equivalent Payments"), if any, actually paid or payable to holders of such common shares in respect of all record dates for such dividends occurring from the closing date of the Offering to, but excluding, the last day on which the Subscription Receipts remain outstanding, to be paid to holders of Subscription Receipts concurrently with the payment date of each such dividend. The Dividend Equivalent Payments will be made regardless of whether the Acquisition is completed or not. If the Acquisition is not completed at or before March 31, 2024, or in certain other events, then the subscription price for the Subscription Receipts will be returned to holders of Subscription Receipts, together with any unpaid Dividend Equivalent Payments and any pro-rata interest on such funds, if any.

The Subscription Receipts issued pursuant to the Equity Offering have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and may not be offered or sold in the United States absent registration under the Securities Act or an applicable exemption from registration under the Securities Act. The Subscription Receipts issued pursuant to the Equity Offering will be distributed by way of a short form prospectus in all provinces of Canada (excluding Québec) and may also be placed privately in the United States to Qualified Institutional Buyers (as defined under Rule 144A under the U.S. Securities Act) pursuant to the exemption provided by Rule 144A thereunder, and may be distributed outside Canada and the United States on a basis which does not require the qualification or registration of any of the Company's securities under domestic or foreign securities laws. This news release is neither an offer to sell nor the solicitation of an offer to buy any securities and shall not constitute an offer to sell or solicitation of an offer to buy, or a sale of, any securities in any jurisdiction in which such offer, solicitation or sale is unlawful. The Equity Offering is expected to close on or about September 26, 2023 and is subject to certain conditions including, but not limited to, the receipt of all necessary approvals including the approval of the Toronto Stock Exchange.

Advisors

BMO Capital Markets is acting as lead financial advisor, CIBC Capital Markets and National Bank Financial are acting as financial advisors to Peyto with respect to the Acquisition.

Burnet, Duckworth & Palmer LLP is acting as legal counsel to Peyto with respect to the Acquisition, the revised credit facilities and the Equity Offering.

Source: EvaluateEnergy® ©2024 EvaluateEnergy Ltd