# Energy stock mergers and acquisitions (TVE)



## zinfit (Mar 21, 2021)

Oil and gas stocks in different times were trading between 5 and 8 times cash flow. Most of these stocks are currently trading between 2. 1/2 -3 times cash flow. A little while ago Whitecap made a significant acquisition and today Tamarack Valley made such an announcement. I note that a similar pattern is happening in the US.I own some US energy stocks who have been followed this path. If the valuations of oil and gas stocks are at bargain basement prices take overs seem rational. I figure more acquisitions are around the corner. CNQ is Canada's largest energy stock and I believe Murray Edwards created this giant by making a number of astute acquisitions .


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## Jimmy (May 19, 2017)

From what I understand these companies will be making cash flow yields ( and price returns ) of ~ 20-40%/yr even at $75/bbl oil. So whatever they do it seems, dividends, share buybacks, acquisitions) all sounds good. Even capex if the returns are similar.

Everyone has been saying we will need oil for at least 5 more yrs, maybe longer. The EU has shown how much of a disaster relying more on green energy can be at this stage.

I have CNQ as a large cap and just bought a little Baytex when oil was pounded down to $82.


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## zinfit (Mar 21, 2021)

Jimmy said:


> From what I understand these companies will be making cash flow yields ( and price returns ) of ~ 20-40%/yr even at $75/bbl oil. So whatever they do it seems, dividends, share buybacks, acquisitions) all sounds good. Even capex if the returns are similar.
> 
> Everyone has been saying we will need oil for at least 5 more yrs, maybe longer. The EU has shown how much of a disaster relying more on green energy can be at this stage.
> 
> I have CNQ as a large cap and just bought a little Baytex when oil was pounded down to $82.


Baytex like TVE has a strong position in the Clearwater formation. Some of the energy experts say that is North America's most lucrative and productive formation.


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## AltaRed (Jun 8, 2009)

@Jimmy Global oil demand is not going to decrease that quickly. It will likely be still at 50% of current levels in 2040 or so in the best (most aggressive) case. That means new sources will have to be continually developed to replace natural declines in production absent any development capex of about 3.5-5% per year. To put this in perspective, in the absence of capex, a natural decline rate of 3.5%/yr means supply falls to 50% of current levels in 20 years. At 5%/yr natural decline rate, supply falls to 50% of current levels in 15 years. Key message: Development capex will continue to be required in some amounts of tens of billions of dollars for decades to come. How much of that will be from Canada is the billion dollar question.

FWIW, the NE Alberta Clearwater formation has been drilled off and on since at least the mid-80s. It is only now that: 1) technology and oil prices make major exploitation highly economic, and 2) the highest value sweet spots have been identified and being exploited. A number of well positioned intermediate companies will do well in their areas of operation but rest assured, this is no Eagle Ford in Texas. This is heavy oil so will be discounted from lighter blends. See this for a bit of history to early 2020 https://www.gljpc.com/blog/creativity-clearwater I have no idea what to expect for ultimate production rates from this formation as it is drilled out. Maybe 100kbpd - triple Mar 2020 levels? 200kbpd? 300kbpd? If I can find more recent data, I will post for info purposes.

Added: A more recent DOB infographic on it. Production could be over 70kbpd this year. Clearwater Growth Exploding: New Daily Oil Bulletin Infographic

Added again somewhat later: Per Crude Oil Production oil production from all wells in AB is less than 500 kbpd. Clearly from Figure S4.2, the forecast did NOT include the large new volumes of Heavy Oil now coming on production out of the Clearwater formation. That graphic will need to be revised.


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## Jimmy (May 19, 2017)

zinfit said:


> Baytex like TVE has a strong position in the Clearwater formation. Some of the energy experts say that is North America's most lucrative and productive formation.


I am a novice but Erica Nuttal had Baytex, Enerplus and Meg as his top picks on BNN.


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## Jimmy (May 19, 2017)

AltaRed said:


> @Jimmy Global oil demand is not going to decrease that quickly. It will likely be still at 50% of current levels in 2040 or so in the best (most aggressive) case. That means new sources will have to be continually developed to replace natural declines in production absent any development capex of about 3.5-5% per year. To put this in perspective, in the absence of capex, a natural decline rate of 3.5%/yr means supply falls to 50% of current levels in 20 years. At 5%/yr natural decline rate, supply falls to 50% of current levels in 15 years. Key message: Development capex will continue to be required in some amounts of tens of billions of dollars for decades to come. How much of that will be from Canada is the billion dollar question.
> 
> FWIW, the NE Alberta Clearwater formation has been drilled off and on since at least the mid-80s. It is only now that: 1) technology and oil prices make major exploitation highly economic, and 2) the highest value sweet spots have been identified and being exploited. A number of well positioned intermediate companies will do well in their areas of operation but rest assured, this is no Eagle Ford in Texas. This is heavy oil so will be discounted from lighter blends. See this for a bit of history to early 2020 https://www.gljpc.com/blog/creativity-clearwater I have no idea what to expect for ultimate production rates from this formation as it is drilled out. Maybe 100kbpd - triple Mar 2020 levels? 200kbpd? 300kbpd? If I can find more recent data, I will post for info purposes.
> 
> Added: A more recent DOB infographic on it. Production could be over 70kbpd this year. Clearwater Growth Exploding: New Daily Oil Bulletin Infographic


Thanks for the links and Interesting. I recall from their presentation Baytex was projecting production increases of 3-5% over the next few years.


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## zinfit (Mar 21, 2021)

Another emerging player in the Clearwater is Headwater. I believe RBC has TVE as one of its top global stocks.


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## AltaRed (Jun 8, 2009)

These are all small cap companies though with market caps in the $1-2B range though TVE will bulk up with Deltastream. Whoever doesn't acquire will get acquired.


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## doctrine (Sep 30, 2011)

This may not be popular opinion but this TVE acquisition as well as the previous WCP one look just terrible for shareholders on all metrics. TVE was only a $1.4B company that "acquired" another company for $1.4B, and they paid a massive premium for it - nearly a 100% premium over their own existing production. I.e. $1.4B company with 44,000 boe/d of production pays $1.4B for a company with 23,000 boe/d. It may be the most expensive acquisition anywhere since the pre-2014 rush.

Just 3 months ago, TVE management clearly said when debt got to $400M, which they just achieved, that they would be returning 50% of cash to shareholders. They already delayed the return because of other two acquisitions they already made this year with the "promise of big shareholder returns". Sorry, but a 25% increase to their dividend is nothing compared to the 300% increase they could have made, but instead have given to Deltastream shareholders, who have seen a 1000% return in 10 years. Nice cash out.

This is a fleece job on shareholders. Everything they have done is not only contrary to what they promised just months ago, it is also contrary to what Eric Nuttall asked them to do and I would not be surprised to see him dump his fund's shares, just like he dumped WCP shares after their big XTO acquisition. If TVE wanted to create a Clearwater monster, they should not have promised 50% of free funds flow to be distributed to shareholders starting Q3, i.e. now. Classic bait and switch.

TVE equity holders are unlikely to see substantial returns until 2024. And much of that might just be buying out the dilution to Arc Financial.

CNQ is drilling at less than $10,000 a boe/d on their lands including on Clearwater acreage. Compare that to the TVE acquisition metrics (>$60k) and you realize how bad of a deal it is.

Ugh.


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## zinfit (Mar 21, 2021)

doctrine said:


> This may not be popular opinion but this TVE acquisition as well as the previous WCP one look just terrible for shareholders on all metrics. TVE was only a $1.4B company that "acquired" another company for $1.4B, and they paid a massive premium for it - nearly a 100% premium over their own existing production. I.e. $1.4B company with 44,000 boe/d of production pays $1.4B for a company with 23,000 boe/d. It may be the most expensive acquisition anywhere since the pre-2014 rush.
> 
> Just 3 months ago, TVE management clearly said when debt got to $400M, which they just achieved, that they would be returning 50% of cash to shareholders. They already delayed the return because of other two acquisitions they already made this year with the "promise of big shareholder returns". Sorry, but a 25% increase to their dividend is nothing compared to the 300% increase they could have made, but instead have given to Deltastream shareholders, who have seen a 1000% return in 10 years. Nice cash out.
> 
> ...


Based on the pay back on new wells [something like 3 months] it won't take long to pay for this acquisition. Quality assets cost money. Whitecap pay for high quality assets in the Monterey . Same story. They have become a much more diversified stock with great assets in BC,Alberta and Sk.In a year the cost of these acquisitions will be history.


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## DenisD (Apr 19, 2009)

Eric comments on the TVE acquisition.









Tamarack Valley Energy buying Deltastream for $1.43B


Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners, joins BNN Bloomberg and talks about Deltastream is being purchased by Tamarack Valley Energy for $1.425 billion.




www.bnnbloomberg.ca


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## doctrine (Sep 30, 2011)

zinfit said:


> Based on the pay back on new wells [something like 3 months] it won't take long to pay for this acquisition. Quality assets cost money. Whitecap pay for high quality assets in the Monterey . Same story. They have become a much more diversified stock with great assets in BC,Alberta and Sk.In a year the cost of these acquisitions will be history.


The point isn't that the assets are good, the point is they paid the highest price imaginable at a relative high in the oil price. If the oil price crashes, it will take a lot longer to pay off the debt. The company is just aligned with growth, and as far as I am concerned, outright misled investors on the direction they were taking. Don't say you are returning free cash flow, then go out and spend 24 months worth of free cash flow the next week. WCP is in a similar position and was the worst performing mid-cap in 2021 and so far is the worst performing mid-cap in 2022. Debt funded acquisitions at cyclical highs are recipes for disaster in all commodity markets.


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## AltaRed (Jun 8, 2009)

doctrine said:


> Debt funded acquisitions at cyclical highs are recipes for disaster in all commodity markets.


I couldn't have said it better. In my 25 years in the patch, and for part of it, the M&A guy in our company, I saw some terrible acquisitions done for which companies never fully recovered from it, or took years to do so. Unless the synergies are mind boggling effective for economies of scale, paying well above market is just plain stupid.... with debt or even equity. 

You would never see a Mike Rose doing this sort of thing. These small caps are rolling the dice for a 6 and they may get a 1 or a 2.


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## zinfit (Mar 21, 2021)

TVE had a market value of around 1.8 billion prior to the deal and the cost of the acquisition is 1.5 billion. The deal allows TVE to double its production and to grow production. Many experts have rated TVE as a very undervalued stock. RY has placed it as one of their top global picks. Before people get to judgemental they might want to review the history of CNQ and how Murray Edwards through accretive acquisitions made it into Canada's largest energy stock.I own 1700 shares and I have no intent on selling any shares.


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## AltaRed (Jun 8, 2009)

Murray Edwards was highly disciplined to buy cheap. Much of that occurred when I was still in the O&G M&A business and when I had business relationships with FirstEnergy Corp (co-founded by Murray Edwards, Brett Wilson and Jim Davidson - since bought out in 2016 by GMP Capital). That is vastly different from what TVE has done.

You may well be right that TVE's expensive acquisition may play out but the jury is out on this roll of the dice. It doesn't hurt to be open to alternative views.


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## Covariance (Oct 20, 2020)

Great dialogue everyone. The best investors know and are fully aware of the bull and bear case for each active investment.


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## Covariance (Oct 20, 2020)

One left field comment. Investment banks follow and put ratings on companies because they expect them to either issue equity or raise debt and generate fees. It's a business. They are not investors. Their ratings are worthless, but the thought process and methodologies they use to arrive at valuations are highly instructive when forming one's own sense of intrinsic value.


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## zinfit (Mar 21, 2021)

I should point out that the Clearwater is a very active area for new drilling. According to some experts the success rate on drilling success is off the charts and the full payback for each new well is 3 months. Based on current cash flow valuations oil and gas stocks are selling away below historic valuations. That is clear when you look at debt repayments, share buybacks and shareholder payouts . . There is a lot of value in the Clearwater oil stocks. I think many could argue TVE made a pretty deal with this purchase. The debt portion was only about 20% of the purchase price and is expected to be payed off within a year. About 30% was by issue of stock. Again at $80 dollar oil they could buy back that number of shares within a couple of years. If this is correct they doubled their size, greatly enhanced their ability to increase production and within 2 years the cost of the acquisition is fully payed for. It might take them two years to pay for this asset. It took me 25 years to pay for my home.


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## AltaRed (Jun 8, 2009)

Moderators.... It would seem best to re-title this Tamarack Valley - TVE given the bulk of the discussion.


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## AltaRed (Jun 8, 2009)

FWIW, it appears Eric Nuttall has this as a top pick today on BNN Marketcall


> Tamarack recently announced a material bolt-on acquisition in the Clearwater play from ARC Financial for $1.4 billion. While this transaction defers its ability to return meaningful free cash flow back to shareholders by about two quarters given the need to deliver, assets of this quality and running room rarely come to market. As a result, Tamarack is now the dominant public Clearwater player with 12+ years of running room in the most economic oil play in North America. We estimate the stock to be trading at 2.1x EV/CF and a 44 per cent free cash flow yield, able to buy back 12 per cent of its stock in 2023 while paying a four per cent dividend and peg fair value at 5X = $11.66/share = 195 per cent potential upside.


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## londoncalling (Sep 17, 2011)

With ninepoint being the 2nd largest shareholder post acquisition, Nutall would be stupid not to say he likes the deal. I see this as a great opportunity for TVE that is not without substantial risk. Like all things stock investment related risk and reward are correlated. I do hope the deal returns the results TVE is expecting. It would be a good thing for Canadian oil companies to get another win.


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## AltaRed (Jun 8, 2009)

I purposely didn't offer an opinion in my prior post, recognizing.........


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## zinfit (Mar 21, 2021)

londoncalling said:


> With ninepoint being the 2nd largest shareholder post acquisition, Nutall would be stupid not to say he likes the deal. I see this as a great opportunity for TVE that is not without substantial risk. Like all things stock investment related risk and reward are correlated. I do hope the deal returns the results TVE is expecting. It would be a good thing for Canadian oil companies to get another win.


His projection was based on $100 oil. That could be a false assumption. I still think these companies are very profitable at 70 or 80 dollar oil.


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