Shareholders of Pipestone Energy last Wednesday approved (with a 67/33% yes/no vote) a reverse merger with Strathcona Resources. Strathcona (substantially owned by a private fund) will own 91% of the remaining entity, while Pipestone shareholders will own 9%.
Needless to say the valuation received by Pipestone shareholders was lacklustre (hence describing the minority protest vote). On August 1st, when the reverse merger was announced, the stock traded down 10% to close at $2.42. After the deal with approved, the stock is now at $2.14. It has dramatically unperformed as almost every other oil and gas equity has appreciated considerably since then. Next week they will complete the acquisition and there will be a share consolidation.
Strathcona has assembled a bunch of relatively interesting assets over the past decade. Considering I have owned debt securities of some of the entrails they have devoured, it is something I still keep track of once in awhile, but now they are public I can continue taking a more relevant look at them.
One of them was the acquisition of Pengrowth Energy for $0.05 a share (and the assumption of their not-inconsiderable at the time debt of about $700 million). I had owned Pengrowth’s convertible debentures ages ago (and they were matured at par, pretty much just before the company was running into liquidity issues). An interesting asset was the SAGD heavy project near Lindbergh, but it was relatively inefficient (recently reported steam to oil ratio was around 4), producing around 20k boe/d.
The total estimated production of Strathcona and Pipestone is 185,000 barrels/day, at apparently a $735 million sustained capital spend (this estimate seems a little bit low in my estimation). At US$80 WTI the estimated EBITDA is $2.5 billion. The metrics at the current commodity price structure is relatively favourable. The market cap, at $2.14/share, will be about $6.8 billion and the debt that will get added on will be in excess of $3 billion. Relatively speaking, the valuation is roughly in the ballpark of (a small number of) peers, so paying attention to asset quality and management’s intentions on how to best work with their capital remain to be seen.
One thing is undeniable – Waterous Energy Fund (the private owner of Strathcona Resources) is going to make a fortune on their investment in Pengrowth Energy made back in 2019. They timed the low nearly perfectly (I do not think they could be faulted for not foreseeing Covid-19). That said, there are other companies out there that have proven shareholder-friendly policies and are trading at even better valuations.