CNRL Acquiring Painted Pony

Canadian Natural Resources Limited is acquiring Painted Pony Energy Ltd. for a cash consideration of 69 cents/share.

The company will also assume Painted Pony’s total debt of approximately $350 million. This transaction value represents approximately one per cent of Canadian Natural’s enterprise value and does not materially impact the company’s balance sheet strength or liquidity position.

Maps shows operated/licensed wells by Painted Pony. Image courtesy CanOils. Click this link for more information.

CNRL’s acquisition of Painted Pony will help to re-balance the oil/gas split in CNRL’s portfolio as well as adding almost 200 producing wells, says Evaluate Energy senior M&A analyst Eoin Coyne.

"In 2002, the oil gas split on a production basis for CNRL was 52 per cent in oil’s favour. This increased to reach 79 per cent by Q2 of this year, following a series of large oil weighted acquisitions. At a time when global events have highlighted the exposure of oil markets to demand shocks, the acquisition of Painted Pony will reduce CNRL’s oil weighting to 76 per cent based on recent quarterly data from each company.”

Coyne also noted that the Painted Pony deal sees CNRL re-enter M&A after a relative hiatus during the first half of 2020.

Painted Pony’s land and production are located within Canadian Natural’s core area providing opportunity to leverage synergies with a significant amount of pre-built infrastructure and transportation available, said CNRL.

Current production, before royalties, acquired by Canadian Natural is approximately 270 mmcf/d of natural gas and 4,600 bbls/d of NGLs. The assets include properties in the northeast British Columbia areas of Blair, Daiber, Kobes and Townsend.

“This acquisition further strengthens Canadian Natural’s natural gas assets and production base in key operating areas and complements the company’s diversified portfolio,” said Tim McKay, Canadian Natural’s president. “This transaction also allows us to further insulate against natural gas costs in our oilsands operations and has minimal impact on the company’s low overall corporate decline rate.  We look forward to working together with the staff currently employed by Painted Pony.”

The transaction is targeted to close in late Q3 or early Q4, 2020, subject to normal closing conditions.

Raymond James Ltd. put a neutral rating on the deal, saying the approximately $450 million cash and debt transaction is in-keeping with CNRL’s M&A strategy during downtimes in the cycle. 

“While investors were likely anticipating another oilsands transaction, the acquisition of Pony is consistent with the company’s long term strategy and track record of consolidating at the bottom of the cycle,” analyst Chris Cox said in a note. 

“We do not see the transaction as signaling a shift in strategy to re-focus on gas assets, at least over the near-term, even with an improving outlook for gas prices into 2021.

Painted Pony rationale

Weak prices for natural gas over the past three years and a recent decline in NGL prices have resulted in lower than expected adjusted funds flow. This sustained period of low adjusted funds flow, as well as Painted Pony’s limited ability to access external markets on an accretive basis, has deprived Painted Pony’s asset base of the capital necessary to fund meaningful development, said Painted Pony,

Given the challenges facing Painted Pony, including potential near-term liquidity considerations, the company’s board of directors initiated a confidential process, supervised by a special committee of independent members of the board to explore opportunities to enhance shareholder value.

After reviewing Painted Pony’s current circumstances and the proposals received in connection with the process, the board determined that the transaction represented the best alternative for Painted Pony’s shareholders given current industry, economic and capital markets conditions.

 “The purchase price is all cash and not subject to any financing conditions, which provides Painted Pony shareholders with an immediate opportunity to realize full liquidity and certainty of value in cash for their investment in the corporation,” Painted Pony stated this morning.

TD Securities Inc. and RBC Capital Markets are acting as co-lead financial advisors, and Raymond James Ltd. is also acting as a financial advisor, in connection with the transaction. TD provided a verbal fairness opinion that, subject to review of the final form of documents affecting the transaction, as at the date of the arrangement agreement, the consideration to be received by Painted Pony shareholders pursuant to the transaction is fair, from a financial point of view, to Painted Pony shareholders.

Blake, Cassels & Graydon LLP is acting as legal counsel to Painted Pony. Bennett Jones LLP is acting as legal counsel to the purchaser.

Gryphon Advisors Inc. is acting as proxy solicitor for Painted Pony.

Painted Pony will seek approval of the transaction by its shareholders and holders of options at a special meeting expected to be held in September 2020. The arrangement agreement provides for a non-completion fee of $20 million, payable in the event that the transaction is not completed or is terminated in certain circumstances, including if Painted Pony enters into an agreement with respect to a superior proposal or if the board withdraws or modifies its recommendation with respect to the transaction.