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Crescent Point Energy Corp falls on Legacy Oil and Gas deal

By Jonathan Ratner | May 27, 2015 2:22 PM ET


Shareholders don’t exactly love Crescent Point Energy Corp.’s $1.5-billion deal to acquire Legacy Oil and Gas Inc. — at least not at first glance.

The stock was down almost five per cent Wednesday, after the Calgary-based oil and gas producer announced it is buying its competitor to add assets in its core southeast Saskatchewan area.

Strategically, the deal makes a lot of sense, since roughly two-thirds of Legacy’s production folds into Crescent Point’s core areas. The land being acquired also provides an attractive entry into the Midale formation in southeast Saskatchewan, where Legacy has been posting strong results.

The transaction also looks like it will have a positive impact on the prospects for Crescent Point’s dividend.

Desjardins Capital Markets analyst Kristopher Zack noted that related cost savings could help Crescent Point tighten its payout ratio, particularly as the company revisits its capex budget in the third quarter.

He thinks that could be a catalyst for the stock, making the current dividend yield of about 9.3 per cent even more attractive.

With the average yield of Crescent Point’s dividend peers at about 5.2 per cent, Zack believes a dividend cut has already been priced into its share price.

Raymond James analyst Chris Cox thinks the deal provides investors with greater visibility around the sustainability of Crescent Point’s dividend beyond 2015.

He estimates the company’s cyclically adjusted price-to-earnings payout ratio will improve to roughly 125 per cent in 2016, from about 135 per cent previously.

Cox noted that with the higher production that Legacy’s assets would provide, Crescent Point will be able to fully fund its capital program and current dividend at oil prices in the range of US$70-to-US$75 per barrel in 2016.

Brian Kristjansen at Dundee Capital Markets upgraded Crescent Point to buy from hold, noting that Legacy’s overlevered position and resulting share price weakness allowed it to be bought at an attractive level.

“The accretion relative to our existing Q2 2015 Crescent Point metrics… is fairly impressive,” he said. “Legacy’s position in southeast Saskatchewan was fairly large, and ideally complements Crescent Point’s existing acreage position.”

CIBC World Markets analyst Adam Gill agreed that Legacy isn’t getting a great price in light of other recent light oil deals in Saskatchewan. However, given Legacy’s high leverage, he noted that there are few companies that would be able to absorb its debt load and have a strong understanding of the region.

“With that, we do not have strong conviction that a better bid will emerge,” Gill said.

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