Canadian Natural Resources Ltd. agreed to acquire Montney Shale producer Painted Pony Energy Ltd. on Aug. 10, continuing consolidation among E&Ps in the gas play located in the Western Canadian Sedimentary Basin.

In a company release, Canadian Natural Resources, Canada’s largest oil and gas producer, said it will acquire smaller rival Painted Pony for about C$461 million (US$344.26 million) including debt. The offer includes the acquisition of all the issued and outstanding common shares of Painted Pony, for a cash consideration of C$0.69 per share, a premium of 17% to the closing price on the Toronto Stock Exchange on Aug. 7, according to the release.

The transaction follows the acquisition of Kelt Exploration Ltd.’s Montney position by ConocoPhillips Co. in an agreement announced late last month. At the time, analysts with Tudor, Pickering, Holt & Co. (TPH) said the move by ConocoPhillips delivers “much awaited Montney consolidation” while also shining a light on discounted valuations in the shale play.

ConocoPhillips’ Kelt acquisition “satisfies the calls for consolidation and puts a spotlight on just how far valuations have dropped in the Montney,” TPH analysts wrote in a July 23 research note.

In the Kelt transaction, ConocoPhillips agreed to acquire 140,000 net Montney acres producing approximately 15,000 boe/d for about $375 million. The company will also assume about $30 million in financing obligations for associated partially owned infrastructure.

According to TPH analysts, the Kelt transaction has an implied acreage value of about $1,250 to $1,600 per acre, assuming a 3-4x cash flow multiple at about $42/bbl WTI next year. Further, assuming production was sold at 3x cash flow, the analysts estimate the transaction’s implied land metrics equate to just about C$2,250 per acre versus recent purchases of “high quality Montney land” at C$5,000 to C$8,000 per acre. 

“No matter how you slice it, valuations in the Montney have been on a multi-year slide, but in a world where cash is king, we see the average 15% 2021 FCF (free cash flow) yield being a sign that things have slid a little too far,” the TPH analysts wrote.

Painted Pony holds a high working interest, contiguous land block covering 186,727 net acres of Monterey rights, according to the company website. The properties are located in Northeast British Columbia areas of Blair, Daiber, Kobes and Townsend, which Canadian Natural Resources said are within its core area.

The Painted Pony properties produce about 270 MMcf/d of natural gas and 4,600 bbl/d of NGL, expeted to further strengthen Canadian Natural Resources’ natural gas assets and production base, according to President Tim McKay.

“This transaction also allows us to further insulate against natural gas costs in our oils sands operations and has minimal impact on the company’s low overall corporate decline rate,” McKay said in a statement on Aug. 10.

Assuming a 3x cash flow multiple, TPH analysts estimate the Painted Pony transaction value implies about C$1,550 per acre for the company’s roughly 187,000 net acres across the Northeast British Columbia Montney fairway.

“While the move to bolster Montney inventory at competitive levels into an improving North American natural gas market offers [Canadian Natural Resources] greater LT optionality, with still some headway to be made on improving its own balance sheet we don’t expect shares to be rewarded on the announcement,” TPH analysts wrote in an Aug. 10 research note.

The Painted Pony transaction value represents approximately 1% of Canadian Natural’s enterprise value and does not materially impact the company’s balance sheet strength or liquidity position, according to the release from Canadian Natural Resources.

The transaction is targeted to close in late third-quarter or early fourth-quarter 2020, subject to normal closing conditions. 

TD Securities Inc. and RBC Capital Markets are co-lead financial advisers to Painted Pony in connection with the transaction. Raymond James Ltd. is also a financial adviser to Painted Pony for the transaction. 

Blake, Cassels & Graydon LLP is providing legal counsel to Painted Pony. Bennett Jones LLP is acting as legal counsel to Canadian Natural Resources. Gryphon Advisors Inc. is acting as proxy solicitor for Painted Pony.

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