Pacific Rubiales Energy Corp (TSE:PRE) disclosed the termination of the proposed takeover offer from Alfa, S.A.B. de C.V. and Harbour Energy that will leave the firm to continue pushing forward in a challenging environment. With the deal falling through and with company’ high debt levels / limited growth visibility, we expect the stock will suffer in the near-term and likely into 2016 estimate as it will need to redefine itself via further assets sales / debt repayment.
Saying that, the solid opposition from the O’Hara group (largest shareholder at 19.82%) persists to surprise us given what we saw as a more or less fair offer to the company’s booked 2014 2P NPV10 of $6 billion (inclusive of a long-term escalated WTI price of $81/bbl), however Alfa/Harbour stayed true to their previous statements that they would not offer a sweetener to obtain further support. Our previously calculations noticed the offer price as eye-catching given it valued the firm at a 35% premium to the market price prior to the deal announcement and greater than 70% compared to the 30-day average price. The offer was also well ahead of our 2P net asset value per share of $3.16 and risked net asset value per share of $3.49 that assumes a long-term Brent price of $85/bbl.
The decision last week to request adjournment of the shareholder vote highlighted the risk that the deal did not have the high favour we had begun to believe. O’Hara’s release last Friday more mainly highlighted that 59.6% of the company’s common shares voted against the deal and the transaction requires approval from two thirds of the common shares to proceed. Given the lower oil prices of today, high debt levels, limited interest in Colombia by the majors, and lack of growth visibility within Pacific Rubiales, we see very limited probability of a new takeover offer emerging in the near term.
We expect the focus will now shift to reiterating the company’s production profile in the context of its hefty debt load. Management earlier delivered that the team believes debt to weigh should the transaction fail and the team would pursue asset divestitures to pay down debt. We see the need to likely sell down a portion of core assets such as Rio Ariari or even CPE-6 if oil prices continue to be at lower levels ($60/bbl) over the next few years. Growth opportunities comprising entry into Mexico would also be restricted as the firm believes it could reiterate its production profile, but debt repayments would take precedent. That said, no termination fee will be paid although the covenants regarding debt to EBITDA will revert to 3.5 times which would further restrict financial flexibility.
Production inclined to be challenging over the next 24 months. In 2015 estimate, we forecast production would average 151,154 barrel per day (exit 143,000 barrels per day) and 2016 estimate production would fall 13% to 132,300 BOE per day. Our initial guidance for 2017 estimate reflects moderate growth back to 143,400 BOE per day, but relies heavily on CPE-6 ( 18,000 barrels per day) and Rio Ariari (5,600 barrels per day) which could be impacted by lower oil prices and lowered cash flow/spending as the firm focuses on debt repayments.
As per balance Sheet – greater than $5 billion in net-debt inclined to weigh on future developments. As of March 31, 2015 company had cash on hand of $860 million and a net working capital deficit of $17 million. We forecast second quarter estimate net debt at $5.2 billion, which is essentially fully drawn on all longer term and short-term debt. Recall the firm has fully drawn its $1 billion revolving credit facility to repay short-term bank debt and reiterate a solid cash position to reiterate activity and its $1 billion capital budget (vs. our 2015 estimate cash flow of $840 million). Management estimates maintenance capital is around $800-$900 million with Rubiales and about $150 million less without although funding development at Rio Ariari and CPE-6 will be challenge given development has been pegged at $2 billion (gross) per project.
We are downgrading our rating to “Sector Underperform” from Sector Perform and reduced our 12 months target price to $3.50 (vs. $5.50 post deal announcement and versus $4.50 prior to deal announcement). We expect the stock will trade closer to our forecasted 2P net asset value per share of $3.16 (40% downside from close) without the possible for a higher takeover price. We expect high debt levels will compound with issues around the lack of growth visibility in the next few years.
In the context of our constant 2P net asset value per share forecast of $3.16, company is trading at a P/NAV ratio of 116% and a 2015 Debt-adjusted cash flow multiple of 6.5 times relative to its International peer group at 104% and 6.7 times, correspondingly.