PrairieSky Royalty Ltd. may have solidified its position as Canada’s premier oil and gas royalty company after its recent deal with Canadian Natural Resources Ltd., however the weak commodity price environment will most likely still result in a dividend cut.
The $1.8-billion cash-and-stock deal for five.4 million acres of Canadian Natural’s land, equal to 81 per cent of PrairieSky’s royalty portfolio, should be accretive to its cash flow per share in the range of roughly 3 to 5 per cent.
Management has established that its dividend is going to be reviewed in February and adjusted just once annually.
Given the cruel business environment, CIBC World Markets analyst Arthur Grayfer expects PrarieSky will cut its dividend to somewhere between 90 cents and $1.00 per share from $1.30.
He continues to see upside within the stock due to its above-average income margin, strong balance sheet and long-term growth prospects resulting from a very large land position.
As an effect, Grayfer maintained a sector outperform rating on PrarieSky, but cut his price target to $27.50 from $34.
The analyst lowered his third-party capex forecast, thereby reducing his 2016 production estimate by approximately 1,000 barrels of oil equivalent each day to roughly 22,300.
“In our view, the Viking in west central Saskatchewan may be the crown jewel from the acquisition,” Grayfer told clients, noting that about 270 from the approximately 480 wells that came on production in 2014 on Canadian Natural’s royalty lands were in the Viking.
The analyst also noted that activity in the Viking remains relatively robust (only down about Half year over year), despite challenging oil prices, and more than 600 wells have been drilled by no more the 3rd quarter.
“Consistent performance and low capital costs have been a key reason why the Viking is constantly on the attract capital, even just in a depressed commodity price environment,” he said.