ARC Resources has inked an agreement to buy Seven Generations Energy Ltd. in an all-share deal worth C$8.1 billion, inclusive of net debt, to create Canada’s largest condensate producer.
Under the terms of the agreement, Seven Generations shareholders will receive 1.108 common shares of ARC (AETUF) for each share of Seven Generations held. Upon closure of the transaction, which is expected in the second quarter of 2021, ARC shareholders will own 49% of the combined company and Seven Generations shareholders will hold 51% of the total shares outstanding.
The combined company will create a major pure-play Montney producer of low-cost natural gas and high-margin condensate, producing a total of over 340,000 barrels of oil equivalent per day in 2021, and about 1.2 billion cubic feet per day of natural gas. The company, which will operate as ARC Resources, is expected to be immediately accretive on a free funds flow and net asset value per share basis to all shareholders. Additionally, synergies are estimated to create about C$110 million in annual cost savings by 2022.
“The transaction will create a combined company with material size and scale that enhances ARC’s and Seven Generations’ existing commodity and geographic diversification,” the two companies said in a joint statement.
The combined company plans to pay a quarterly dividend of $0.06 per share, subject to the approval of the Board of Directors. (See ARC Resources stock analysis on TipRanks)
ARC shares have seen a great run recently as the stock has already appreciated 23% so far this year. Nonetheless, Scotiabank’s Cameron Bean sees more upside going forward. The analyst last month lifted the price target on ARC to $7.08 (35% upside potential) but maintained a Hold rating on the shares.
Overall, the rest of the Street has a bullish call on the stock. The Strong Buy consensus rating is backed up by 5 Buy ratings versus only 1 Hold rating. The average analyst price target of $6.95 implies 19% upside potential over the coming 12 months.
Meanwhile, on TipRanks’ Smart Score system, ARC gets a 6 out of 10, indicating that the stock is likely to perform in line with market averages.
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