In an Oct. 8 research note, iA Securities analyst Elias Foscolos reported that Tidewater Midstream and Infrastructure Ltd. (TWM:TSX; TWMIF:OTCMKTS) entered an agreement to acquire Husky Energy's Prince George Refinery (PGR) for about $277 million. The deal is expected to close in Q4/19.
IA Securities wants to wait and see how this "bold acquisition" plays out for Tidewater, Foscolos indicated. On one hand, he pointed out, Tidewater "should benefit from high crack spreads making the acquisition attractive." Recent spreads averaged about $50–55 per barrel ($50–55/bbl) whereas Tidewater used a $44/bbl calculation in determining annual EBITDA contributions from PGR would be around $75 million.
This difference constitutes upside for Tidewater as crack spreads are expected to stay higher for the ensuing 12 months and the break even point for the company is an estimated $30/bbl barrel, according to iA estimates.
On the other hand, Foscolos highlighted, Tidewater's purpose in doing the deal with Husky is to help delever its balance sheet to two and a half to three and a half times. Because refining is a different business segment for Tidewater and deleveraging relies on the acquired asset's future performance, the strategy is risky.
Due to that heightened risk, iA Securities trimmed its target price on Tidewater to CA$1.75 per share from CA$1.80. In comparison, the energy company's share price today is around CA$0.98.
Also, Tidewater is financing the PGR acquisition with debt, which requires an up to $600 million increase to its credit facility and a $100 million term loan.
Finally, Tidewater has a five-year offtake agreement with Husky covering 90% of volumes produced by PGR. While this "adds certainty for Tidewater, the sale of Husky's retail business adds longer-term uncertainty," Foscolos commented.
IA Securities has a Speculative Buy rating on Tidewater.[NLINSERT]
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Disclosures from iA Securities, Tidewater Midstream and Infrastructure Ltd., Research Update, October 8, 2018
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