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Natural Gas Midstream, Infrastructure Firm to Acquire Oil Refinery
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The pros and cons of the deal are discussed in an iA Securities report.

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 $5055 per barrel ($5055/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.


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Disclosures from iA Securities, Tidewater Midstream and Infrastructure Ltd., Research Update, October 8, 2019

Conflicts of Interest: The research analyst and or associates who prepared this report are compensated based upon (among other factors) the overall profitability of iA Securities, which may include the profitability of investment banking and related services. In the normal course of its business, iA Securities may provide financial advisory services for the issuers mentioned in this report. iA Securities may buy from or sell to customers the securities of issuers mentioned in this report on a principal basis.

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