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ANALYSIS: Keystone XL is finally old news, at least as far as Shafik Hirani is concerned.
The beleaguered TransCanada Corp. (TRP-T) pipeline proposal is no longer the main topic of conversation when clients enter the downtown Calgary offices of Investors Group Financial Services. All anyone wants to talk about now is Encana Corp.’s (ECA-T) impending initial public offering of its royalty-paying PrairieSky spinoff.
“This IPO is all I’ve been hearing about lately,” the director of IG’s Calgary division told BNN on Sunday. “We’ve got 5 more days as the clock winds down to the May 29th [closing] date and the ticker ‘PSK’ will definitely be the one to watch.”
In the largest IPO to hit the Canadian market since the start of the new millennium, Encana will be offering 52 million shares of PrairieSky at $28 apiece, valuing the new company at $3.64-billion. Canada’s largest natural gas producer will be retaining 60%, leaving $1.456-billion available for public distribution via the IPO’s underwriters; co-led and joint bookrun by TD Securities and CIBC. If demand exceeds the available shares being offered, the underwriters are allowed to sell an additional 7.8 million shares up to 30 days after the May 30 closing date, called an “over-allotment option”, which would increase the total amount available for purchase to $1.67-billion.
Exercising the over-allotment seems virtually inevitable, with one trader telling BNN’s Amber Kanwar demand as of last week was approaching $15-billion, or nine times the shares available
PrairieSky will not produce any oil or gas itself, or have any discernable expenses beyond basic payroll and administration. Rather, it will administer roughly 500,000 acres (about the size of New Jersey) of drillable land in southern Alberta. PrairieSky will allow other companies to handle all the actual “work” and in exchange, those companies will pay the royalties that are normally paid to the government directly to PrairieSky. The dividend is expected to be quite high, accounting for about 85% of free cash flow.
“Baby boomers like royalties as they are lower beta,” Hirani said, referring to a metric that measures risk volatility versus the market. “Plus a 6-8% yield would be a high [dividend] yield and that is attractive considering prime is 3% and the alternative risk-free rate of GICs is 2.5%.”
Rafi Tahmazian, senior portfolio manager at Canoe Financial, told BNN he believes part of the massive demand is from a “frenzy herd mentality,” but added the deal was “priced fair relative to the quality of the asset base.” PrairieSky’s mineral rights come from Encana’s history as a Crown corporation [read: government owned], based on the Latin “usque ad coelom et ad inferos” or “up to Heaven, and down to Hell”. BNN’s Andrew Bell perhaps translated that best when he told colleagues “even Satan has to pay royalties to PrairieSky.”
“Go to the market and buy [PSK] stock as chances are this thing will trade well up on the opening,” Tahmazian said. “[PSK going through $31 is not out there at all, [the] best way to play it is just to keep focused on the good yield funds and specifically yield energy funds.”
Getting in on the ground floor of PrairieSky, however, will be no easy task for a typical retail investor.
“I must admit that will be very difficult,” Hirani said. “The issue is already in a significantly overbought state as the demand is higher than I’ve ever seen. TD and CIBC have stated their allotments are fully subscribed [and] so have the smaller players. GMP is grasping [and] AltaCorp may have just a tiny offering left. Internally I see conversions between institutional leads to try and entice other dealers with remaining units to give up their allocations.”
The best, or at least the easiest, way to play PrairieSky in Hirani’s view is simply to bulk up on Encana stock. ECA shares are widely available and since that company will remain PrairieSky’s single largest shareholder by a gigantic margin, it is expected to reap substantial cash flow benefits in the medium and longer terms. “Encana is the real winner here,” said Hirani.
Buying more of a stock that is already among the most widely held in Canada hardly seems like the most strategic way to play such a rare opportunity as the country’s largest IPO in 14 years represents. Yet with so many major players in PrairieSky already, the vast majority of Canadian energy investors may find Encana to be their best bet; even if it is an indirect one.Jameson Berkow is BNN's western bureau chief based out of Calgary. Every weekday morning he researches the top stories affecting commodities and the oil patch, and sends his analysis to the BNN newsroom in Toronto. You can follow him on twitter @crudereporter