The roster of big TSX-listed oil and gas companies is about to get a new name. The five incumbents are Cenovus Energy (CA:CVE), Suncor Energy (CA:SU), Imperial Oil (CA:IMO), Enbridge (CA:ENB), Canadian Natural Resources (CA:CNQ). 

The new name will be the firm formed via Strathcona Resources’s acquisition of Calgary-based Pipestone Energy (CA:PIPE), announced on Tuesday. It will be Canada’s fifth-largest liquids producer by production and reserves. 

The group is down 2.7% over the last 12 months, as reflected in the Toronto-traded BMO Equal Weight Oil & Gas ETF (CA:ZEO). 

However, PIPE stock shows some top scores on Fintel’s quant dashboards. Its Quality score -- the proprietary model that identifies high quality companies, based on cash generating efficiencies -- is a rich 93.75. And with the share price down almost 40% in the last six months, the stock clocks a Value score of 91.26 on the 0-to-100 range, with stocks at the high end being the most undervalued.

All-Share Exposure

Based on Pipestone’s July 31 closing price of $2.72 a share, Strathcona is paying $761 million in stock and will assume $202 million in debt and lease liabilities. Strathcona shareholders will own 90.5% of the combined entity, with Pipestone shareholders owning the rest. It will have an enterprise value of $11.5 billion.      

“The acquisition of Pipestone by Strathcona reflects the successful culmination of growing and delineating our asset base over the past four years,” stated Strathcona Resources COO and interim CEO Dustin Hoffman.  

“This all-share transaction delivers shareholders ongoing exposure to one of the largest, well diversified, upstream producers in North America, which has the capacity to grow its production meaningfully over the next decade.”

If you invest in the Canadian energy sector -- most people do through broad market TSX indexes -- Strathcona’s announcement is a big deal. It’s time to put the name on your watch list. Here’s why. 

Chess Game Got Strathcona to Today

Strathcona was formed by Waterous Energy Fund (WEF) in August 2020, combining two of its portfolio companies -- Cona Resources Ltd. and Strath Resources Ltd. -- into Strathcona Resources. 

Former Scotiabank energy banker Adam Waterous created WEF in January 2017. It launched with $400 billion in investment from individual and institutional investors, including Gord Flatt, Brookfield Corporation (CA:BN) CEO Bruce Flatt’s brother. 

“There are enormous opportunities in unconventional oil and gas,” Waterous said in 2017. “Look past the headlines on carbon tax and low commodity prices, and you find new technology has transformed the energy industry and rates of return on drilling are now at 100-year highs.”

Since the launch, WEF’s roll-up strategy has acquired several oil and gas producers. It acquired 67% of Cona Resources in May 2017 for $244 million. In 2018, it acquired the remaining shares it didn’t own in March 2018. 

From there, Cona acquired Pengrowth Energy Corp. in January 2020 for $740 million. Later that year, Strathcona was formed, as mentioned earlier. Strathcona then made three acquisitions in 2022, including Serafina Energy Ltd., for $2.3 billion in August 2022.

Strathcona Goes Public

What’s supporting that Strathcona enterprise value of $11.5 billion expected once it completes its acquisition of Pipestone?

The company will have an annual production of 185,000 barrels of oil-equivalent (boe) per day from three areas in Alberta: Cold Lake Thermal (55,000 bbls/d), Lloydminster Heavy Oil (55,000 bbls/d) and Montney (75,000 boe/d). It believes it can grow organically to 325,000 boe/d by 2031. 

Adam Waterous will be executive chairman of the new Strathcona, with current CEO Rob Morgan retaining his role as chief executive.

“Over the last six and half years we have built Strathcona from 5,000 boe/d to 185,000 boe/d through a combination of organic growth and complementary acquisitions,” Adam Waterous stated in the joint press release announcing the acquisition of Pipestone. 

“In doing so we have employed a value investing strategy to grow per share intrinsic value while maintaining a margin of safety. We are excited to continue building Strathcona within the public markets and believe that now is an attractive time to be growing an oil and gas business in Canada.”

It also helps that it will have $3 billion in tax deductions immediately available to it and an additional $3.4 billion in the future. As a result, it does not expect to pay any cash taxes until at least 2026.