In early-March, Kimmeridge engaged with Advantage in a move that ultimately led to a committee formed to "evaluate strategic alternatives". This is a positive outcome for Advantage as their assets are very high-quality (as evidenced by their average lean gas well being second-best amongst peers) yet they trade at an average multiple (partly a hangover from their unnecessary Charlie Lake acquisition). We think Kimmeridge is looking to force M&A, or use Advantage as a vector to consolidate the greater Pouce Coupe area; something that really should happen. Kimmeridge’s activism is usually directionally correct and achievable, though can be at time superficial and lacks (or ignores) nuances of local geology and transaction markets. 

Two of Kimmeridge’s recent whitepapers focused on the need for consolidation in the upstream industry; their most recent focused on natural gas demand expansion from data centers – assuming those are their current “internal themes” – consolidating the gas producers in the Pouce Coupe/Valhalla area would be a logical motion for their activist fund. In the short-term, we think that Kimmeridge will focus on expelling Entropy from the Advantage umbrella, a move that we would see as positive – then perhaps pushing for further consolidation of Advantage’s operating area, which may be done ultimately by an Advantage acquirer. The pro forma consolidated company would have ~600K undeveloped prospective acres in the Lower Montney, ~750K in the Middle, and ~200K in the Upper Montney for over 1.5MM bench-acres. Truly massive. The combined entity, which would have an EV of $8.5Bn (US$6.3Bn), would produce ~270MBOE/d, and generate >$2Bn in FFO annually. The size of the pro forma company would still be smaller than most US-focused SMID-cap E&Ps, yet have an inventory footprint larger than all the US SMIDs. We like the idea of E&Ps that have mostly ramped through their value creation via growth phase to work towards relevance through increased scale. 

If Kimmeridge leans on a sale – we believe that Advantage is a key opportunity for Tourmaline to continue their acquisition work and add very high-quality inventory supported by owned infrastructure below what they may consider a long-term NAV. Tourmaline should acquire Advantage. Taking a step back and appreciating that Tourmaline wants to add a 3^rd decade of Tier 1 inventory into their portfolio – there are only 4 real ways to do that. Advantage, Birchcliff, Murphy, and Paramount. Paramount’s assets are too early-stage for Tourmaline, leaving Advantage an extremely key asset to adding that 3^rd Tier 1 decade. We’d note that there are only 155K “transactable” acres in the BC Montney, while there are 550K transactable acres in Alberta (both figures excluding Advantage). Considering then, Tourmaline would need a platform acquisition to enter Alberta, Advantage makes a lot of sense. Tourmaline’s 3^rd decade of inventory is not going to come from the Deep Basin, it must be in the Montney which is a more repeatable and consistently-improving resource. We estimate Tourmaline has 5,400 Montney locations, and Advantage has ~1,000. A 20% increase in Montney inventory is meaningful for Tourmaline and would be one part of the 3^rd decade they are targeting, allowing Tourmaline to tuck in the balance of the independent E&Ps in the Valhalla and Pouce Coupe area. While we think Tourmaline can drive cost-structure improvements, we moreso see Advantage as an extremely attractive way to become a meaningful player in Alberta. Taking a step back from purchase price; Advantage has more proven Tier 1 inventory, more owned gas processing, and more production than Crew. We see >20 years of Tier 1+ inventory at Glacier on a maintenance budget that fits our “AECO Put” classification (i.e. is extremely dispatchable and deliverable) with achievable synergies in the Charlie Lake, and generally an updip Montney asset at Progress that fits into their existing Triassic oil footprint. Tourmaline can pay $2.6-$3.0Bn for Advantage and it would be equally as sensible, and long-term strategic, as the acquisition of Crew was.