Morning. My name is Ina, and I will be your conference operator today. I would like to welcome everyone to The First Quarter 2025 Conference Call of Strathcona Resources Ltd.. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. For attendees on the conference call that would like to ask a question, please press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star then the number two. I now introduce Angie Lau, Treasurer of Strathcona, to open the conference and introduce the speakers. Please go ahead.
Welcome to the Q1 2025 Conference Call of Strathcona Resources Ltd.. Over the past two days, Strathcona released its first quarter 2025 results, reached definitive agreements to sell substantially all of its Montney business, and disclosed an investment in MEG Energy, along with an intention to make an offer for the balance of its shares it does not currently own. We encourage our investors to visit Strathcona's website and review the disclosure materials in detail. On today's call, we have from our management team, Adam Waterous, Executive Chairman; Connor Waterous, Chief Financial Officer; Connie De Ciancio, Chief Commercial Officer; Dale Babiak, Chief Operating Officer; Kim Chiu, President of Strathcona Cold Lake; Seamus Murphy, President of Strathcona Lloydminster Conventional; Ryan Tracey, President of Strathcona Lloydminster Thermal.
Please note that all commentary made by today's speakers are subject to the same advisories regarding, among other things, forward-looking information and non-GAAP measures, as can be found in our earnings and M&A press releases and our other disclosure materials. Listeners and participants are urged to refer to and review those advisories and materials carefully. In particular, any comments made regarding the asset dispositions, including completion and timing for completion of these dispositions, commencement of the formal offer to MEG shareholders, and timing of such offer, as well as any related financings and any expectations about the pro forma results or resulting capital structure of Strathcona, are based on our current expectations regarding our business and combined business and are, in part, based on MEG's available public data.
While we believe our current assumptions and expectations to be reasonable, actual results could differ materially from those discussed today, and listeners should not place undue reliance on any such statements. Please note that no offer to purchase MEG shares has been made by Strathcona at this time, and any such offer will be made in Strathcona's sole discretion, pursuant to a formal offer to purchase and Take-O ver Bid Circular of Strathcona. Please refer to the press release of Strathcona relating to its intention to make an offer for further information. With that, in keeping with our practice, we will take all of our materials as read, and we would now like to jump straight to questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by the one on your telephone keypad. You will hear a prompt that your hand has been raised, and should you wish to cancel your request, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Once again, that is star and one to ask a question. One moment, please. Once again, that is star and one to ask a question.
What are we supposed to do after?
Your first question comes from the line of Justin Ho from RBC Capital Markets. Please go ahead.
Thanks, yes. Justin Ho on the line for Greg. Just wondering if you can just give us a little bit more detail around the strategic rationale you're thinking going to this, positioning away from the Montney and kind of doubling down here on Thermal and the Oil Sands.
Sure. This is Adam Waterous speaking. I'll try and give you a perspective. Maybe give you the first thing. I'm going to try and be incremental to what maybe some material we've provided. Maybe on a macro basis, we remain very constructive on long-term oil demand, and we remain pessimistic on long-term oil supply. I've been fairly public on being bearish on incremental U.S. oil supply. That does not mean we're negative on natural gas, and I quickly would say that I think that the three buyers of our former Montney business are going to be very successful with their purchases, and all three buyers are very sophisticated buyers, and the assets fit them like hand in glove. I think they're going to be very successful with what we have sold them. Having said that, generally speaking, we're more constructive on long-term oil than natural gas.
That is maybe as a starting point. The second—and that helps maybe explain the divestiture of the Montney business. The second thing is that why we are making the proposal to MEG shareholders is we think that these are extremely complementary businesses. When I mean extremely, I am actually not aware of two businesses of any scale in North America that share this level of complementary nature. These are doppelgangers, brothers from another mother, twins, identical twins. Why that ends up being particularly important is that our ability to then be able to maximize operational synergies from them we think will be comparatively straightforward. I will talk a little bit more about that again. It is also essentially getting more of what we already have, which is long-life low-decline, high free cash flow oil.
When we think about the business that we're building, the business will be what we believe is going to be the only investment-grade long-life low-decline, high-free cash flow oil company that does not have mines or refineries in North America. If someone's interested in a lower-risk, long-life low-decline, high-free cash flow oil business of scale in North America, we think that this is going to be the business to own. If you look on page five of the deck that was posted on our website last night, you'll see that the combination oozes with it. In Canada, to 219,000 barrels a day, the fifth largest oil producer in Canada. I think more relevantly, if you look at it in North America, on a reserve basis, net of royalty, that's U.S. convention deducting royalties. For comparability purposes, our peers are Diamondback, Occidental.
EOG's got a fair amount of natural gas, but Diamondback, Occidental. And those businesses are very fine businesses, but have very short reserve life indexes, meaning they have several multiples of our production and the same reserves. We think that if a company is looking for what will be a senior producer with a very long life, we think we're going to be very uniquely positioned in the North American landscape. The second rationale that I could maybe try and give a little bit more color on is the accretion. I know there's a lot of very sophisticated and knowledgeable analysts on the call today, but this is how M&A usually works. How M&A usually works is a bigger company takes over a smaller company. The bigger company trades at a bigger multiple than the smaller company.
The smaller company trades at, say, five times cash flow, and the bigger company trades at seven times cash flow. What the bigger company does is they pay the smaller company a premium, say, 10% premium. They say, "Okay, so they're going to be buying it for," so a 5 and a 1/2x multiple. The selling straightforward says, "Well, I got a premium. I got 10% more than I thought. That's a good thing for me." The bigger company that trades at seven times gets accretion. That's essentially a large percentage of how M&A works in all sectors. It's not just this sector. Now, what's super unusual about this is that in this case, the company that is effectively being acquired trades at a bit of a premium to the buyer, the buyer being Strathcona, essentially the target being MEG.
That is really unusual. Now, why we think that is the case is that Strathcona is a comparatively new company, has a comparatively limited float, all things that, I understand, affect price. Of course, price is what you pay, value is what you get. Now, what that leads to is this super unusual dynamic. That is, if you are a MEG shareholder, you get two things. The first thing is you get a premium, which you would have obviously seen based on yesterday's close. Our proposal indicates a 9.3% premium. That is a good thing. They also get per-share accretion on a variety of different metrics. Very rare. Usually, you get a premium, and then you actually, on a per-share basis, have some dilution. They get both things. At the same time, what is also super unusual is Strathcona also gets accretion on almost all metrics.
What is the Jedi mind trick? How does that happen? There are two reasons why Strathcona also gets accretion. Number one, we are putting a little bit of cash in the deal. As you get leverage, you can get accretion. You can trade at a discount relative to the target. The second reason is the operating synergies. The pro forma, the combined business, is going to have incremental cash flow. As you would have seen in the material we provide, that is going to be CAD 175 million in annual synergies, CAD 50 million from overhead, which we think that MEG is extremely heavily staffed given the size and operations of their business. The interest savings because the combined business will have CAD 1.5 billion in debt, but will be investment-grade, which will lead to a lower overall interest rate and so interest rate savings.
The third is the operating synergies, which we think at CAD 75 million in capital, CAD 25 million in operating costs. Just to give you a sense on the scale of the business, the pro forma business is going to be drilling about a quarter of all of the SAGD wells in Western Canada. Our ability to be able to get volume discounts from our suppliers is great. We also think that we're going to be able to share best practices, which will increase capital efficiency. We've seen that very directly in our SAGD business in Strathcona, where our different SAGD assets, what we learn from one, we can apply to another. We also think that we're going to be more effective at controlling costs. 75% of management's compensation is tied to controlling capital costs and F&D, whereas to MEG, it's 10%. Got it. I'll own it.
All right. We think we're going to have very meaningful synergies. For those three reasons, Fits, Hand in Glove, the two most similar companies we believe of this scale in North America. Uniquely, both companies get synergies, and there's going to be accretion, and there'll be large operational synergies. That was essentially the strategic rationale for the proposal.
Great. Great. Thanks for that. That was very thorough. Just one follow-up. I think a part of these transactions that might be flying under the radar a bit is the rail terminal acquisition. Could you walk through your thinking around that and how that kind of ties into your strategic outlook, whether as a standalone or pro forma entity?
Sure. I think I'll have Connor answer that.
Sure. A big part of our strategy from day one, as we have thought about investing more capital in the business, is first, obviously, a focus on value, and second, on how is the best way to manage risk. Obviously, a big risk for an oil and gas-heavy oil business like ours is the WCS differential. What we think we've been able to do by buying the largest crude-by-rail terminal in Western Canada is buy an asset which has cash flows which are going to be adversely correlated to the cash flows in our oil and gas upstream business.
While the asset is making about CAD 12 million free cash flow today, or call it a mid-20s % free cash flow yield on the CAD 45 million price that we paid, we think that in the event pipelines get full again and diffs start to get wider, those cash flows are going to start to go up pretty fast, which will be a nice hedge to the cash flows from our upstream business.
That's great. Thank you very much.
Thank you once again. Should you have a question, please press star followed by the one on your telephone keypad. There are no further questions at this time. I would now hand the call back to Mr. Adam Waterous for any closing remarks.
I'd like to thank everyone for calling in today. Hopefully, what we've provided online, we've tried to make it extremely comprehensive, not only regarding what we have done in terms of exiting the Montney business, but a good view on why we've made the proposal to MEG. Hopefully, that's helpful, and we appreciate everyone tuning in.
Thank you. This concludes today's call. Thank you for participating. You may all disconnect.