Pinecrest Energy Inc. to Combine with Spartan Oil Corp. to create a
Sustainable Light Oil Dividend and Growth Company
CALGARY, Nov. 21, 2012 /CNW/ - Pinecrest Energy Inc.
(TSX-V: PRY) ("Pinecrest") and Spartan Oil Corp.
("Spartan") (TSX: STO) are pleased to announce that they
have entered into an arrangement agreement (the "Arrangement
Agreement") providing for the combination of Pinecrest and
Spartan (collectively, the "Combined Company") to form a
premier light oil weighted entity that will provide shareholders
with a sustainable model of income and production growth. The
Combined Company will have an enterprise value approaching
$1 billion and an attractive suite of
high netback light oil projects.
Under the terms of the Arrangement Agreement,
the merger will be completed through the acquisition by Pinecrest
of all of the outstanding common shares of Spartan (the "Spartan
Shares") on the basis of 2.738 common shares of Pinecrest (the
"Pinecrest Shares") for each outstanding Spartan Share (the
"Transaction"). The exchange ratio in respect of the
Transaction represents a deemed price of $5.12 per Spartan Share and a deemed price of
$1.87 per Pinecrest Share. The combination of
Pinecrest and Spartan creates a premier light oil weighted entity
that will provide shareholders with a sustainable model of income
and growth. The Combined Company is targeting a medium and
long term payout ratio of less than 100%; the forecasted 2013
capital spending and dividend payments are expected to represent
approximately 103.8% of the funds from operations.
Pinecrest's existing executive team, led by
Wade Becker, will manage the
Combined Company. At closing, and prior to the proposed 3 for
1 share consolidation to be completed under the terms of the
Arrangement Agreement, the Combined Company will have approximately
513.4 million shares outstanding with Spartan shareholders owning
approximately 49 percent of the Combined Company (assuming the
exercise of certain Pinecrest warrants and options). It is
contemplated that Richard McHardy
and Don Archibald, currently members
of Spartan's Board of Directors, will be appointed to the Board of
the Combined Company at closing.
Creating a Sustainable Premier Light Oil
Income and Growth Company
The combination of high netback oil weighted
assets at Red Earth and Pembina allow for the transition to an
income and growth model that supports sustainable dividend payments
to shareholders and provides the opportunity for annual per share
growth. Through industry leading netbacks (greater than 91% light
oil and liquids) and greater than $190
million of anticipated credit facility capacity, the
Combined Company will have the discretionary ability to accelerate
production and cash flow growth. The combination of a high
corporate netback, low risk drilling, decreasing corporate decline
and year round drilling access allows for efficient long term
sustainability. The key attributes to the Combined Company
sustainability under the dividend model are as follows:
- Industry leading Netbacks
-
- Combining the top 2 netback E&P juniors
- 91% oil and liquids weighting provide $60.00/ boe combined operating netback (2013
combined pro forma)
- Measured Corporate Decline and Capital Efficiency
Management
-
- Complement horizontal multistage drill program with 7
waterflood schemes to be implemented in 2013
-
- Waterflood capital efficiency forecasted at $10,000/bbl
- Attractive capital efficiencies on low risk development
drilling opportunities at Pembina of approximately $30,000 per boe
- Forecast corporate declines of:
-
- 40% in 2013
- 33% in 2014
- 27% in 2015
- Two core light oil resource play areas provide operational
diversity and extensive inventory of horizontal drilling locations
across large oil in place assets
-
- Red Earth Slave Point carbonate play:
-
- Planned implementation of 7 waterflood schemes in 2013
- Pembina Keystone Cardium play:
-
- Low risk, repeatable drilling; year round access; extensive
existing infrastructure
- Financial Flexibility
-
- The Combined Company will have the strongest balance sheet
among both the intermediate and the yield Canadian E&P
universe; proforma 0.2 x Debt/ cashflow
- Annual cash flow in excess of $200MM supports dividend and
capital program
- A $225 million anticipated credit
facility to accelerate growth, including through strategic
acquisitions
- Anticipated hedging program of up to 5,000 boe/d for 2013 to
ensure stability of cash flows
- Experienced Board of Directors and Management Team
-
- Technically focused with a proven track record of value
creation
Subject to the completion of the Transaction,
Pinecrest's Board of Directors has approved an initial annualized
dividend of $0.155 per share that is
anticipated to be declared in the first month subsequent to the
completion of the Transaction. Based on Pinecrest's closing share
price on November 20, 2012 of
$1.87, the dividend translates to an
8.3 percent yield.
The dividend, on an annualized basis, will
require $79.6 million or 39.8 percent
of the Combined Company's estimated 2013 pro-forma cash flow of
approximately $200 million (Cdn
$85.00/bbl and $3.00/mcf, AECO) based on estimated average pro
forma 2013 production of 9,200 - 9,600 boe/d (91% oil and liquids).
Subject to board of director approval, Pinecrest anticipates
allocating approximately $130 million
to 2013 capital expenditures for an estimated 2013 all-in payout
ratio of 103.8 percent. With pro forma tax pools of approximately
$535 million, the Combined Company
has sufficient tax pool coverage to provide shareholders with a tax
efficient yield vehicle.
The Combined Company's capital expenditures will
continue to be focused in the Cardium light oil resource play in
the Pembina area of central Alberta and the Slave Point light oil play in
Otter/Evi and Red Earth areas of
northern Alberta. The
Combined Company's significant low risk development drilling
inventory, together with attractive capital efficiencies and the
high netback nature of these plays supports the sustainability of
the Combined Company's cash flow and dividends for the foreseeable
future.
In addition, the Combined Company will look for
opportunities to acquire stable, low decline, assets with
attractive netbacks. As a larger, dividend paying company,
Pinecrest management believes the Combined Company will be well
positioned to compete for acquisitions. Management feels that
the Combined Company's balance sheet will give it a unique
competitive advantage that will enable it to generate measurable
accretion, while maintaining a conservative debt to cash flow
ratio.
Upon completion of the transaction the Combined
Company may operate under a different name to be released at a
later date.
Key Attributes of the Combined Company:
- An enterprise value approaching $1
billion (based on the current trading price of the Pinecrest
and Spartan Shares and the net debt at the time of closing);
- Unlevered balance sheet with an estimated working capital
deficit of approximately $35 million
at closing, relative to an anticipated credit facility of
$225 million.
- Expected pro forma 2013 average production of approximately
9,200 - 9,600 boe/d (91% light oil and liquids);
- Top-decile operating netbacks of greater than $60.00/boe;
- 39.1% basic payout ratio and 103.8% all-in payout ratio;
- Shallowing corporate declines year over year;
- Proved reserves of 20.1 mmboe and Proved plus Probable reserves
of 29.8 mmboe based on the independent reserve reports as at
December 31, 2011;
- RLI of 8.7 years (based on mid range 2013 average production of
9,200 - 9,600 boe/d); and
- Greater than 500 (gross) horizontal light oil drilling
locations targeting between the Slave Point at Red Earth and the
Cardium at Keystone.
Arrangement
The Transaction is to be effected by way of an
arrangement under the Business Corporations Act
(Alberta). Completion of the
Transaction, which is anticipated to occur in mid January, 2013,
and is subject to, among other things, the approval of shareholders
holding at least 66⅔ percent of the Spartan Shares and Pinecrest
Shares voting on the Transaction, the approval of the Court of
Queen's Bench of Alberta, the
receipt of all necessary regulatory and stock exchange approvals,
and certain closing conditions that are customary for a transaction
of this nature.
The Directors of each of Spartan and Pinecrest
that are eligible to vote have unanimously approved the Transaction
and resolved to recommend that their respective shareholders vote
in favour of the Transaction. Wade
Becker, a director of both Pinecrest and Spartan, abstained
from voting on the Transaction. Directors and officers of Spartan,
who collectively hold approximately 27% of the outstanding Spartan
Shares (on a fully diluted basis), have entered into support
agreements with Pinecrest pursuant to which each has agreed to vote
in favour of the Transaction. Directors and officers of
Pinecrest, who collectively hold approximately 24% of the
outstanding Pinecrest Shares (on a fully diluted basis), have
entered into support agreements with Spartan pursuant to which each
has agreed to vote in favour of the Transaction.
Each of Spartan and Pinecrest has agreed to not
solicit or initiate any discussions regarding any other business
combination or sale of material assets of the other and has granted
the other the right to match competing, unsolicited
proposals. The Arrangement Agreement provides for a mutual
$12.5 million non-completion fee
payable by Spartan or Pinecrest, as the case may be, in certain
circumstances if the Transaction is not completed.
Complete details of the terms of the Transaction
are set out in the Arrangement Agreement, which will be filed by
each of Spartan and Pinecrest and will be available for viewing
under each of Spartan's and Pinecrest's profiles at
www.sedar.com.
Financial Advisors and Fairness Opinions:
Dundee Securities Ltd. ("Dundee") is the lead financial advisor to
Pinecrest with Scotiabank also acting as a financial advisor to
Pinecrest. Dundee has
provided the Board of Directors of Pinecrest with a verbal opinion
that, subject to its review of the final form of document effecting
the Transaction, the consideration offered by Pinecrest pursuant to
the Arrangement, is fair, from a financial point of view,
to Pinecrest.
TD Securities Inc. ("TD") is acting as
financial advisor to Spartan and TD has provided the Board of
Directors of Spartan with its verbal opinion that, as of the date
hereof and subject to the review of final documentation, that the
received by Spartan shareholders pursuant to the Transaction is
fair, from a financial point of view, to Spartan shareholders.
Clarus Securities Inc. and GMP Securities L.P.
are acting as strategic advisors to Spartan. Canaccord
Genuity Corp. is acting as strategic advisor to Pinecrest.
Conference Call Details
Conference call in regards to the Transaction
will occur at 11:00 a.m. EST. A
press release will be issued with conference call details.
About Pinecrest and Spartan
Pinecrest is engaged in the acquisition and
exploration for and development and production of oil and natural
gas in Western Canada.
Pinecrest has a significant position in the emerging, light oil
Slave Point carbonate resource play focussed in the greater Red
Earth area of north-central Alberta. The common shares of Pinecrest
are listed on the TSXV under the symbol "PRY".
Spartan Oil Corp. is engaged in the business of
acquiring crude oil and natural gas properties and exploring for,
developing and producing oil and natural gas in western
Canada. Spartan is uniquely
positioned with a significant position in two of the leading oil
resource plays in western Canada,
being the Cardium light oil play in central Alberta and the Bakken light oil resource play
in southeast Saskatchewan.
The common shares of Spartan are listed on the TSX under the symbol
"STO".
READER ADVISORIES
Dividends
The payment and the amount of dividends
declared in any month will be subject to the discretion of the
board of directors and will depend on the board of director's
assessment of the Combined Company's outlook for growth, capital
expenditure requirements, funds from operations, potential
acquisition opportunities, debt position and other conditions that
the board of directors may consider relevant at such future time.
The amount of future cash dividends, if any, may also vary
depending on a variety of factors, including fluctuations in
commodity prices and differentials, production levels, capital
expenditure requirements, debt service requirements, operating
costs, royalty burdens and foreign exchange rates.
Forward-Looking Statements
This press release contains forward-looking
statements. More particularly, this press release includes, without
limitation, forward-looking statements concerning the timing and
completion of the Arrangement, the characteristics of the Spartan
assets and the Pinecrest assets, the timing and amount of future
dividend payments, the Combined Company's future hedging
activities, the Combined Company's capital expenditure program, the
Combined Company's drilling plans, the expected ability of the
Combined Company to execute on its exploration and development
program and the Combined Company's anticipated production (both in
terms of quantity and raw attributes) funds flow from operations,
operating netbacks, exit net debt and other similar
matters.
The forward-looking statements contained in
this document are based on certain key expectations and assumptions
made by Pinecrest and Spartan, including: (i) with respect to
capital expenditures, generally, and at particular locations, the
availability of adequate and secure sources of funding for the
Combined Company's proposed capital expenditure program and the
availability of appropriate opportunities to deploy capital; (ii)
with respect to drilling plans, the availability of drilling rigs,
expectations and assumptions concerning the success of future
drilling and development activities and prevailing commodity
prices; (iii) with respect to the Combined Company's ability to
execute on its exploration and development program, the performance
of the Combined Company's personnel, the availability of capital
and prevailing commodity prices; and (iv) with respect to
anticipated production, the ability to drill and operate wells on
an economic basis, the performance of new and existing wells and
accounting risks typically associated with oil and gas exploration
and production; (v) oil prices; (vi) currency exchange rates; (vii)
royalty rates; (viii) operating costs; and (ix) transportation
costs. Although Pinecrest and Spartan believe that the expectations
and assumptions on which the forward-looking statements are based
are reasonable, undue reliance should not be placed on the
forward-looking statements because neither Pinecrest nor Spartan
can give any assurance that they will prove to be correct. Since
forward-looking statements address future events and conditions, by
their very nature they involve inherent risks and uncertainties.
Actual results could differ materially from those currently
anticipated due to a number of factors and risks. These include,
but are not limited to, the failure to obtain necessary regulatory,
shareholder and court approvals for the Transaction and risks
associated with the oil and gas industry in general (e.g.,
operational risks in development, exploration and production;
delays or changes in plans with respect to exploration or
development projects or capital expenditures; the uncertainty of
reserve estimates; the uncertainty of estimates and projections
relating to production, costs and expenses; health, safety and
environmental risks; commodity price and exchange rate
fluctuations; and uncertainties resulting from potential delays or
changes in plans with respect to exploration or development
projects or capital expenditures).
Any references in this news release to
initial production (IP) rates are useful in confirming the presence
of hydrocarbons, however, such rates are not determinative of the
rates at which such wells will continue production and decline
thereafter are not necessarily indicative of long term performance
or ultimately recovery. While encouraging, readers are cautioned
not to place reliance on such rates in calculating the aggregate
production for Pinecrest, Spartan or the Combined Company.
Any references in this news release to
undiscounted or discounted net present values of future net revenue
do not represent the fair market value of the reserves.
The forward-looking statements contained in
this document are made as of the date hereof and neither Pinecrest
nor Spartan undertakes any obligation to update publicly or revise
any forward-looking statements or information, whether as a result
of new information, future events or otherwise, unless so required
by applicable securities laws. Please refer to Pinecrest's 2012
Annual Information Form for additional risk factors relating to
Pinecrest and Spartan's 2012 Annual Information Form for additional
risk factors relating to Spartan, both of which are available for
viewing on www.sedar.com.
Conversion
The term barrels of oil equivalent ("boe")
may be misleading, particularly if used in isolation. A boe
conversion ratio of six thousand cubic feet of natural gas to one
boe (6 mcf/bbl.) is based on an energy equivalency conversion
method primarily applicable at the burner tip and does not
represent a value equivalency at the wellhead. All boe conversions
in this report are derived from converting gas to oil in the ratio
of six thousand cubic feet of gas to one barrel of oil. Given that
the value ratio based on the current price of crude oil as compared
to natural gas is significantly different from the energy
equivalency of 6:1, utilizing a conversion on a 6:1 basis may be
misleading as an indication of value.
This news release shall not constitute an
offer to sell or the solicitation of an offer to buy any securities
nor shall there be any sale of securities in any jurisdiction in
which such offer, solicitation or sale would be unlawful. The
securities issued pursuant to the plan of arrangement and financing
described herein have not been and will not be registered under the
United States Securities Act of 1933 and may not be offered or sold
in the United States except in
transactions exempt from such registration.
Neither the TSX Venture Exchange nor its
Regulation Services Provider (as that term is defined in the
policies of the TSX Venture Exchange) accepts responsibility for
the adequacy or accuracy of this release.
SOURCE Pinecrest Energy Inc.