ENERGY TRUSTS / PrimeWest Energy Trust Responds to Directors' Circulars
of Starcor and Orion, Urges Unitholders to Tender
CALGARY, Jan. 5 /CNW/ - PrimeWest Energy Trust (PrimeWest) today
responded to circulars issued by the boards of directors representing Starcor
Energy Royalty Fund (Starcor) and Orion Energy Trust (Orion) in response to
PrimeWest's offers for the outstanding units of Starcor and Orion. PrimeWest
urged unitholders of Starcor and Orion to tender their units under PrimeWest's
offers, thereby taking advantage of the benefits that will come from combining
the three trusts.
''There is a strong business case for accepting our offers,'' said Harold
Milavsky, Chairman of PrimeWest. ''We have made a number of efforts to meet
with Starcor and Orion to more fully describe the benefits of our offers, and
continue to be willing to meet with them at their convenience. We strongly
urge unitholders to consider the benefits of our offers, and to tender their
units. We believe that all unitholders will benefit from participating in
PrimeWest - a trust that is managed by an experienced team with a successful
track record.''
''Combining these trusts clearly makes sense,'' said Kent MacIntyre,
Vice-Chairman and Chief Executive Officer of PrimeWest. ''This is an
attractive opportunity for Starcor and Orion unitholders to participate in a
stronger, larger, more efficient oil and gas trust.''
PrimeWest rebutted reasons cited by the Starcor and Orion boards of
directors for recommending rejection of the PrimeWest offers, made on December
21, 1998:
- With respect to the contention that the offers do not adequately
reflect Starcor's and/or Orion's net asset value: PrimeWest believes
that the best indicator of value is the market price of the Starcor and
Orion units. PrimeWest's offers represent a 15 percent premium to the
market prices of both Starcor and Orion units on the date prior to the
announcement of the offers. While the unit values of the entire oil and
gas trust sector, including Starcor, Orion and PrimeWest, have
declined, all unitholders of the combined trust, including current
unitholders of Starcor and Orion, will benefit from more favourable
market conditions. In addition, the combined trust should enjoy
enhanced liquidity for its units, resulting in a lower yield applicable
to such units, and thereby increasing the market value for those units.
- With respect to the contention that there is no business case for the
offers: As outlined in its offers, PrimeWest carefully considered the
financial, operational and distributions improvements that would result
from combining the trusts. These benefits provide a compelling
business case for the offers.
- With respect to the contention that the offers are dilutive to
unitholders: PrimeWest's analysis demonstrates that the transaction
will be accretive to future distributions per unit for Starcor and
Orion unitholders. This analysis takes into consideration the proposed
exchange ratios and all costs which PrimeWest anticipates incurring in
completing the offers, including acquisition fees to be paid to the
PrimeWest manager and estimated termination fees to be paid to the
managers of Starcor and Orion. It identifies cost efficiencies
associated with reduced management fees, general and administrative
expense reductions and operating synergies, expected to be more than $4
million annually. It also takes into account the aggressive pursuit of
new development opportunities and property enhancements.
- With respect to the contention that management fees will increase:
Under the terms of the offers, PrimeWest is proposing to reduce the
cash portion of its management fee. Starcor's cash management fee for
the 12 months ended September 30, 1998 was $1.06 per barrel of oil
equivalent (BOE) produced, and Orion's cash management fee was $0.38
per BOE produced over the same period. PrimeWest's cash management fee
was $0.26 per BOE over the same period. None of the foregoing figures
take into account fees commonly paid to trust managers as a means of
encouraging asset replacement. PrimeWest estimates that the cash
management fee for the combined entity, as reduced from 2.5% of net
production revenue to 1.75% of net production revenue, would have been
$0.23 per BOE produced (which includes the effect of the one percent
retained royalty payable to the PrimeWest manager as an ownership
dividend) over that time period, had the combination been completed at
the beginning of that period. As is the case with Orion, PrimeWest's
management fee structure includes a non-cash component, designed to
encourage alignment between the interests of the trust manager and
those of unitholders. While not directly reducing cash distributions
payable to unitholders, the cash equivalent value of this compensation
would have amounted to $0.07 per BOE produced over the same period.
- With respect to the contention that general and administrative (G&A)
expenses will rise: PrimeWest distinguishes itself from its competitors
by investing in highly competent technical personnel who deliver
sector-leading low-cost reserve additions, the value of which far
outweighs the G&A costs incurred.
- With respect to the contention that PrimeWest's production has sharply
declined in 1998: Contrary to this contention, PrimeWest's average
daily production rate is expected to be more than 30 percent higher in
1998 than it was in 1997, based on PrimeWest's third quarter operating
results and estimates for the fourth quarter of 1998. PrimeWest's 1998
year-end reserves report is currently being finalized; based on
preliminary discussions with the independent engineering consultant, no
material negative revisions are anticipated. Further, in 1998,
PrimeWest replaced 170% of its production through acquisitions, net of
dispositions. Additional reserve assignments resulting from PrimeWest's
1998 property enhancement program are expected to be confirmed by the
year-end reserves report.
- With respect to the contention that reserve life index and natural gas
exposure will decline: PrimeWest acknowledges that, initially, the
established reserve life index for the combined entity will be slightly
shorter than that of Starcor. However, PrimeWest's property enhancement
strategy is expected to increase reserve recovery year by year, adding
to ultimate recoverable reserves over time. On this basis, PrimeWest
considers that the transaction will be accretive to the combined
entity's reserve life index. Moreover, PrimeWest brings to the
combined entity the greatest exposure to natural gas on a reserve
basis.
In addition to operating synergies from property proximity among the
trusts, PrimeWest reiterated five key benefits that would accrue to
unitholders if a combination were to occur:
1. The offer represents a 15 percent premium to the market price of
Starcor and Orion units on December 10, 1998, the day before the
PrimeWest announcement.
2. Having regard to the exchange ratios in the offers, there will be a
sustainable increase in cash distributions per unit.
3. A larger trust will enjoy enhanced liquidity and access to capital.
Market capitalization of the combined entity will rank a solid third
among conventional oil and gas trusts, and this will likely mean
increased access to lower-cost capital for future reserve additions
and distributions growth.
4. A combined trust will have reduced operational risk through the
diversification of assets. The increase in the number of core
properties in the combined entity will serve to reduce risk.
Moreover, the combined entity will have a high degree of control
through operatorship.
5. There may be potential positive tax effects. Starcor and Orion
unitholders who accept the PrimeWest offers will realize a capital
loss that may be used to offset capital gains elsewhere, to the extent
that the value of the PrimeWest units received in exchange for their
Starcor or Orion units is less than their adjusted cost base.
PrimeWest will hold a conference call describing the benefits of the
offers on Thursday, January 7, 1999 at 7:00 a.m. (Calgary time). Interested
parties may attend by calling 1 (800) 997 6722.
On December 11, 1998, PrimeWest announced offers to purchase all of the
outstanding trust units of Starcor Energy Royalty Fund and of Orion Energy
Trust. PrimeWest retained CIBC Wood Gundy Securities Inc. to act as financial
advisor for the offers. Under the terms of the offers, PrimeWest would issue
1.207 PrimeWest units for each Starcor unit, and 0.968 PrimeWest units for
each Orion unit. These offers were mailed to holders of Starcor and Orion
units on December 21, 1998, and are set to expire on January 12, 1999.
Units of PrimeWest Energy Trust are traded on The Toronto Stock Exchange
under the symbol ''PWI.UN''. The company's website is www.prime-west.com. |
