Tamarack Valley Energy (TVE-V) to acquire Sure Energy (SHR-T) for $50.3-million
Aug 20, 2013 - News Release
Tamarack Valley Energy Ltd. and Sure Energy Inc. have entered into an agreement, whereby Tamarack will acquire all of the issued and outstanding shares of Sure Energy. Pursuant to the transaction, Sure Energy shareholders shall receive 0.1050 of a Tamarack common share for each Sure Energy common share held. In aggregate, Tamarack will issue 6,360,966 Tamarack shares to existing Sure Energy shareholders and assume net debt, as at July 31, 2013, of $32.0-million for total consideration of $50.3-million, based on the offering price and including Sure Energy transaction costs of $2.5-million. The transaction will be effected by way of a plan of arrangement under the Business Corporations Act (Alberta). The board of directors of Sure Energy has unanimously approved the transaction, and shareholders representing 37.9 per cent of the issued and outstanding Sure Energy shares, including the management and board of directors of Sure Energy, have entered into agreements with Tamarack pursuant to which they have agreed to vote their shares in favour of the transaction.In addition to the transaction, Tamarack is pleased to announce that it has entered into a major farm-in and option agreement dated effective Aug. 1, 2013, with an industry major to earn 70-per-cent working interest in up to 113 net sections of highly prospective Cardium lands directly offsetting proven continuing development projects in the greater Pembina area. With 183 gross (128 net) Cardium locations identified on the farm-in lands, the farm-in agreement increases Tamarack's Cardium inventory by approximately 350 per cent. The farm-in agreement is an efficient low-cost means of managing risk and securing a scalable multiyear economic development project which will improve the operating cost structure through access to the farmor's existing infrastructure and favourable processing fees.
Concurrent with the transaction, Sure Energy has entered into a bought deal private placement offering of subscription receipts of Sure Energy for aggregate gross proceeds of $25.0-million with a syndicate of underwriters led by Dundee Capital Markets. Upon satisfaction of certain conditions, including satisfaction or waiver of all conditions to the completion of the plan of arrangement, each subscription receipt shall, without any further action or payment on the part of the holder thereof and pursuant to the plan of arrangement, automatically be converted into one Sure Energy share which will then be immediately exchanged for Tamarack shares on the basis of 0.1050 Tamarack shares for each Sure Energy Share held. Pursuant to the offering 96.2 million subscription receipts will be sold by the underwriters at a price of 26 cents per subscription receipt, which, upon completion of the plan of arrangement, will result in the issuance of 10,101,000 Tamarack shares at an equivalent price of $2.476 per Tamarack share. The net proceeds of the offering will be used to finance 2013 and 2014 capital expenditures, postclosing of the transaction, and general corporate purposes.
Sure Energy transaction summary
Tamarack and Sure Energy shareholders will benefit from the combination of complementary Redwater Viking acreage, Tamarack's proven operations efficiencies and further synergies, including scalability of drill programs to help continue to drive down Viking well capital costs. Through the doubling of Tamarack's land position in the Redwater Viking, Tamarack will hold 200 net locations, which equate to a 7.7-year drilling inventory based on its projected 12-month forward drilling program.
TRANSACTION CHARACTERISTICS Total transaction value(1) $50-million Production(2) 938 boe/d (47 per cent oil + NGLs) Proved reserves(3) 2,325 mboe Proved plus probable reserves(3) 4,246 mboe Proved plus probable RLI(4) 14.6 years Corporate operating netback(5) $25.55/boe Redwater operating netback(5) $58.27/boe Drilling locations(6) 159 locations 1. Including net debt of $32-million as at July 31, 2013, and transaction costs for Sure Energy of $2.5-million. 2. Production based on second quarter 2013. 3. Gross reserves are Tamarack internal estimates prepared effective August, 2013, by a member of management who is a qualified reserve evaluator in accordance with National Instrument 51-101. Gross reserves mean Sure Energy's working interest reserves before the calculation of royalties and before the consideration of the company's royalty interests. 4. Based on production of 938 barrels of oil equivalent per day. 5. Based on second quarter 2013 realized pricing, calculated by subtracting royalties and operating costs from revenue. 6. Based on Tamarack internal estimates.
Net of undeveloped land at an estimated value of $7.3-million, using $100 per acre, the associated transaction metrics are as shown in the table.
TRANSACTION METRICS Production $45,800/boe Proved reserves $18.46/boe Proved plus probable reserves $10.11/boe Proved plus probable reserves recycle ratio 2.5x
Cardium farm-in
Tamarack has entered into a farm-in agreement, effective Aug. 1, 2013, with an industry major to access 177 gross sections (113 net) of Cardium lands in the greater Pembina area. Tamarack has committed to drill a minimum of 20 net wells (approximately 31 gross) over the term of the farm-in agreement, which expires as at Dec. 31, 2016. Tamarack will earn 70 per cent of the farmor's working interest upon drilling and completion of a test well, in the section of lands in which such well is drilled, and the farmor will share in the equipping and tie-in of the well. Tamarack has been afforded the ability to propose and drill joint wells on earned lands while in the earning phase of the farm-in agreement, and the farmor will have the right to participate or to farm out its residual interest subject to a non-convertible gross overriding royalty. A portion of the farm-out lands (approximately 22 net sections) is subject to a right of first refusal to the farmor's partners.
The transaction has several key benefits to Tamarack:
- The farm-in expands Tamarack's inventory of low-risk (85-per-cent chance of success) development opportunities by approximately 350 per cent to 165 locations within the Cardium fairway;
- Minimizes upfront entrance costs and moves to half-cycle economics through sizable acreage position;
- Established infrastructure access and favourable processing fee arrangements;
- Ability to high grade acreage and initial earning locations by drilling wells directly offsetting existing horizontal Cardium development;
- Flexibility to accelerate development drilling while continuing to satisfy the staged earning requirements;
- As operator, Tamarack designed the timing of the capital commitments to be able to be financed through existing cash flow.
Strategic rationale
The transaction and farm-in agreement materially enhance Tamarack's position within its existing light oil core areas establishing Tamarack as a top-tier sustainable growth company. The combination of low-cost, capital-efficient Viking oil exploitation at Redwater and high-impact Cardium oil development positions Tamarack for approximately 29-per-cent growth in production in 2014 from current pro forma production. With greater critical mass and a concentrated land base within its proven core area, Tamarack will continue to focus on reducing well costs and enhancing economics through a larger drilling program.
POSTTRANSACTION HIGHLIGHTS Production(1) 3,828 boe/d (56 per cent oil + NGLs) Operating netback(1) $35.90/boe Undeveloped land 229,130 acres Low-risk drilling inventory(2) 365 well locations P+P reserves(3) 15,431 mboe 1. Production based on second quarter 2013, calculated by subtracting royalties and operating costs from revenue. 2. Based on Tamarack internal estimates. 3. Gross reserves are Tamarack internal estimates prepared effective August, 2013, by a member of management who is a qualified reserve evaluator in accordance with National Instrument 51-101. Gross reserves mean Sure Energy's working interest reserves before the calculation of royalties and before the consideration of the company's royalty interests.
Pro forma 2013 and 2014 guidance
Proceeds from the offering will allow Tamarack to increase its 2013 drilling program and, as a result, Tamarack is please to update its corporate guidance for 2013:
- Average production of 3,150 to 3,250 barrels of oil equivalent per day (up from previous 2,900 to 3,000 boe/d);
- Exit production of 4,200 to 4,300 boe/d (up from previous 3,100 to 3,200 boe/d);
- Capital expenditure program increase to $53-million to $55-million from $33-million to $38-million;
- Cash flow of $38-million;
- Forecasted year-end debt to estimated fourth quarter 2012 annualized cash flow of 1.7 times.
In conjunction with the transaction and the cardium farm-in agreement, Tamarack's board of directors has approved a $62-million to $65-million capital budget for 2014, designed to focus on Cardium horizontal development and Viking oil development. The company expects to drill approximately 8.4 net Cardium one-mile horizontals and 26.0 net Viking oil wells. The capital program will be fully financed with forecasted cash flow from operations and pro forma working capital available at closing. The company expects to have available credit facilities of approximately $100-million on a pro forma basis, postclosing the transaction. The 2014 capital program is based on an average West Texas Intermediate price of $90/barrel Canadian with a $9 Edmonton Par/WTI differential and an average AECO price of $3.25/gigajoule. The current guidance will allow Tamarack to grow on an absolute and per-share basis, highlights include:
- 2014 estimate average production rate of 4,950 to 5,050 boe/d (60 per cent liquids);
- 2014 estimate exit production rate of between 5,300 to 5,400 boe/d (60 per cent liquids);
- Anticipated cash flow of $51-million to $52-million, based on the above commodity price assumptions;
- Estimated 2014 year-end debt to annualized fourth quarter 2014 cash flow from operations of 1.6 times.
Plan of arrangement
Pursuant to the arrangement agreement, Tamarack and Sure Energy have agreed that the transaction will be conducted by way of a plan of arrangement under the Business Corporations Act (Alberta). Tamarack will issue a total of 16,461,966 Tamarack shares and assume Sure Energy net debt, as at July 31, 2013, of $32.0-million, in exchange for all of the issued and outstanding shares of Sure Energy as well as the Sure Energy shares issued pursuant to the offering, subject to the terms and conditions of the arrangement agreement. All dilutive instruments of Sure Energy will vest and be exercised, surrendered or terminated; dilutive instruments carry a range of exercise prices from 39 cents and $1.80.
Under the terms of the arrangement agreement, Sure Energy has agreed that it will not solicit or initiate any inquiries or discussions regarding any other business combination or sale of assets, subject to the fiduciary duty of the Sure Energy board of directors in the event that an unsolicited superior proposal is received by Sure Energy. Sure Energy has granted Tamarack a five-business-day right to match any superior proposal. Both Tamarack and Sure Energy have agreed to pay a non-completion fee of $2.0-million to the other in certain circumstances as set forth in the arrangement agreement.
The board of directors of Sure Energy has unanimously approved the transaction and recommends that shareholders of Sure Energy vote their shares in favour of the transaction. Shareholders representing 37.9 per cent of the issued and outstanding Sure Energy shares, including the management and board of directors of Sure Energy, have entered into agreements with Tamarack pursuant to which they have agreed to vote their shares in favour of the transaction.
The transaction is subject to the approval of the Alberta Court of Queen's bench under the Business Corporations Act (Alberta), the receipt of all necessary regulatory and stock exchange approvals, the requisite approval of the shareholders of Sure Energy, completion of the offering, and satisfaction of certain other closing conditions that are customary for a transaction of this nature. It is anticipated that a Sure Energy shareholder meeting will be held in early to mid-October following the mailing of an information circular regarding the transaction in early to mid-September to shareholders of Sure Energy. Closing of the transaction is expected to occur in mid-October.
Financing
In connection with the transaction, Sure Energy has entered into an agreement, on a bought deal private placement basis, with a syndicate of underwriters led by Dundee Capital Markets, and including GMP Securities LP, National Bank Financial Inc, AltaCorp Capital Inc, Paradigm Capital Inc, Peters & Co. Ltd., RBC Capital Markets and Acumen Capital Finance Partners Ltd., whereby the underwriters have agreed to purchase for resale 96.2 million subscription receipts at a price of 26 cents per subscription receipt for gross proceeds of $25-million. The net proceeds of the offering will be used to finance 2013 and 2014 capital expenditures, and general corporate purposes.
The gross proceeds from the sale of the subscription receipts will be held in escrow and will be released from escrow if certain conditions are satisfied by Oct. 18, 2013, including satisfaction or waiver of all conditions to the completion of the plan of arrangement. The subscription receipts will be subject to a four-month hold period, however, upon release of the escrowed funds and pursuant to the plan of arrangement, each subscription receipt will be converted into one Sure Energy share which will then be immediately exchanged for Tamarack shares on the basis of 0.1050 Tamarack share for each Sure Energy share held. Therefore, upon completion of the plan of arrangement, Tamarack shares issued to holders of subscription receipts will be generally freely tradable.
Closing of the offering is expected to occur on or about Sept. 15, 2013, and is subject to customary conditions and regulatory approvals. Completion of the plan of arrangement is expected to occur on or about Oct. 9, 2013, at which time it is anticipated that subscription receipts will be converted to Sure Energy shares and subsequently exchanged for 10,101,000 Tamarack shares pursuant to the plan of arrangement at an equivalent price of $2.476 per Tamarack share. If the transaction is not completed on or before Oct. 18, 2013, or the arrangement agreement is terminated at an earlier time, then the purchase price for the subscription receipts shall be returned to subscribers, together with a pro rata portion of the interest accrued thereon, if any.
Financial advisers
Dundee Capital Markets is acting as exclusive financial adviser to Tamarack and GMP Securities is acting as financial adviser to Sure Energy with respect to the transaction. GMP Securities has provided the board of directors of Sure Energy with its verbal opinion that, as at the date hereof, and subject to review of final documentation, that the consideration to be received by Sure Energy pursuant to the terms of the arrangement agreement is fair, from a financial point of view, to Sure Energy shareholders.
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