Tamarack Valley Energy (TVE-V) Sept 3rd 2014 wholly owned subsidiary, Tamarack Acquisition Corp., has entered into a purchase and sale agreement with Suncor Energy to acquire 100 per cent of Suncor's interests in the Wilson Creek area of Alberta, contiguous with Tamarack's existing Cardium interest in Wilson Creek, for total cash consideration of approximately $168.5-million, subject to certain closing adjustments. In addition to the closing adjustments, there are two rights of first refusal applicable to the Wilson Creek Pekisko unit, that, if exercised, would not have any material impact to the acquisition. The acquisition is highly accretive to Tamarack and further bolsters the company's Cardium-focused land position in the Wilson Creek area, where the company has achieved some of the highest production rates in the area. As of July 1, 2014, being the effective date (as defined herein), the acquisition adds 1,702 barrels of oil equivalent per day (44 per cent oil and natural gas liquids) of high-netback production, including 18,360 (13,728 net) acres of undeveloped land and mid-stream assets composed of a 100-per-cent interest in a 3,800-barrel-per-day oil battery and a 52-per-cent interest in a 30-million-cubic-foot-per-day gas plant. As a result of the acquisition, Tamarack has increased its 2014 estimated exit production guidance by approximately 30 per cent to 9,500 boe per day (approximately 60 per cent oil and NGLs) from 7,300 to 7,500 boe per day.
Concurrently with the acquisition, Tamarack is also pleased to announce that it has entered into an aggregate $125-million bought-deal financing agreement with a syndicate of underwriters co-led by Dundee Securities Ltd. and National Bank Financial Inc. as described herein.
The acquisition will be partially financed with the proceeds of the financing, bank debt and a temporary bridge facility; however, the completion of the acquisition is not contingent on the completion of the financing as funds available under the bank debt and bridge facility are sufficient to satisfy the total cash consideration for the acquisition. Upon closing of the financing and the acquisition, the bridge facility will be eliminated, and Tamarack Valley's credit facilities are anticipated to increase to $150-million from $110-million, of which approximately 25 per cent will be undrawn. The effective date of the acquisition is July 1, 2014. Subject to approval under the Competition Act (Canada), the acquisition is expected to close no later than Oct. 31, 2014. The acquisition is expected to close on or about Oct. 15, 2014.
Rationale
The acquisition is consistent with Tamarack's previously communicated portfolio strategy focused on sustainable, predictable and reliable oil-focused assets while maintaining a healthy balance sheet that provides management the flexibility to deliver efficient growth to shareholders through technical and operational expertise.
The key benefits to Tamarack's shareholders pro forma the acquisition and the financing are as follows:
- Consolidates a sizable and contiguous land base within Tamarack's existing prolific Wilson Creek area, where the company has achieved an area-leading average 30-day initial production and 150-day initial production Cardium results of 390 boe per day (74 per cent oil and NGLs) and 286 boe per day (74 per cent oil and NGLs), respectively (based on calendar-day averages);
- The company's two longest-producing wells at Wilson Creek exceeding industry offsets by approximately 2.4 times over their first 180 days on production;
- Forecasts increasing production from 6,000 boe per day (second quarter 2014 exit rate) to a 2015 average production rate in excess of 11,500 boe per day resulting in:
- Two thousand fifteen accretion of approximately 15 per cent on production per fully diluted share basis;
- The Wilson Creek assets anticipated to generate free cash flow after capital expenditures by the third quarter of 2015, allowing the company to redirect free cash flow to additional drilling, acquisitions or debt repayment, as appropriate;
- Is increasing 2014 exit guidance by approximately 30 per cent to 9,500 boe per day (60 per cent oil and NGLs) on stronger than budgeted results and the acquisition, the second exit production guidance increase within the last month;
- In addition to cash flow and production per share accretion, estimates greater than 20-per-cent accretion on reserves per share;
- Expands Tamarack's inventory of low-risk (85-per-cent chance of success) Cardium development opportunities by approximately 26 per cent to 229 locations within the Cardium fairway.
- Maintains a clean balance sheet with year-end 2015 estimated net debt to funds flow of only 1.0 times;
- Estimates that existing underutilized mid-stream assets and associated pipeline infrastructure have an estimated replacement value of greater than $20.0-million;
- Approximately 63 to 75 per cent of unutilized capacity ensuring future production growth is not restricted.
Asset description
The acquisition consists of Cardium oil production of approximately 826 boe per day (70 per cent oil and NGLs), a 52-per-cent working interest in the Wilson Creek unit No. 1 Pekisko liquids-rich gas unit, which produces approximately 1.45 million cubic feet per day and 97 barrels per day of liquids, and Mannville production of 538 boe per day (26 per cent oil and NGLs).
The acquisition includes approximately 62 (43.4 net) sections of contiguous land in the multizone area of Wilson Creek. Tamarack estimates that 47.4 net low-risk, quick-payout horizontal Cardium oil locations exist on the 28.7 (21.4 net) sections of undeveloped land. In addition, the company estimates 11.6 net drilling locations exist in other zones, such as the Ellerslie, Notikewin and Pekisko.
The infrastructure to be acquired pursuant to the acquisition complements Tamarack's growth plans for the Wilson Creek area. Tamarack will operate a 100-per-cent-owned 3,800-barrel-per-day oil battery (currently less than 25 per cent utilized), a 52-per-cent-owned 30-million-cubic-foot-per-day gas plant (currently less than 37 per cent utilized) and a 100-per-cent-owned refrigeration liquids recovery unit. The company has assigned $20.0-million of value to these infrastructure assets and will explore alternatives to increase the company's economics.
Given Tamarack's existing operations in the Wilson Creek area, general and administrative expense increases are anticipated to be insignificant.
Summary of the acquisition
The acquisition and the assets to be acquired pursuant thereto have the characteristics and metrics summarized in the attached table.
Total purchase price (1)
| $168.5 million
| Current production (at June 30, 2014)
| 1,702 boe/d (44% light oil and NGLs)
| Forecasted annual decline rate
| 26%
| Undeveloped land (net acres)
| 13,728 acres
| Proved reserves (2)
| 6.4 million boe (60% light oil and NGLs)
| Proved plus probable reserves (2)
| 10.5 million boe (60% light oil and NGLs)
| Proved plus probable RLI (3)
| 16.9 years
| 2014 operating netback (4) (5)
| $44.00/boe
| 2015 estimated production
| 3,500 to 3,700 boe/d (65% light oil and NGLs)
| 2015 cash flow multiple (6)
| 3.2 x
| Proved reserves (7)
| $22.77/boe
| Proved plus probable reserves (7)
| $13.88/boe
| Recycle ratio (8)
| 2.9 x
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Preliminary 2015 guidance
Although Tamarack has not finalized its 2015 capital budget, the company anticipates that the Wilson Creek asset will be able to generate free cash flow by the third quarter of 2015, enabling Tamarack to further accelerate drilling on the Cardium farm-in opportunity it entered into in August of 2013. Tamarack is pleased to announce preliminary 2015 guidance as follows:
- A 2015 capital expenditure budget of approximately $170-million to $180-million;
- A 2015 estimated average production rate of between 11,500 to 12,000 boe per day (approximately 55 to 60 per cent oil and NGLs);
- A 2015 estimated exit production rate of between 14,000 to 14,500 boe per day (approximately 55 to 60 per cent oil and NGLs);
- Estimated cash flow from operations in 2015 of between $140-million to $150-million, assuming a 2015 Edmonton par price average of $89 per barrel and an AECO price average of $3.57 per gigajoule;
- Estimated 2015 year-end debt to annualized fourth quarter 2015 funds flow from operations of approximately 1.0 times.
Tamarack intends to bring on two to three rigs in the Wilson Creek area and spud six net one-mile horizontal Cardium oil wells by year-end 2014. The 9,500-barrel-of-oil-equivalent-per-day exit rate assumes three of these wells are on production.
Tamarack expects to finalize its 2015 budget by the end of November, 2014.
Financing
Subscription receipt financing
In connection with the acquisition, the company has entered into an agreement with a syndicate of underwriters co-led by Dundee Securities and National Bank Financial and including Macquarie Capital Markets Canada Ltd., GMP Securities LP, Clarus Securities Inc., Peters & Co. Ltd., RBC Dominion Securities Inc. and AltaCorp. Capital Inc., pursuant to which the underwriters have agreed to purchase for resale to the public, on a bought-deal basis, 16.1 million subscription receipts of the company at a price of $7.15 per subscription receipt for gross proceeds of approximately $115.1-million. The gross proceeds from the sale of subscription receipts will be held in escrow pending the completion of the acquisition.
The subscription receipts will be distributed by way of a short-form prospectus in all provinces of Canada and in the United States, the United Kingdom and certain other jurisdictions as the company and the underwriters may agree on a private placement basis. Completion of the acquisition and the financing is subject to certain conditions, including the receipt of all necessary regulatory approvals, including the approval of the TSX Venture Exchange and the securities regulatory authorities. Closing of the financing is expected to occur on or about Sept. 26, 2014, or such other date as agreed upon between Tamarack and the underwriters. The acquisition is expected to close after receiving Competition Act (Canada) approval, or at the latest Oct. 31, 2014. The acquisition is expected to close on or about Oct. 15, 2014.
In addition, the underwriters have been granted an overallotment option, exercisable for a period commencing at closing of the financing and ending 30 days following closing, to purchase up to 2,415,000 additional subscription receipts at a price of $7.15 per subscription receipt to cover overallotments, if any, and for market stabilization purposes. If the overallotment is fully exercised, gross proceeds from the subscription receipt offering will be approximately $132.4-million.
Each subscription receipt shall entitle the holder thereof to receive, for no additional consideration and without further action on the part of the holder thereof, one common share of the company, upon satisfaction of the escrow release conditions (defined herein). The gross proceeds of the subscription receipt offering will be held in escrow and will be released to the company upon satisfaction of the following conditions: (i) the closing of the acquisition in accordance with the terms and conditions of the purchase and sale agreement; and (ii) receipt by the company of all necessary regulatory and other approvals (including the approval of the TSX Venture Exchange) for the acquisition and the issuance of the common shares issuable pursuant to the subscription receipts. In the event that the escrow release conditions are not satisfied on or before Oct. 31, 2014, the purchase and sale agreement is terminated in accordance with its terms, a party to the acquisition has disclosed to the public that it does not intend to proceed with the acquisition, or Tamarack advises the underwriters that it does not intend to proceed with the acquisition, and the escrowed funds, together with accrued interest thereon, shall be returned to the holders of the subscription receipts.
Private placement
Concurrently with the subscription receipts offering, the company and the same syndicate of underwriters intend to complete a private placement of 1.28 million common shares of the company to be issued on a CDE flow-through basis at a price of $7.85 per CDE flow-through share, for aggregate gross proceeds to the company of approximately $10.0-million. Closing of the private placement, subject to approval by the TSX Venture Exchange, is anticipated to occur concurrently with the closing of the subscription receipts offering on or about Sept. 26, 2014, and is subject to the receipt and approval of the TSX-V.
The company expects to raise an aggregate of approximately $142.4-million from the financing (assuming the overallotment option is exercised in full).
Advisers
Dundee Securities acted as the lead financial adviser, and National Bank Financial acted as financial adviser to Tamarack with respect to the acquisition. |
