Daylight Resources Trust and Cadence Energy Inc. Joins Forces- Announce Strategic Business Combination
Monday May 26, 2:36 am ET
CALGARY, ALBERTA--(Marketwire - May 26, 2008) - Daylight Resources Trust (TSX:DAY.UN - News; "Daylight" or the "Trust") and Cadence Energy Inc., formerly known as Kereco Energy Ltd. (TSX:CDS - News; "Cadence"), are pleased to announce that they have entered into an agreement that provides for a strategic business combination of the two entities. Daylight and Cadence will proceed, by way of plan of arrangement, to have Daylight acquire all of the outstanding common shares of Cadence, under which Cadence Shareholders will receive 0.47 of a Daylight trust unit (TSX:DAY.UN - News) for each common share of Cadence (TSX:CDS - News) or, subject to certain conditions, Cadence Shareholders may elect to receive $5.32 in cash for each common share of Cadence. Should Cadence Shareholders elect to receive cash in an aggregate amount of more than $30 million, such consideration will be prorated among holders of Cadence shares who have made such election. Those Cadence Shareholders electing to receive Daylight trust units will receive a value of $5.33 per Cadence share based on the closing price of $11.33 for Daylight trust units on the Toronto Stock Exchange (the "TSX") on May 23, 2008. This value represents a premium of 15.5 percent to the 20 day weighted average trading price of Cadence shares on the TSX. Total consideration for the transaction, based on the 20 day weighted average trading price of Daylight trust units on the TSX, is approximately $301 million, including the assumption of an aggregate of $70 million, face value, of convertible debentures and positive net working capital of approximately $64 million.
TRANSACTION RATIONALE
Daylight's acquisition of Cadence is driven by the synergies with and the value adds of Cadence's holdings in the Sturgeon Lake South Leduc oil pool. This asset and associated holdings represent approximately 95% of the reserve value of Cadence. Prior to the combination, the parties held divided interests in this single pool making the business combination between the two a strategic and natural fit. This strategic transaction consolidates the Sturgeon Lake South Leduc light oil pool in the hands of a single operator for the first time since its discovery in 1953. The Sturgeon Lake South Leduc pool is the sixth largest Leduc oil pool in the Western Canadian Sedimentary Basin, consists of a reef structure with an original oil column of up to 100 metres in thickness and extends over 61 square kilometres. Provincial regulators estimate that this pool originally contained over 320 million barrels of oil in place. Current recovery is estimated to be approximately 53 percent with ultimate recovery, excluding potential CO2 miscible flood, expected to be approximately 57 percent. Consolidated ownership will facilitate cost savings and a more orderly exploitation of the pool. The high quality 38 degrees API light oil produced from the Leduc formation receives a price close to Edmonton light par, which has recently been in the range of $130 per barrel. The asset is also highly complimentary to Daylight's 100 percent owned and operated Sturgeon Lake North pool, located 16 kilometres to the northwest. A map showing the synergy between Daylight and Cadence's lands in Sturgeon Lake South and a revised corporate presentation can be accessed on Daylight's website at www.daylightenergy.ca.
Both parties have independently investigated, and believe that there is significant potential reserve upside from the implementation of a CO2 miscible flood in the Leduc. Incremental miscible flood recovery estimates range from 10 to 18 percent of original oil in place. Daylight believes that this technology may also be applicable to the Sturgeon Lake North asset. While the potential implementation of such a flood lies a number years into the future, the extensive land base and full 3D seismic coverage of the pool will allow the immediate continuation of a successful infill drilling program, with over 25 potential development drilling locations identified to date.
Daylight and Cadence have additional synergies beyond that found in the Leduc assets. Cadence also owns significant Montney oil production in the Sturgeon Lake area, where Daylight and Cadence have recently been successful with their optimization programs. Cadence also owns approximately 300 boe/d of production in the Peace River Arch, adjacent to Daylight's Cecil/Mulligan area of operations.
Anthony Lambert, President and CEO of Daylight stated, "We are very pleased to be able to establish an acquisition as complementary as the proposed transaction with Cadence. The asset overlap is tremendous and the ability to control all of the Sturgeon Lake South Leduc pool will drive significant operational efficiencies."
Grant Fagerheim, President and CEO of Cadence added "The combination with Daylight provides Cadence Shareholders with immediate value for our high quality, long life assets, continued exposure to the significant potential value to be unlocked from Sturgeon through a future CO2 miscible flood and exposure to Daylight's impressive conventional and resource play assets."
SIGNIFICANT TRANSACTION HIGHLIGHTS
Operational Impact
- The transaction adds approximately 3,600 boe/d of production to Daylight consisting of 70 percent high netback light oil and natural gas liquids, increasing the Trust's production by 17 percent.
- Daylight Unitholders and Cadence Shareholders benefit from the consolidation of operations of one of the most significant light oil properties in Alberta and direct exposure to the application of miscible flood technology.
- The transaction supports Daylight's goal of maintaining a balanced portfolio between natural gas and oil, moving Daylight's proportion of oil and natural gas liquids production from 41 to 45 percent.
- The transaction exposes Cadence Shareholders to the upside in Daylight's portfolio of assets including; a significant tight gas Cadomin play in Elmworth, continued development and waterflood implementation in the Cecil Kiskatinaw light oil pool, significant CBM and shallow gas potential with over 200 drilling locations in Sylvan Lake, heavy oil development and an emerging shale gas opportunity in Wildmere, and significant natural gas development opportunity in our core West Central area.
Reserves and Drilling Inventory Impact
- Increases Daylight's Proved Plus Probable Reserves ("2P") to 82.4 million barrels with the inclusion of Cadence's 18.2 million barrels of 2P reserves (based on independent year end 2007 reserve evaluations excluding the 2008 disposed properties), thereby lifting Daylight's reserve base by 28 percent.
- Increases Daylight's Reserve Life Index to 9.2 years from 8.4 years and decreases corporate decline rate.
- Increases Daylight's drilling inventory with significant incremental development locations identified to date in the Leduc and Montney formations.
Financial and Balance Sheet Impact
- Substantial increase in forecast 2008 Proforma Funds from Operations.
- Transaction de-levers Daylight's balance sheet and significantly increases Daylight's borrowing base capacity.
- Increases Daylight's tax pool base from $824 million to over $1.1 billion.
- The transaction will reduce Daylight's Safe Harbour to approximately $400 million for the remainder of 2008. Safe Harbour will increase by $200 million in each of the years 2009 and 2010.
Transaction Metrics
- Based on a total transaction cost of approximately $301 million, utilizing the 20 day weighted average trading price of Daylight trust units on the TSX, the production acquisition cost is approximately $83,500/boed and 2P reserve acquisition cost is $16.54/boe.
- Total consideration represents approximately 4 times Cadence estimated annual Funds from Operations based on current strip pricing, on an unhedged basis.
- The transaction yields a substantial 6 percent increase to Daylight's netback, based on current strip pricing, increasing it from $48/boe to $51/boe, before hedging, due to premium light oil pricing.
- The transaction is accretive to Net Asset Value.
- The transaction is neutral in terms of cash flow and reserves accretion.
Distributions, Budget Considerations, Hedging and Guidance
- Daylight has previously announced monthly distributions of $0.10 per unit until the end of Q2 2008. This transaction further strengthens Daylight's ability to maintain 2008 cash distributions and capital program at a level that is fully funded by internally generated Funds from Operations. Distributions are continuously monitored by the management and Board of Directors of Daylight to ensure that the Trust retains sufficient cash flow to execute our capital program and maintains sufficient financial flexibility to pursue additional strategic business opportunities as they arise.
- At this time, Daylight will maintain our current capital budget guidance of $140 million for 2008, but will reallocate some portion of the capital to the Cadence assets.
- Daylight and Cadence have existing hedge contracts as detailed in their respective Q1 2008 results, which have been previously released.
- Daylight will provide additional guidance with respect to the Trust's production upon successful completion of the arrangement.
Cadence Transaction Details
The completion of the arrangement is subject to customary stock exchange, court and regulatory approvals, as well as the approval of at least 66 2/3 percent of the votes cast by the Cadence Shareholders present, in person or by proxy, at the Cadence Shareholders meeting. It is expected that the Cadence Shareholders meeting to vote on the arrangement and closing will occur in mid to late July 2008. An information circular is expected to be mailed to Shareholders of Cadence in mid to late June 2008.
Debenture Offer
On April 29, 2008 Cadence made a formal offer to purchase its issued and outstanding 4.75% Convertible Unsecured Subordinated Debentures (the "Debentures") at a price of $950 for each $1,000 principal amount of Debentures. This offer is open for acceptance until 2:00 pm (Eastern Standard Time) on June 4, 2008 and is subject to satisfaction of a number of conditions, including that Cadence will not be required to take up and pay for any Debentures deposited under the offer if an arrangement involving Cadence, such as the proposed transaction with Daylight, has been proposed, announced or made by any individual or entity. Under the agreement with Daylight, Cadence has agreed not to waive any of the conditions of the offer. Cadence has also agreed to make available to holders of the Debentures a "Make Whole Premium" (as defined in the governing indenture), if any, and it is expected that Daylight will assume the Debentures in accordance with their terms. In accordance with the terms of the Debentures, the Debentures will become convertible into trust units at a price of approximately $21.28 per trust unit, being 47 trust units per $1,000 of principal amount of Debentures.
Normal Course Issuer Bid
Cadence has also agreed to suspend making purchases under its normal course issuer bid.
Board Approval
The Board of Directors of Daylight and Cadence have unanimously approved the arrangement agreement. Cadence's Board of Directors have unanimously determined that the proposed arrangement is fair to Cadence Shareholders, is in the best interests of Cadence Shareholders and have unanimously recommended that Cadence Shareholders vote in favor of the arrangement. The Cadence Board of Directors and Officers, who own approximately 7 percent of the outstanding Cadence shares, have agreed to vote their Cadence shares in favor of the proposed arrangement. Cadence has agreed that it will not solicit or initiate any discussions concerning any other business combination. Cadence has agreed to pay a non-completion fee of $9 million to Daylight in certain circumstances. In addition, Daylight has the right to match any competing proposal for Cadence in the event such a proposal is made.
Advisors
Scotia Waterous Inc. is acting as exclusive financial advisor to Daylight with respect to this transaction.
Tristone Capital Inc. ("Tristone") is acting as financial and strategic advisor to Cadence with respect to this transaction. Tristone has advised the Board of Directors of Cadence, that subject to the review of definitive legal agreements, it is of the opinion, as of the date hereof, that the consideration to be received by Cadence Shareholders pursuant to the proposed arrangement is fair from a financial point of view to Cadence Shareholders.
Contact:
Anthony Lambert
Daylight Resources Trust
President & CEO
(403) 213-5306
Email: alambert@daylightenergy.ca
Steve Nielsen
Daylight Resources Trust
Vice President & CFO
(403) 213-5312
Email: snielsen@daylightenergy.ca
Ted Hanbury
Daylight Resources Trust
Executive Vice President
(403) 770-6318
Email: thanbury@daylightenergy.ca
Toll Free: 1-877-266-6901
Daylight Resources Trust
(403) 266-6988 (FAX)
Email: ir@daylightenergy.ca
Website: www.daylightenergy.ca
Grant B. Fagerheim
Cadence Energy Inc.
President & CEO
(403) 290-3401
Email: GFagerheim@kereco.com
Source: Daylight Resources Trust, Cadence Energy Inc.
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