MQL-V Holy Gap Man!!
Marquee Energy to acquire Sonde Resources (SOQ-T) Western Canadian assets
Nov 5, 2013 - News Release
Marquee Energy Ltd. and Sonde Resources Corp. have entered into an agreement whereby Marquee will acquire substantially all of the Western Canadian assets of Sonde, including all of its Southern Alberta properties. The assets are primarily located in Marquee's core area at Michichi, Alta., immediately offsetting Marquee's lands and production. Pursuant to the transaction, Sonde will transfer the assets and related tax pools to a newly formed subsidiary of Sonde, which will either amalgamate with a wholly owned subsidiary of Marquee or be directly acquired by Marquee pursuant to a plan of arrangement.Pursuant to the transaction, Sonde will, subject to the election below, receive 0.72 of a Marquee common share for each Sonde common share outstanding, or in aggregate, 44,857,041 Marquee shares. Alternatively, Sonde has an option until Nov. 20, 2013, to elect to receive 0.34 of a Marquee share for each Sonde share outstanding, or in aggregate 21,182,492 Marquee shares, and Sonde to receive $15-million in cash. Pursuant to the plan of arrangement, Sonde will distribute all Marquee shares received to its shareholders, and retain the cash received if so elected.
Marquee shareholders will own approximately 55 per cent of the pro forma shares outstanding following the transaction, or if the cash election is made by Sonde, Marquee shareholders will own approximately 72 per cent of the pro forma shares outstanding. The combined entity will continue to be led by current management of Marquee. The new board of directors of Marquee would comprise Richard Alexander, Glenn Carley, Dennis Feuchuk and Richard Thompson from Marquee and James Riddell, William Roach and Greg Turnbull from Sonde.
The board of directors of Sonde and Marquee have unanimously approved the transaction and shareholders representing 12 per cent of the issued and outstanding Sonde shares, including management, directors and significant shareholders of Sonde, have entered into agreements with Marquee pursuant to which they have agreed to vote their shares in favour of the transaction.
Strategic rationale
This acquisition represents a progression of Marquee's strategy of becoming a focused, top-tier oil-weighted company with a clear path to repeatable and sustainable growth. Through the transaction, Marquee substantially augments its production, land base and drilling inventory at its Michichi core area, doubling its overall corporate production to approximately 4,000 barrels of oil equivalent per day (50 per cent oil and liquids), and positions the company for future liquids growth with a stronger balance sheet. Almost 74 per cent of the production involved in the transaction is from the Michichi area.
Over the past 18 months, the two companies have placed 16 new horizontal wells on production at Michichi, and now have combined production of over 2,400 boe/d in the area and have established Michichi as an ideal platform for low-cost, high netback, repeatable growth. Optimization of drilling and completion techniques has reduced capital costs to less than $2.5-million per well, and netbacks on Marquee's new production at Michichi in the second quarter of 2013 exceeded $52.00/boe. Marquee and Sonde both believe that the creation of a larger, contiguous land base in the area offers numerous opportunities for further operating and capital cost reductions through: infrastructure, land and development synergies, application of continually improving drilling and completion techniques, and scalability of drilling programs.
Anticipated benefits of the transaction for Marquee and shareholders of Sonde are as follows:
- Creates a dominant presence in the Michichi area, with approximately 2,400 boe/d of combined production, a substantial low-risk technically supported drilling inventory at Michichi of more than 155 locations and a dominant, operated, high working interest net undeveloped land base of approximately 180 sections;
- Materially improves Marquee's financial flexibility, providing it with the ability to grow with estimated pro forma debt to cash flow of approximately 1.5 times for 2014 (or 1.8 times if the cash election is made by Sonde);
- Combined assets and infrastructure provide the opportunity to reduce future operating and capital costs on both an area basis and on a corporate basis through infrastructure, land and development synergies in the Michichi area;
- Sonde shareholders preserve the upside of the North Africa and Western Canada exploration properties while participating in a growth-oriented, oil-focused Marquee portfolio.
Summary of the transaction
Through the transaction, Marquee is acquiring high-quality, oil and natural gas assets at Michichi contiguous with its own operations in the area. The Assets have total current production of 1,900 boe/d (with 1,400 boe/d in Michichi), a low-risk horizontal development drilling inventory of more than 40 unbooked locations and approximately 37,500 acres of net undeveloped land at Michichi. The assets also contain significant-owned infrastructure including a battery with capacity for 2,000 bbl/d, in addition to various area pipelines, gathering systems and compressor stations.
The transaction and the assets have the following characteristics:
Current production (1): 1,900 boe/d
PDP reserves (2): 4,100 Mboe
Proved reserves (2): 5,100 Mboe
Proved plus probable reserves (2): 9,400 Mboe
Proved plus probable NPV 10 per cent (2)(3): $109-million
Proved plus probable RLI (2)(4): 13.6 years
Current operating netback (5): $17.24/boe
Drilling locations (6): greater than 40 horizontal locations at Michichi
Net undeveloped land (6): 101,100 acres (37,500 acres at Michichi)
Notes:
- Production based on September, 2013, sales volumes.
- Derived per the Sonde reserves report prepared by GLJ Petroleum Consultants Ltd. effective Dec. 31, 2012. The Sonde reserves report has not been adjusted to reflect changes in reserves occurring after Dec. 31, 2012, as a result of production, drilling or other events.
- Before tax net present value based on a 10-per-cent discount.
- Based on current production.
- Calculated by subtracting royalties, operating costs and transportation costs from revenue from Sonde's second quarter second quarter 2013 financial statements.
- Internal estimates.
Key attributes of pro forma Marquee
This deleveraging transaction is accretive to Marquee on a debt adjusted cash flow, production, reserves and net asset value per share basis. Marquee's pro forma profile after giving effect to the transaction and including the assets is currently anticipated to be as follows:
Shares outstanding: 99.5 million or, 75.8 million if the cash election is made by Sonde
Current production (2): approximately 4,000 boe/d (50 per cent oil and natural gas liquids)
Proved developed producing reserves (4): 7,800 Mboe
Proved reserves (4): 11,600 Mboe
Proved plus probable reserves (4): 21,400 Mboe
Proved plus probable NPV 10 per cent (4): $254-million
Proved plus probable RLI (4,5): 14.7 years
Drilling locations (3): 180 net wells (includes approximately 155 horizontal locations at Michichi)
Net undeveloped land (3): 250,000 acres (approximately 116,000 acres at Michichi)
Tax pools: approximately $170-million
Fourth quarter 2013 exit net debt (3): $57.5-million or, $72.5-million if the cash election is made by Sonde
Credit facility: $85-million
2013 exit production rate (3): 4,400 to 4,600 boe/d
2014 average production guidance (3): 4,500 to 4,700 boe/d (54 per cent oil and NGLs)
2014 exit production rate (3): 5,000 to 5,200 boe/d (56 per cent oil and NGLS)
2014 forecast cash flow: $37-million to $39-million
2014 operating netback: $28/boe
2013 exit debt to 2014 cash flow (3): 1.5 times or, 1.8 times if the cash election is made by Sonde
In conjunction with the transaction, Marquee expects to execute a $45-million capital program for 2014. (1) The capital budget is designed to focus on oil opportunities in Marquee's two core areas, Michichi and Lloydminster, and is intended to be fully financed using forecasted cash flow from operations and its available credit facility. Marquee anticipates drilling approximately 14 Michichi horizontal wells and six Lloydminster vertical wells. The company expects to have total credit facilities of $85-million on a pro forma basis postclosing of the transaction, based on a letter of intent from Marquee's lender. Marquee's production averaged 2,139 boe/d in the third quarter of 2013, and on a stand-alone basis Marquee is reiterating its 2013 exit guidance of 2,700 boe/d with production additions from its capital program at Michichi and Lloydminster in the second half of 2013.
Notes:
- WTI $95 (Canadian) and AECO $3.25 (Canadian)
- Production based on September, 2013, sales volumes
- Internal estimates
- Derived from Marquee reserves report prepared by Sproule Associates Ltd. effective Dec. 31, 2012, and the Sonde reserves report. Neither the Marquee reserves report nor the Sonde reserves report has been adjusted for changes occurring after Dec. 31, 2012, including production, drilling or other events.
- Based on current production.
Sonde going forward
Upon completing the transaction Sonde will continue as a publicly traded entity under the ticker SOQ, with a business focused on the development of the Zarat field and exploration of the joint oil block in North Africa.
Sonde will retain its current cash and working capital balances of approximately $21-million, in addition to cash received in the transaction should Sonde make the cash election. In addition, Sonde will retain ownership of about 100,000 net acres of Western Canada exploration assets, split approximately equally between its Eaglesham area Wabamun play and west-central Alberta Duvernay play. Sonde will continue to seek strategic alternatives for the Western Canada exploration acreage, which could include cash sales, farm-outs, other forms of merger, or other options.
Plan of arrangement
Marquee and Sonde have entered into the arrangement agreement pursuant to which Marquee and Sonde have agreed that the transaction will be undertaken by means of the plan of arrangement.
The board of directors of Sonde unanimously supports the transaction, has unanimously determined that the transaction is fair to Sonde shareholders and in the best interest of Sonde and has agreed to unanimously recommend that the shareholders of Sonde vote in favour of the transaction. Certain Sonde shareholders, including all officers and directors, who collectively hold over 12 per cent of the issued and outstanding Sonde shares, have entered into agreements with Marquee pursuant to which they have agreed to vote their shares in favour of the transaction at the Sonde shareholder meeting.
Under the terms of the arrangement agreement, both Sonde and Marquee have agreed that they will not solicit or initiate any inquiries or discussions regarding any other business combination or sale of assets, subject to the fiduciary duty of either the Sonde or Marquee board of directors in the event that an unsolicited superior proposal is received by Sonde or Marquee, respectively. Each of Sonde and Marquee has granted the other a three-business-day right to match any superior proposal. Each of Marquee and Sonde 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, including upon any acceptance of a superior proposal.
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 Sonde, and satisfaction of certain other closing conditions that are customary for a transaction of this nature. It is anticipated that a Sonde shareholder meeting will be held in late December following the mailing of an information circular regarding the transaction in early December to shareholders of Sonde. Assuming approval of the transaction by Sonde shareholders, closing is expected to occur shortly thereafter.
Financial advisers
National Bank Financial Inc. and Peters & Co. Ltd. are acting as joint financial advisers to Marquee and Acumen Capital Partners as strategic advisers with respect to the transaction. Each of National Bank Financial Inc. and Peters & Co. Ltd. has provided the board of directors of Marquee with its opinion that, subject to its review of the final form of documents effecting the arrangement, the consideration to be offered by Marquee pursuant to the arrangement is fair, from a financial point of view, to Marquee shareholders.
FirstEnergy Capital Corp. acted as financial adviser to Sonde in respect of the transaction and has provided the board of directors of Sonde with its verbal opinion that, as of the date of the arrangement agreement and subject to review of final documentation, the consideration to be received by the holders of Sonde shares under the transaction is fair from a financial point of view, to such holders. A copy of the fairness opinion will be included in the information circular to be sent to Sonde shareholders for the special meeting to be called to consider the transaction.
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