Canadian Small Cap Consolidation Continues - Image Courtesy Of FlashDBA.com
Pursuant to my theme that a Canadian small-cap catharsis is underway … and long overdue … take a look at the huge headline below.
Hats off to the management teams of all 3 companies for this great move.
Pace Oil & Gas, AvenEx Energy and Charger Energy to Combine and Form Intermediate Dividend Paying Corporation
Conversion of natural gas volumes to barrels of oil equivalent (boe) are at 6:1.
CALGARY, ALBERTA–(Marketwire – Dec. 20, 2012) –
NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES. ANY FAILURE TO COMPLY WITH THIS RESTRICTION MAY CONSTITUTE A VIOLATION OF U.S. SECURITIES LAWS.
Pace Oil & Gas Ltd. (“Pace”) (TSX:PCE), AvenEx Energy Corp. (“AvenEx”) (TSX:AVF) and Charger Energy Corp. (“Charger”) (TSX VENTURE:CHX) announce that they have entered into an agreement (the “Arrangement Agreement”) providing for the combination of Pace, AvenEx and Charger to form a dividend paying corporation to be named “Spyglass Resources Corp.” (“Spyglass”). Spyglass will have a balanced commodity profile and sustainable business model underpinned by 18,000 boe/d of stable, low decline oil and gas production and will be led by an experienced management team.
The merger will be completed through an amalgamation of the three parties (the “Merger”) on the basis of 1.30 Spyglass shares for each outstanding common share of Pace (the “Pace Shares”), 1.00 Spyglass share for each outstanding common share of AvenEx (the “AvenEx Shares”) and 0.18 Spyglass shares for each outstanding Class A share of Charger (the “Charger Shares”). The exchange ratios represent a value of $4.32 for each Pace Share, $3.32 for each AvenEx Share and $0.60 for each Charger Share based on the closing price for AvenEx on December 19, 2012.
In conjunction with the Merger, AvenEx has reached a binding agreement for the sale of its Elbow River Marketing business (the “Elbow River Sale”) for aggregate cash proceeds of $80 million, subject to regulatory approvals, customary closing conditions and adjustments. The Elbow River Sale is expected to close by mid-February 2013.
Spyglass will have approximately 129 million common shares outstanding upon completion of the Merger and, subject to receipt of the final approval of the TSX, will be listed on the TSX under the symbol “SGL”. Spyglass will be managed by the current Charger team, led by Tom Buchanan as CEO (former President and CEO of Provident Energy Trust) and Dan O’Byrne as President (former COO of Provident Energy Trust). The Board of Directors of Spyglass will consist of 8 members with nominees from each party including Randy Findlay as Chair, Dennis Balderston, Tom Buchanan, Gary Dundas, Mike Shaikh, Jeff Smith, Fred Woods and John Wright.
“We are very pleased to introduce a new dividend-paying intermediate oil and gas producer to the Canadian market,” said Tom Buchanan, Chairman and CEO of Charger. “The combined asset base features mature, low decline properties and a balanced commodity profile coupled with the light oil development opportunities needed to sustain the model. The management team has previously operated the majority of the assets that are being contributed to Spyglass and has a proven track record in respect of the execution, financial and operational discipline that is required to sustain a cash-distributing entity.”
Dividend Policy
Upon closing, Spyglass will implement a monthly dividend of $0.03 per share with a dividend payout of 35% to 40% of cash flow (approximately $46 million annual dividend) and a target all-in payout ratio (including $80 to $90 million of sustaining capital expenditures) of approximately 100% of cash flow. The dividend policy will be reviewed monthly and is based on a number of factors including current and future commodity prices, foreign exchange rates, an active commodity price hedging program, status of current operations and future investment opportunities. Each dividend declaration will be confirmed by Spyglass in a monthly news release. Spyglass will consider implementing a dividend reinvestment plan (DRIP) following completion of the Merger.
Key Attributes and Sustainability Criteria of Spyglass
Each of Pace, AvenEx and Charger believe that the Merger will create immediate and long term shareholder value through the introduction of an income and growth company of scale with a low decline, balanced commodity profile and a sustainable dividend. The business model is supported by the following key attributes:
Spyglass Key Attributes
Pro Forma Operational
Current Production (boe/d)
18,000 boe/d
% Oil & Liquids
45%
Total Proved Reserves(1)
57.5 MMboe
Total Proved plus Probable Reserves(1)
93.9 MMboe
Undeveloped Land (Net)
645,000 acres
Pro Forma Financial
Shares Outstanding
129 million
Credit Facility Capacity
$400 million
Net Debt(2)
$280 million
Expected Credit Facility Availability
$120 million
Estimated Tax Pools
$900 million
Pro Forma 12-Month Outlook (3)(4)
12-Month Production Forecast
18,000 boe/d
% Oil & Liquids
52%
Operating Netback
$21 – $23 / boe
12-Month Cash Flow Forecast(5)
$115 – $130 million
Capital Expenditures
$80 – $90 million
Pro Forma Dividend Features & Sustainability Criteria
Annualized Dividend per Share
$0.36
Payment Frequency
Monthly
Dividend Payout Ratio
35% – 40%
All-In Payout Ratio
100% – 115%
Base Decline Rate
20%
Development Capital Efficiencies
$25,000 / boe/d
Pro Forma Net Debt to Cash Flow
2.2x – 2.4x
Reserve Life Index
14 years
Light Oil Drilling Inventory (Halkirk, Matziwin, Pembina, Randell, etc.)
> 1,000 locations
Years of Sustaining Development Available
> 20 years
Active Hedging Program
Management of Spyglass will employ an active commodity price hedging strategy to protect the dividend and capital program. Spyglass plans to protect up to 60% of production by volume using a rolling 12 month hedging strategy featuring a blend of fixed price and participating products designed to reduce the impact of commodity price volatility on netbacks and cash flow.
The combined hedging position of the parties currently protects approximately 40% of pro forma forecast 2013 natural gas production at a weighted average AECO floor price of $3.06/Mcf and approximately 10% of pro forma forecast 2013 crude oil production at a weighted average WTI floor price of approximately C$99.00/bbl, assuming a CAD/USD exchange rate of 1.00.
Credit Facility
Spyglass has received proposals for a $400 million senior revolving credit facility with a syndicate of lenders co-arranged by National Bank Financial and TD Securities, subject to the closing of the Merger. Management anticipates that Spyglass will have approximately $120 million availability on the credit facility at closing.
2013 Capital Program Designed for Sustainability
The 2013 capital program is designed to sustain current production levels and support the cash flow underpinning the dividend model. A total of $80 to $90 million in capital expenditures are planned and will be focused primarily on light oil development in the following areas:
Halkirk-Provost Viking: approximately 30%
Southern Alberta multiple zones (Pekisko and other): approximately 20%
Randell Slave Point and Gilwood: approximately 20%
Pembina Cardium: approximately 10%
Other: approximately 20%
It is estimated that the combined development program as currently contemplated will yield capital efficiencies of approximately $25,000 per boe/d.
Arrangement
The Merger will be effected by way of a plan of arrangement under the Business Corporations Act (Alberta), and is anticipated to close in mid-February 2013. Closing of the Merger is subject to, among other conditions, the closing of the Elbow River Sale, the approval of at least 66 2/3% of the shares voted at each of the parties’ respective shareholder meetings, the approval of the Alberta Court of Queen’s Bench, the receipt of all necessary regulatory and stock exchange approvals and satisfaction of certain other closing conditions that are customary for a transaction of this nature. Closing of the Elbow River Sale is not conditional on the closing of the Merger.
It is anticipated that separate Pace, AvenEx and Charger shareholder meetings will be held in February 2013 following the mailing of a joint information circular regarding the Merger in January 2013 to shareholders of each company. Closing of the Merger is expected to occur in mid to late February. Each party has agreed to pay a non-completion fee of approximately 2.5% of its enterprise value to the other two parties in certain circumstances as set forth in the Arrangement Agreement, and in the case of AvenEx such non-completion fee is also payable in the event the Merger does not close as a result of the Elbow River Sale condition not being satisfied.
The Directors of each of Pace, AvenEx and Charger that are eligible to vote have unanimously approved the Merger and resolved to recommend that their respective shareholders vote in favour of the Merger. Tom Buchanan and Mike Shaikh, Directors of both Pace and Charger, abstained from voting. Each of the Directors and Officers of Pace, AvenEx and Charger have entered into support agreements pursuant to which each has agreed to vote their shares in favour of the Merger.
Complete details of the terms of the Merger are set out in the Arrangement Agreement, which will be filed by each of the parties and will be available for viewing under each company’s respective profile at www.sedar.com.
Financial Advisors and Fairness Opinions
National Bank Financial Inc. is acting as exclusive financial advisor to Pace and has provided the Board of Directors of Pace with its verbal opinion that, as of the date hereof and subject to its review of the final form of the documentation effecting the Merger, the consideration to be received by holders of Pace Shares pursuant to the Merger is fair, from a financial point of view to the holders of Pace Shares.
GMP Securities L.P. is acting as strategic advisor to AvenEx with respect to the Merger and the Elbow River Sale. Peters & Co. Limited is acting as financial advisor to AvenEx and has provided the Board of Directors of AvenEx with its verbal opinion that, as of the date hereof and subject to its review of the final form of the documentation effecting the Merger, the consideration to be received by holders of AvenEx Shares pursuant to the Merger is fair, from a financial point of view to the holders of AvenEx Shares. Raymond James Ltd. is acting as financial advisor to AvenEx with respect to the Elbow River Sale.
TD Securities Inc. is acting as financial advisor to Charger and has provided the Board of Directors of Charger with its verbal opinion that, as of the date hereof and subject to the review of the final documentation, that the consideration received by holders of Charger Shares pursuant to the Merger is fair, from a financial point of view to the holders of Charger Shares. Macquarie Capital Markets Canada Ltd. is acting as strategic advisor to Charger with respect to the Merger.