Pinecrest Energy Inc. to Combine with Spartan Oil Corp. to create a Sustainable Light Oil Dividend and Growth Company (cnw)
CALGARY, Nov. 21, 2012 /CNW/ - Pinecrest Energy Inc. (TSX-V: PRY) ("Pinecrest") and Spartan Oil Corp. ("Spartan") (TSX: STO) are pleased to announce that they have entered into an arrangement agreement (the "Arrangement Agreement") providing for the combination of Pinecrest and Spartan (collectively, the "Combined Company") to form a premier light oil weighted entity that will provide shareholders with a sustainable model of income and production growth. The Combined Company will have an enterprise value approaching $1 billion and an attractive suite of high netback light oil projects.
Under the terms of the Arrangement Agreement, the merger will be completed through the acquisition by Pinecrest of all of the outstanding common shares of Spartan (the "Spartan Shares") on the basis of 2.738 common shares of Pinecrest (the "Pinecrest Shares") for each outstanding Spartan Share (the "Transaction"). The exchange ratio in respect of the Transaction represents a deemed price of $5.12 per Spartan Share and a deemed price of $1.87 per Pinecrest Share. The combination of Pinecrest and Spartan creates a premier light oil weighted entity that will provide shareholders with a sustainable model of income and growth. The Combined Company is targeting a medium and long term payout ratio of less than 100%; the forecasted 2013 capital spending and dividend payments are expected to represent approximately 103.8% of the funds from operations.
Pinecrest's existing executive team, led by Wade Becker, will manage the Combined Company. At closing, and prior to the proposed 3 for 1 share consolidation to be completed under the terms of the Arrangement Agreement, the Combined Company will have approximately 513.4 million shares outstanding with Spartan shareholders owning approximately 49 percent of the Combined Company (assuming the exercise of certain Pinecrest warrants and options). It is contemplated that Richard McHardy and Don Archibald, currently members of Spartan's Board of Directors, will be appointed to the Board of the Combined Company at closing.
Creating a Sustainable Premier Light Oil Income and Growth Company
The combination of high netback oil weighted assets at Red Earth and Pembina allow for the transition to an income and growth model that supports sustainable dividend payments to shareholders and provides the opportunity for annual per share growth. Through industry leading netbacks (greater than 91% light oil and liquids) and greater than $190 million of anticipated credit facility capacity, the Combined Company will have the discretionary ability to accelerate production and cash flow growth. The combination of a high corporate netback, low risk drilling, decreasing corporate decline and year round drilling access allows for efficient long term sustainability. The key attributes to the Combined Company sustainability under the dividend model are as follows:
- Industry leading Netbacks
- Combining the top 2 netback E&P juniors
- 91% oil and liquids weighting provide $60.00/ boe combined operating netback (2013 combined pro forma)
- Measured Corporate Decline and Capital Efficiency Management
- Complement horizontal multistage drill program with 7 waterflood schemes to be implemented in 2013
- Waterflood capital efficiency forecasted at $10,000/bbl
- Attractive capital efficiencies on low risk development drilling opportunities at Pembina of approximately $30,000 per boe
- Forecast corporate declines of:
- 40% in 2013
- 33% in 2014
- 27% in 2015
- Two core light oil resource play areas provide operational diversity and extensive inventory of horizontal drilling locations across large oil in place assets
- Red Earth Slave Point carbonate play:
- Planned implementation of 7 waterflood schemes in 2013
- Pembina Keystone Cardium play:
- Low risk, repeatable drilling; year round access; extensive existing infrastructure
- Financial Flexibility
- The Combined Company will have the strongest balance sheet among both the intermediate and the yield Canadian E&P universe; proforma 0.2 x Debt/ cashflow
- Annual cash flow in excess of $200MM supports dividend and capital program
- A $225 million anticipated credit facility to accelerate growth, including through strategic acquisitions
- Anticipated hedging program of up to 5,000 boe/d for 2013 to ensure stability of cash flows
- Experienced Board of Directors and Management Team
- Technically focused with a proven track record of value creation
Subject to the completion of the Transaction, Pinecrest's Board of Directors has approved an initial annualized dividend of $0.155 per share that is anticipated to be declared in the first month subsequent to the completion of the Transaction. Based on Pinecrest's closing share price on November 20, 2012 of $1.87, the dividend translates to an 8.3 percent yield.
The dividend, on an annualized basis, will require $79.6 million or 39.8 percent of the Combined Company's estimated 2013 pro-forma cash flow of approximately $200 million (Cdn $85.00/bbl and $3.00/mcf, AECO) based on estimated average pro forma 2013 production of 9,200 - 9,600 boe/d (91% oil and liquids). Subject to board of director approval, Pinecrest anticipates allocating approximately $130 million to 2013 capital expenditures for an estimated 2013 all-in payout ratio of 103.8 percent. With pro forma tax pools of approximately $535 million, the Combined Company has sufficient tax pool coverage to provide shareholders with a tax efficient yield vehicle.
The Combined Company's capital expenditures will continue to be focused in the Cardium light oil resource play in the Pembina area of central Alberta and the Slave Point light oil play in Otter/Evi and Red Earth areas of northern Alberta. The Combined Company's significant low risk development drilling inventory, together with attractive capital efficiencies and the high netback nature of these plays supports the sustainability of the Combined Company's cash flow and dividends for the foreseeable future.
In addition, the Combined Company will look for opportunities to acquire stable, low decline, assets with attractive netbacks. As a larger, dividend paying company, Pinecrest management believes the Combined Company will be well positioned to compete for acquisitions. Management feels that the Combined Company's balance sheet will give it a unique competitive advantage that will enable it to generate measurable accretion, while maintaining a conservative debt to cash flow ratio.
Upon completion of the transaction the Combined Company may operate under a different name to be released at a later date.
Key Attributes of the Combined Company:
- An enterprise value approaching $1 billion (based on the current trading price of the Pinecrest and Spartan Shares and the net debt at the time of closing);
- Unlevered balance sheet with an estimated working capital deficit of approximately $35 million at closing, relative to an anticipated credit facility of $225 million.
- Expected pro forma 2013 average production of approximately 9,200 - 9,600 boe/d (91% light oil and liquids);
- Top-decile operating netbacks of greater than $60.00/boe;
- 39.1% basic payout ratio and 103.8% all-in payout ratio;
- Shallowing corporate declines year over year;
- Proved reserves of 20.1 mmboe and Proved plus Probable reserves of 29.8 mmboe based on the independent reserve reports as at December 31, 2011;
- RLI of 8.7 years (based on mid range 2013 average production of 9,200 - 9,600 boe/d); and
- Greater than 500 (gross) horizontal light oil drilling locations targeting between the Slave Point at Red Earth and the Cardium at Keystone.