CEX Contact Exploration Inc.

/NOT FOR DISTRIBUTION IN THE UNITED STATES OR DISSEMINATION OVER UNITED STATES WIRE SERVICES/

CALGARY, Oct. 21, 2014 /CNW/ - Contact Exploration Inc. ("Contact") (TSXV: CEX) is pleased to announce that it has entered into a strategic merger with Donnycreek Energy Inc. ("Donnycreek") to form a new, amalgamated corporation having an operated 75% working interest ("WI") in Contact's core East Kakwa, Alberta property.  The combined company will also have significant additional acreage in the Kakwa/Resthaven and Wapiti areas of Alberta's Deep Basin.  Contact is also pleased to announce that it has entered into a $20 million bought deal private placement equity financing (the "Financing") with a syndicate of underwriters to fund Contact's ongoing development and exploration program.

EAST KAKWA BACKGROUND

Contact is the 25% WI operator of 16.75 gross sections, and holds a 24% WI in 2 additional gross sections, at East Kakwa, Alberta (the "East Kakwa Property").   Donnycreek holds a 50% WI in the 16.75  section block, a 24% WI in the additional 2 gross sections, as well as a 62% WI in an 2 additional sections, at East Kakwa.  The East Kakwa Property is located in the condensate prone Montney Formation gas fairway, with production from wells at East Kakwa averaging 150bbl of condensate per MMcf of natural gas.  Industry continues to be active in adjacent acreage as the activity in the Montney advances from exploration to development characterized by steady reductions in well drilling and completion costs.  Contact is currently drilling its 14^th and 15^th operated wells at the East Kakwa Property as part of a two rig drilling program.  Since resuming production on October 9, 2014 following a scheduled plant turn-around, gross production from the East Kakwa Property is approximately 4,000 BOE/d (52% natural gas, 48% condensate and other natural gas liquids ("NGLs")), with the three 1.5 mile long lateral horizontal wells completed by Contact this summer contributing a majority of this production. Contact anticipates operating the Kakwa 16-7 compressor and condensate stabilization facility ("16-7 Facility") at a fully utilized capacity of approximately 4,000 BOE/d until March 2015, with production from existing wells and wells expected to be drilled and completed before spring break up 2015.  Contact is planning to double the capacity of the 16-7 Facility by April 2015. 

Effective March 31, 2014, McDaniel & Associates Consultants Ltd. ("McDaniel") independently evaluated (the "McDaniel Evaluation") the reserves associated with Contact's 25% WI at East Kakwa in compliance with National Instrument 51-101.  The McDaniel Evaluation booked Contact gross reserves^([1]) on 10.75 out of the 18.75 gross sections, with 100% of the booked Total Proved value (NPV10) and 97% of the Total Proved Plus Probable value (NPV10) being attributable to the Middle Montney Formation (D2) unit, with the remaining value being booked to the Upper Montney Formation (D4) unit, which was being tested at the East Kakwa Property at the time of the McDaniel Evaluation. 

The following is a summary of the results of the McDaniel Evaluation of Contact's 25% WI acreage at East Kakwa.  Gross reserves, effective March 31, 2014, associated with the consolidated 75% WI acreage at East Kakwa, would be approximately three times the amounts shown in the table below.

The foregoing East Kakwa reserves information does not include the reserves associated with Contact's East Coast assets.  Effective March 31, 2014, GLJ Petroleum Consultants Ltd. ("GLJ") independently evaluated (the "GLJ Evaluation") the reserves associated with Contact's New Brunswick properties in compliance with National Instrument 51-101.  The GLJ Evaluation booked a Total Proved Plus Probable (NPV10) value on these properties of $46.8MM⁽³⁾⁽⁴⁾.

DONNYCREEK MERGER

Contact has entered into an arm's length definitive arrangement agreement (the "Arrangement Agreement") with Donnycreek whereby Contact and Donnycreek will merge (the "Merger") to form a new, amalgamated corporation to be named "Kicking Horse Energy Inc." ("Kicking Horse" or the "Company").  Kicking Horse will have a Deep Basin focus underpinned by approximately 3,000 BOE/d⁽⁵⁾ of high netback production from East Kakwa (52% natural gas, 48% condensate and other NGLs), approximately 350 net sections of Deep Basin Montney acreage, and will be led by the experienced Contact management team. Kicking Horse will also hold the shallow mineral rights in approximately 63 net sections, most of which overlie Montney held acreage.

^{_______________________________________
1} Contact gross reserves being WI share before deduction of royalties and without including any royalty interests.
² Based on McDaniel April 1, 2014 price forecast before tax.
³ Estimates of the net present value of the future net revenue from Contact's reserves do not represent the fair market value of the reserves.
⁴ Based on GLJ April 1, 2014 price forecast before tax.
⁵ Based on current production.

In addition to its joint venture lands with Contact at East Kakwa, Donnycreek will contribute additional Deep Basin lands as follows:

The Merger will be undertaken by way of a plan of arrangement under the Business Corporations Act (Alberta) ("ABCA"). Pursuant to the Merger, Contact and Donnycreek will amalgamate to form Kicking Horse on the basis of 0.075 of a common share of Kicking Horse (each, a "Kicking Horse Share") being issued in exchange for each outstanding common share of Contact (the "Contact Shares") and 0.6 of a Kicking Horse Share being issued in exchange for each outstanding common share of Donnycreek (the "Donnycreek Shares").  The Merger will represent an exchange ratio of 8 Contact Shares for each Donnycreek Share, being a value of $2.96 for each Donnycreek Share, based on the issue price of the Contact Shares in the Financing of $0.37 per share.  Immediately following the closing of the Financing and Merger (collectively, the "Transactions"), the former Donnycreek shareholders will hold approximately 58% of the outstanding Kicking Horse Shares and the former Contact shareholders (including subscribers under the Financing) will hold approximately 42% of the outstanding Kicking Horse Shares.

Upon completion of the Transactions, Kicking Horse will have approximately 60.6 million common shares outstanding (without giving effect to the possible exercise of the Underwriters' option granted in connection with the Financing) and the Kicking Horse Shares will (subject to receipt of the final approval of the TSX Venture Exchange (the "TSXV")) be listed on the TSXV.

Kicking Horse will be managed by the current Contact team, led by Steve Harding as President and CEO, Raymond Sully as COO, Chad Kalmakoff as VP Finance and CFO, Mark Hadley as VP Exploration and Paul Poohkay as Production Manager.  The Board of Directors of Kicking Horse will consist of 7 members, being Ken Bowie, Bob Hodgins, Bruce Allford, Steve Harding and up to three directors to be determined by Donnycreek and agreed to by Contact.  

 "We are very excited to have expanded our interest in an asset that continues to demonstrate increased value and future opportunity", said Steve Harding, President and CEO of Contact.  "East Kakwa becomes the cornerstone that not only secures the Company's growth, but also leverages our expansion into other Deep Basin properties."  Mr. Harding added, "The Contact management team has operated the East Kakwa Property since 2011 and has an exceptional track record in terms of not only execution, but also financial and operational discipline."

STRATEGIC RATIONALE

The key benefits to Contact shareholders pro forma the Transactions are as follows:

• Creates a growth oriented oil and gas company with a strong balance sheet and control in the heart of the liquids rich Montney play.
• Consolidates ownership in the prolific East Kakwa Property, characterized by high netback production and high resource density per section.
• Immediately adds approximately 2,000 BOE/d⁽¹⁾ (52% natural gas, 48% condensate and other NGLs) of production with attractive operating netbacks.
• Adds significant and predictable operating income forecasted to be approximately $65 - $70 million in 2015⁽²⁾ that can be deployed in exploring and developing Kicking Horse's lands both in and outside of East Kakwa.
• Accretive on a cash flow per share, production per share and net asset value basis.
• Increases Contact shareholders' ownership in the East Kakwa Property to 32% from 25%.
• Improves corporate efficiencies through operating 75% owned producing assets and infrastructure.
• Increases near term growth opportunities in the Montney and other Deep Basin prospective intervals, with a land position increasing from 72 net sections to approximately 350 net sections.
• Provides for continued exposure to emerging east coast LNG markets through New Brunswick asset ownership and equity ownership in Pieridae Energy Ltd.

Pro-forma closing the Transactions, Contact forecasts as follows:

CREDIT FACILITY

Contact has received a proposal from its current lender for a $45 million combined senior revolving credit/acquisition and development facility, subject to the closing of the Merger.

FINANCING

In connection with the Merger, Contact has entered into an agreement with a syndicate of underwriters led by Canaccord Genuity Corp. (collectively, the "Underwriters"), pursuant to which the Underwriters have agreed to carry out a private placement, on an underwritten, bought deal basis, of 54,100,000 Contact Shares at a price of $0.37 per Contact Share (the "Offering Price") for gross proceeds of $20,017,000.  The net proceeds from the sale of the Contact Shares will be used to fund ongoing development and exploration at East Kakwa.  Subject to regulatory approval, the Underwriters will also be granted an Underwriters' option (the "Option"), to purchase up to an additional 15% of the Contact Shares (representing 8,115,000 Contact Shares) offered at the Offering Price, which Option will be exercisable in whole or part at the sole discretion of the Underwriters at any time up to 48 hours prior to the closing date of the Financing.

The Contact Shares will be distributed on a private placement basis in all provinces of Canada and in the United States and certain other jurisdictions as Contact and the Underwriters may agree. Completion of the Financing is subject to certain conditions including the receipt of all necessary regulatory approvals, including the approval of the TSXV.  Closing of the Financing is expected to occur on or about November 13, 2014.

MERGER

The Merger will be effected by way of a plan of arrangement under the ABCA, and is anticipated to close in mid to late December 2014. Closing of the Merger is subject to, among other conditions, the approval by holders of at least 66 2/3% of the shares (and by a majority of holders of the minority of shares, if applicable) voted at each of the parties' respective securityholder 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 Merger is not conditional on the closing of the Financing.

It is anticipated that separate Contact and Donnycreek securityholder meetings will be held in December 2014 following the mailing of a joint information circular regarding the Merger in November 2014 to securityholders of each company.  Each party has agreed to pay a non-completion fee of $10 million to the other party in certain circumstances as set forth in the Arrangement Agreement, and upon the termination of the Arrangement Agreement.

The Board of Directors of Contact has unanimously approved the Arrangement Agreement, determined that the Merger is in the best interests of Contact and, based on the fairness opinion provided by Canaccord Genuity Corp., determined that the consideration to be received by Contact securityholders pursuant to the Merger is fair from a financial point of view and has unanimously resolved to recommend that Contact securityholders vote in favour of the Merger.

The Board of Directors of Donnycreek has unanimously approved the Arrangement Agreement, determined that the Merger is in the best interests of Donnycreek and, based on the fairness opinion provided by RBC Dominion Securities Inc., determined that the consideration to be received by Donnycreek shareholders pursuant to the Merger is fair from a financial point of view and has unanimously resolved to recommend that Donnycreek securityholders vote in favour of the Merger.

The directors and officers of Contact and Donnycreek, holding approximately 3% and 11% of the Contact Shares and Donnycreek Shares, respectively, have each entered into support agreements pursuant to which each has agreed to vote their securities 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

Canaccord Genuity Corp. is acting as exclusive financial advisor to Contact respecting the Merger and has provided the Board of Directors of Contact with its verbal opinion that, as of the date hereof and subject to the assumptions, qualifications and limitations contained therein and subject to its review of the final form of the documentation effecting the Merger, the consideration to be received by holders of Contact Shares and the holders of options to purchase Contact Shares pursuant to the Merger is fair, from a financial point of view to the holders of Contact Shares and the holders of options to purchase Contact Shares.

RBC Dominion Securities Inc. has provided the Board of Directors of Donnycreek with its verbal opinion that, as of the date hereof and subject to the assumptions, qualifications and limitations on which the opinion is based, that the consideration received under the Merger is fair, from a financial point of view to the holders of Donnycreek Shares.

Reader Advisory and Note Regarding Forward Looking Information

This press release contains forward-looking information within the meaning of applicable securities laws and is based on the expectations, estimates and projections of management of Contact as of the date of this press release, unless otherwise stated. The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "project", "should", "believe", "plans", "intends" and similar expressions are intended to identify forward-looking information.  More particularly and without limitation, this press release contains forward-looking information concerning: the anticipated benefits of the Merger to the securityholders of Contact, including anticipated synergies; anticipated future production, operating netbacks, cash flow, capital expenditures, dividends, payout ratios, decline rates, development capital efficiencies, net debt to cash flow, reserve life index, credit facility availability and years of sustaining development available; the anticipated drilling program for Kicking Horse at the East Kakwa Property following completion of the Merger, including anticipated production, capacity at the 16-7 Facility and timing of such drilling program and increases in production and capacity at the 16-7 Facility; the timing and anticipated receipt of required regulatory, court and securityholder approvals for the Transactions; the ability of Contact to satisfy the other conditions to, and to complete, the Merger; the anticipated timing of the joint information circular regarding the Merger and the holding of the securityholder meetings of each of Contact and Donnycreek; the anticipated closing date of the Financing and the anticipated use of proceeds of the Financing; the anticipated name of the company to be formed following the Merger; the anticipated management team and Board of Directors of Kicking Horse; the anticipated outstanding share capital of Kicking Horse, including the percentage of Kicking Horse Shares held by former Contact Shareholders and Donnycreek Shareholders; and the anticipated credit facility of Kicking Horse following completion of the Merger.  Such forward-looking information is provided for the purpose of providing information about management's current expectations and plans relating to the future. Investors are cautioned that reliance on such information may not be appropriate for other purposes, such as making investment decisions.

In respect of the forward-looking information and statements concerning the anticipated benefits and completion of the proposed Merger and the anticipated timing for completion of the Merger, Contact has provided such in reliance on certain assumptions that it believes are reasonable at this time, including assumptions as to the time required to prepare and mail securityholder meeting materials, including the required joint information circular; the ability of each of Contact and Donnycreek to receive, in a timely manner, the necessary regulatory, court, securityholder, stock exchange and other third party approvals, including but not limited to the receipt of applicable competition approvals; the ability of each of Contact and Donnycreek to satisfy, in a timely manner, the other conditions to the closing of the Merger; and expectations and assumptions concerning, among other things: commodity prices and interest and foreign exchange rates; planned synergies, capital efficiencies and cost-savings; applicable tax laws; future production rates; the sufficiency of budgeted capital expenditures in carrying out planned activities; and the availability and cost of labour and services.

The anticipated dates for the Merger provided may change for a number of reasons, including unforeseen delays in preparing meeting materials, inability to secure necessary securityholder, regulatory, court or other third party approvals in the time assumed or the need for additional time to satisfy the other conditions to the completion of the Merger.  Accordingly, readers should not place undue reliance on the forward-looking information contained in this press release.  In respect of the forward-looking information, Contact has provided such in reliance on certain assumptions that it believes are reasonable at this time, including assumptions in respect of: prevailing commodity prices, margins and exchange rates; that each of Donnycreek's and Contact's future results of operations will be consistent with past performance and management expectations in relation thereto; the continued availability of capital at attractive prices to fund future capital requirements relating to existing assets and projects, including but not limited to future capital expenditures relating to expansion, upgrades and maintenance shutdowns; the success of growth projects; future operating costs; that counterparties to material agreements will continue to perform in a timely manner; that there are no unforeseen events preventing the performance of contracts; and that there are no unforeseen material construction or other costs related to current growth projects or current operations.

Since forward-looking information addresses future events and conditions, such information by its very nature involves inherent risks and uncertainties.  Actual results could differ materially from those currently anticipated due to a number of factors and risks.  These include, but are not limited to the risks associated with the industries in which each of Contact and Donnycreek operates in general such as: operational risks; delays or changes in plans with respect to growth projects or capital expenditures; costs and expenses; health, safety and environmental risks; commodity price, interest rate and exchange rate fluctuations; environmental risks; competition; failure to realize the anticipated benefits of the Merger and to successfully integrate each of Contact and Donnycreek; ability to access sufficient capital from internal and external sources; and changes in legislation, including but not limited to tax laws and environmental regulations.  Risks and uncertainties inherent in the nature of the Merger include the failure of each of Contact and Donnycreek to obtain necessary securityholder, regulatory, court and other third party approvals, or to otherwise satisfy the conditions to the Merger, in a timely manner, or at all.  Failure to so obtain such approvals, or the failure of each of Contact and Donnycreek to otherwise satisfy the conditions to the Merger, may result in the Merger not being completed on the proposed terms, or at all.

Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information on other factors that could affect the operations or financial results of each of Contact and Donnycreek, and the combined company, are included in reports on file with applicable securities regulatory authorities, including but not limited to, the Annual Information Form for the year ended December 31, 2013 for Donnycreek, which may be accessed on their respective SEDAR profiles at www.sedar.com.

Any financial outlook or future oriented financial information in this press release, as defined by applicable securities legislation, has been approved by management of Contact and Donnycreek. Such financial outlook or future oriented financial information is provided for the purpose of providing information about management's reasonable expectations as to the anticipated results of Kicking Horse and its anticipated business activities for the twelve months following the closing of the Merger.

The forward-looking information contained in this press release is made as of the date hereof and each of Contact and Donnycreek undertake no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.

BOEs are presented on the basis of one BOE for six Mcf of natural gas.  Disclosure provided herein in respect of BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf:1 Bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.

The TSXV has neither approved nor disapproved the contents of this press release.

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.

This press release does not constitute an offer to sell or the solicitation of an offer to buy any securities within the United States. The securities to be offered have not been and will not be registered under the U.S. Securities Act of 1933, as amended, or any state securities laws, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of such Act or other laws.

SOURCE Contact Exploration Inc.