/NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR
DISSEMINATION IN THE UNITED
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CALGARY, July 23, 2018 /CNW/ - Gear Energy Ltd.
("Gear") (TSX: GXE) is pleased to announce that it has
entered into a definitive agreement (the "Arrangement
Agreement") providing for the acquisition by Gear of all of the
issued and outstanding common shares (the "Steppe Shares")
of Steppe Resources Inc. ("Steppe"), a private oil and gas
company, pursuant to a plan of arrangement under the Business
Corporations Act (Alberta)
(the "Arrangement").
Light Oil Acquisition
Under the terms of the Arrangement, Steppe shareholders will
receive, for each Steppe Share held, 0.1445 Gear common shares
("Gear Shares"). As a result, Gear will issue in
aggregate 21,896,087 Gear Shares pursuant to the Arrangement.
Additionally, as part of the Arrangement, Gear will assume the net
debt of Steppe of approximately $40.9
million, after taking into account expected Steppe
transaction costs. In aggregate, the total consideration represents
a Steppe enterprise value of $70.4
million (based on today's closing price of the Gear Shares
of $1.35 on the Toronto Stock
Exchange).
Steppe's assets are focused in the Tableland area of
Southeast Saskatchewan where
Steppe has established a material land position and grown light oil
production through multiple years of reservoir expansion drilling
and consistent improvement in completion results, primarily in the
Torquay formation. This
acquisition provides Gear with an exceptional opportunity to
leverage its success with fractured drilling in Gear's Wilson Creek assets to an area with higher
netback oil and a significantly larger areal extent. In addition,
Gear believes that the Ratcliffe formation in the Tableland area
could be very amenable to multi-lateral, un-lined horizontal
drilling techniques, similar to those employed successfully by Gear
throughout its heavy oil portfolio.
Highlights of the acquisition of Steppe include:
- Production of approximately 1,175 BOE/d for June 2018, with estimated 2H 2018 annualized
funds from operations of $24 million
assuming no drilling and strip pricing (an acquisition metric of
approximately three times funds from operations on a proved
developed producing production forecast).
- High margin, high netback, light oil providing netbacks of
$52 per barrel for the first quarter
of 2018, which would have increased Gear's pro-forma Q1 2018
netbacks by 23 per cent to $26.50 per
BOE.
- Meaningful, delineated drilling inventory of an estimated 100
future light oil locations in the Torquay (essentially 100% working interest in
more than 50 net contiguous sections) with additional multi-zone
potential in the Ratcliffe and Bakken.
- Ability for the Steppe assets to deliver more than 15%
production growth in 2019 while spending less than cash flow
generated by the assets, complementing the performance of Gear's
existing Saskatchewan and
Alberta oil operations.
- 100% ownership of two oil batteries with significant remaining
capacity, enabling growth of production volumes with limited
infrastructure spending.
- A strong asset to liability ratio of approximately 5.3 times,
which is highly accretive to Gear's existing 2.2 ratio.
Acquisition Metrics and Balance Sheet
The acquisition of Steppe is being conducted at approximately
three times estimated annualized second half 2018 funds from
operations and less than $60,000/BOE/d. It is also forecast to deliver
competitive future growth while investing less than cash flow for
many years to come, consistent with Gear's business model for its
existing operations. The acquisition improves Gear's netbacks,
balances the inventory of drilling opportunities between light oil
and heavy oil, and delivers visibility for Gear to exceed 10,000
BOE/d of oil-weighted production in the near term while continuing
to deliver strong per-share performance measures.
Upon closing of the Arrangement, Gear expects to enter into an
increased borrowing based credit facility commensurate with the
increased value of Gear's assets resulting from the acquisition of
the Steppe assets. Under current strip pricing for the second half
of 2018, Gear is forecasting a continued strong balance sheet, with
net debt estimate of approximately $71
million by the end of 2018 and a forecasted fourth quarter
2018 annualized net debt to funds from operations ratio of 0.7
times (estimates are based on the following pricing assumptions:
WTI – US$68/bbl, WCS differential –
US$23.50/bbl, Edmonton Par
differential – US$7/bbl, AECO –
Cdn$1.50/GJ and FX – $0.76 USD/CAD).
Future Potential
Management and the board of directors of Gear believe that the
combined assets will provide significant benefits to Gear and
Steppe shareholders. Notably, the Arrangement further enhances a
diversified, well-funded, low-cost, growth focused oil company with
a deep inventory of drilling opportunities, a strong balance sheet
and significant optionality for future value creation.
For 2019, and assuming completion of the Arrangement, Gear is
forecasting the execution of a 6 well light oil drilling program on
the Steppe assets, which management of Gear has predicted to yield
the following annual results from the new assets:
Annual
production(1)
|
1,400 – 1,500 BOE/d
(99% light oil)
|
Royalty
rate
|
8%
|
Operating
costs
|
$13.00/BOE
|
Estimated net
operating income(2)(3)
|
$27
million
|
Capital
expenditures
|
$18
million
|
Planned
wells
|
6
|
(1)
|
Range of annual
expectation primarily due to timing of execution.
|
(2)
|
Net operating income
is defined as revenue net of royalties and operating
expenses.
|
(3)
|
Estimated net
operating income is based on forward strip pricing for 2019.
They include the following pricing assumptions: WTI – US$63/bbl;
Edmonton Par discount – US$8/bbl; and FX – $0.76
USD/CAD.
|
Arrangement Agreement
Pursuant to the Arrangement Agreement, Gear and Steppe have
agreed that the Arrangement will be completed by way of plan of
arrangement under the Business Corporations Act
(Alberta). The Arrangement
Agreement provides that the completion of the Arrangement is
subject to certain customary conditions, including the receipt of
all required regulatory approvals, the approval of the Toronto
Stock Exchange, approval under the Competition Act
(Canada), the approval of the
holders of Steppe Shares and the approval of the Court of Queen's
Bench of Alberta. The Arrangement Agreement contains a
non-solicitation covenant on the part of Steppe, subject to
customary superior proposal provisions as well as a right to match
provision in favour of Gear. The Arrangement Agreement also
contains representations, warranties, covenants and termination
provisions customary for a transaction of this nature.
The Steppe Board of Directors has received a verbal opinion from
Tudor, Pickering, Holt & Co. Securities – Canada, ULC that, subject to review of the
final form of the documents affecting the Arrangement, the
consideration to be received by Steppe shareholders pursuant to the
terms of the Arrangement is fair, from a financial point of view,
to the Steppe shareholders.
Certain directors and officers of Steppe, and certain
shareholders of Steppe, representing approximately 91% of the
issued and outstanding Steppe Shares, have entered into support
agreements with Gear pursuant to which they have agreed to vote
their Steppe Shares in favour of the Arrangement. Steppe
intends to seek shareholder approval by written resolution or by
calling a special meeting of such shareholders. The
Arrangement is expected to close in the third quarter of 2018.
Advisories
Forward-Looking Statements: This press release contains
forward-looking statements. More particularly, this press release
contains statements concerning the proposed Arrangement including
the impact of the Arrangement on Gear and Gear's plans; the
anticipated approval of the Arrangement by the shareholders of
Steppe; the anticipated receipt of all Court and regulatory
approvals in respect of the Arrangement; the satisfaction of all
parties to the conditions to closing of the Arrangement; the
anticipated closing time of the Arrangement; anticipated effect and
benefits of the Arrangement including the anticipated 2019 drilling
program with respect to Steppe's inventory, including estimated
production, royalty rates, operating costs, net operating income,
capital expenditures and the number of planned wells; estimated
annual funds from operations in respect of the Steppe assets;
estimated net debt of Gear; the ability to use multi-lateral
un-lined horizontal drilling techniques for the assets of Steppe
being acquired; the expected treatment of the securities of Steppe
in connection with the Arrangement; expected terms and availability
of increased credit facilities upon closing of the Arrangement;
expected yearend 2018 and year 2019 heavy oil prices, differential
and foreign exchange; and intention of Gear management to build
value by continuing to operate effectively within the current oil
price environment. Certain forward-looking statements are based on
certain key expectations and assumptions made by Gear's management,
including among others, the timing of receipt of regulatory and
Steppe shareholder approvals for the Arrangement; the ability of
Gear to execute and realize on the anticipated benefits of the
Arrangement; that the increased credit facilities will be entered
into in the amounts and terms anticipated which shall be
satisfactory to Gear or at all; expectations and assumptions
concerning prevailing commodity prices, exchange rates, interest
rates, applicable royalty rates and tax laws; expectations
regarding pricing assumptions; future production rates and
estimates of operating costs; performance of existing and future
wells; reserve and resource volumes; anticipated timing and results
of capital expenditures; the success obtained in drilling new
wells; the sufficiency of budgeted capital expenditures and
carrying out planned activities; the timing, location and extended
future drilling locations; the state of the economy and the
exploration and production business; results of operations;
performance; availability of labour and services; the impact of
increasing competition; the ability to market oil and natural gas
successfully; the ability of Gear to access capital as may be
required; and the other assumptions identified herein. Although
Gear believes that the expectations reflected in these
forward-looking statements are reasonable, undue reliance should
not be placed on them because Gear can give no assurance that they
will prove to be correct. Since forward-looking statements address
future events and conditions, by their very nature they involve
inherent risks and uncertainties, some of which are beyond Gear's
control.
Completion of the Arrangement could be delayed if parties are
unable to obtain the necessary regulatory, stock exchange,
shareholder and court approvals on the timeline planned. The
Arrangement will not be completed if all of these approvals are not
obtained or some other condition of closing is not satisfied.
Accordingly, there is a risk that the Arrangement will not be
completed within the anticipated time or at all. Any increases to
Gear's credit facilities will be subject to a number of conditions,
including the closing of the Arrangement. If an increased credit
agreement is not entered into it may impact Gear's ability to
continue to fund its operations and may prevent the closing of the
Arrangement. In this press release, Gear has disclosed certain
expected details relating to the Gear's 2019 capital program on the
Steppe assets if the Arrangement closes; however, the board of
directors of Gear has not approved a budget for 2019 and as such
the details relating to the 2019 capital program are intended only
to illustrate Gear's management's current expectations based on
information and conditions known as of the date hereof. Gear's
actual 2019 capital budget once approved may differ from the
details disclosed herein for a variety of reasons including as a
result of any change in conditions and information known to Gear
prior to the date the 2019 budget is approved and/or as a result of
Gear's management and board of directors allocating capital
differently than currently expected. The actual 2019 capital
program on the Steppe assets may also differ from the expectations
as set out herein due to the other risk factors identified
herein. Other risks include risks associated with oil
and gas exploration, development, exploitation, production,
marketing and transportation, loss of markets and other economic
and industry conditions, volatility of commodity prices, currency
fluctuations, imprecision of reserve estimates, environmental
risks, competition from other producers, inability to retain
drilling services, incorrect assessment of value of acquisitions
and failure to realize the benefits therefrom, delays resulting
from or inability to obtain required regulatory approvals, the lack
of availability of qualified personnel or management, stock market
volatility and ability to access sufficient capital from internal
and external sources and economic or industry condition changes.
Actual results, performance or achievements could differ materially
from those expressed in, or implied by, these forward-looking
statements and, accordingly, no assurance can be given that any
events anticipated by the forward-looking statements will transpire
or occur, or if any of them do so, what benefits that Gear will
derive therefrom. Additional information on these and other factors
that could affect Gear are included in reports on file with
Canadian securities regulatory authorities that may be accessed
through the SEDAR website (www.sedar.com) or at Gear's website
www.gearenergy.com. The forward-looking statements
contained in this press release are made as of the date hereof and
Gear undertakes no obligations to update publicly or revise any
forward-looking statements or information, whether as a result of
new information, future events or otherwise, unless so required by
applicable securities laws.
Future Oriented Financial Information: To the extent that any
forward-looking statements presented herein constitutes
future-oriented financial information or a financial outlook
(collectively, "FOFI"), as such terms are defined in
applicable securities laws, such information has been presented to
provide Gear management's expectations following completion of the
Arrangement used for budgeting and planning purposes based on a
number of assumptions, including the assumptions presented herein,
and such information may not be appropriate for other
purposes. The actual results of operations of Gear and the
resulting financial results will likely vary from the amounts
presented in this press release, and such variation may be
material. Gear and its management believe that the FOFI has been
prepared on a reasonable basis, reflecting management's best
estimates and judgments. However, because this information is
subjective and subject to numerous risks it should not be relied on
as necessarily indicative of future results. Except as required by
applicable securities laws, Gear undertakes no obligation to update
such FOFI.
Non-GAAP Measures: This press release contains the terms "net
debt", "funds from operations", "net operating income" and
"netbacks", which do not have a standardized meaning prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and,
therefore, may not be comparable with the calculation of similar
measures by other companies. These measures have been described and
presented in this press release in order to provide readers with
additional information regarding Gear's liquidity and its ability
to generate funds to finance its operations. Net debt in this press
release is estimated as debt less current working capital items,
excluding out-of-the-money risk management contracts, and after
taking into account anticipated transaction costs (including
Steppe's legal, accounting and financial advisory fees, severance
costs and forecasted costs of out-of-the-money risk management
contracts), in each case calculated in accordance with GAAP.
Funds from operations is defined as cash flow from operating
activities before changes in non-cash operating working capital and
decommissioning liabilities settled. Gear evaluates its financial
performance primarily on funds from operations and considers it a
key measure as it demonstrates its ability to generate the cash
flow necessary to fund Gear's capital program and repay debt. Net
operating income equals total revenue less royalties and operating
and transportation expenses and is used to analyze operating
performance. Netbacks equal total revenue less royalties and
operating and transportation expenses calculated on a per BOE basis
and are used to analyze operating performance. For additional
details relating to these non-GAAP measures see Gear's most recent
management's discussion and analysis
Barrels of Oil Equivalent: Disclosure provided herein in
respect of barrels of oil equivalent (BOE) 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.
Drilling Locations: This press release discloses drilling
locations associated with Steppe's assets.
These locations are Gear management's internal estimates based
on a review of Steppe's prospective acreage and an
assumption as to the number of wells that can be drilled per
section based on industry practice and internal review. While
certain of these internally estimated drilling locations may be
consistent with drilling locations identified in Steppe's
most recent independent reserves report as having associated
proved and/or probable reserves, for the purpose of this press
release management has considered them as unbooked locations.
These locations have been identified by management of
Gear as an estimation of Steppe's multi-year
drilling activities based on evaluation of applicable geologic,
seismic, engineering, production, pricing assumptions and reserves
information. There is no certainty that all such drilling locations
will be drilled and if drilled there is no certainty that such
locations will result in additional oil and gas reserves, resources
or production. The drilling locations on which Gear actually drill
wells will ultimately depend upon the availability of capital,
regulatory approvals, seasonal restrictions, oil and natural gas
prices, costs, actual drilling results, additional reservoir
information that is obtained and other factors. While the majority
of Steppe's unbooked locations are extensions or infills
of the drilling patterns already recognized by the independent
evaluator, other unbooked drilling locations are farther away from
existing wells where Steppe has less information about
the characteristics of the reservoir and therefore there is more
uncertainty whether wells will be drilled by Gear in such
locations and if drilled there is more uncertainty that such wells
will result in additional oil and gas reserves, resources or
production.
Selected Definitions: The following terms used in this press
release have the meanings set forth below:
"bbl" means barrel of oil
"BOE" means barrel of oil equivalent of natural gas and crude
oil on the basis of 1 boe for six thousand cubic feet of natural
gas (this conversion factor is and industry accepted norm and is
not based on either energy content or current prices)
"BOE/d" means barrel of oil equivalent per day
"FX" means foreign exchange
"GJ" means gigajoule
"Mcf" means thousand cubic feet
"mmBOE" means million barrels of oil equivalent
"WTI" means West Texas Intermediate
SOURCE Gear Energy Ltd.