Crew Energy Inc. Enters Into an Agreement to Acquire Gentry Resources Ltd.
June 23 2008 - 9:53AM
Marketwired Canada
Crew Energy Inc. ("Crew" or "the Company") (TSX:CR) and Gentry Resources Ltd.
("Gentry") (TSX:GNY) are pleased to jointly announce that they have entered into
an Arrangement Agreement whereby, subject to certain conditions, Crew will
acquire all of the issued and outstanding shares of Gentry (the "Transaction").
Under the terms of the agreement, Gentry shareholders will receive 0.22 of a
Crew common share for each Gentry common share held. The consideration reflects
a value of $4.19 per Gentry common share based on the five day volume weighted
average price of Crew's common shares on the Toronto Stock Exchange ("TSX") on
June 20, 2008, which represents a premium of 23 percent to the closing price of
Gentry common shares on the TSX as at June 20, 2008. The total purchase price is
approximately $298 million, comprised of approximately $238 million of equity
value and the assumption of approximately $60 million of net debt (estimated at
closing). Gentry holds approximately 277,000 net acres of undeveloped land
valued at $59.3 million.
The Transaction is expected to be completed by way of a Plan of Arrangement and
is subject to normal stock exchange, court and regulatory approval and the
requisite approval of the Gentry shareholders. It is expected that an
information circular will be mailed to Gentry shareholders in July with the
Gentry shareholder meeting to occur in August.
The Board of Directors of Crew and Gentry have both unanimously approved the
Transaction and the Board of Directors of Gentry has concluded that the
Transaction is in the best interests of its shareholders and has resolved to
recommend that Gentry shareholders vote their shares in favour of the
transaction. All of the directors and officers of Gentry, who own approximately
6% of the Gentry common shares outstanding, have agreed to vote their Gentry
shares in favour of the Transaction. Gentry has agreed that it will not solicit
or initiate discussions regarding any other business combination or sale of
material assets. Gentry has also granted Crew the right to match any superior
proposals. The agreement provides for a $9 million non-completion fee payable to
Crew in certain circumstances if the Transaction is not completed.
STRATEGIC BENEFITS OF THE TRANSACTION
Over the past year, Crew has assembled a dominant land position in the heart of
the Montney resource play in Northeast British Columbia. With a stable royalty
environment in British Columbia and significant technological advancements in
drilling and completion techniques, it is expected that with success Crew's
Montney resource assets will soon require substantial amounts of capital
spending beyond Crew's ability to internally finance.
The Gentry transaction is accretive on key operational and financial measures
and provides substantial free cash flow to deploy into Crew's Montney resource
assets. The majority of Gentry's current production and its future growth
potential resides on "freehold" lands which are unaffected by Alberta's New
Royalty Framework ("NRF"). Longer term, the 444 freehold section parcel located
in the Princess, Alberta area controlled by Gentry is believed to have the
potential for significant original oil in place in the Mississippian Pekisko
formation. Crew believes this play represents a significant resource that has
the potential to be exploited with horizontal drilling and enhanced recovery
schemes.
Gentry assets include 277,000 net acres of undeveloped land and current
production of approximately 4,500 boe per day with near term production
additions expected to increase production to approximately 5,000 boe per day at
closing of the Transaction. On its Princess property in southeast Alberta,
Gentry's large contiguous block of land is covered by 486 square miles of 3D
seismic with over 200 identified drilling locations. Current production on the
Princess block is approximately 2,100 boe per day which is processed through
three 100% owned production facilities. While Gentry's operating costs exceed
Crew's current cost structure, Crew sees near term opportunities to reduce these
operating costs and migrate them towards Crew's cost structure over time. Gentry
has a number of non-strategic properties that Crew may consider high grading
over time; however, given the pro forma balance sheet will be relatively under
leveraged, Crew has no near term property divestiture plans.
"We have spent the last 5 years building an idea into nearly 450 sections of
high working interest, large reserve potential oil development acreage in the
Princess area. Gentry has transformed the Pekisko play from an exciting
exploration discovery to a large low risk, highly economic development project.
Gentry's Pekisko lands bring Crew significant long term development and reserve
growth with over 200 new drilling locations.
We agreed to merge with Crew because of their high quality asset base and a
management team which has a successful track record of achieving significant per
share growth. We believe Crew's assets possess tremendous potential within the
Montney trend, exposing Gentry shareholders to one of the most exciting gas
plays in North America, in addition to the growth opportunities from our
extensive inventory of lower risk development locations at Princess", said
Gentry's President & CEO, Hugh Ross.
The strategic benefits of the Transaction include:
- accretive to Crew's estimated production per share by 20%
- accretive to Crew's estimated cash flow per share by 21%
- accretive to Crew's proved plus probable reserves per share by 15%
- accretive to Crew's undeveloped land per share by 50%
- attractive purchase price metrics in the context of recent industry
transactions and the current commodity price environment
- results in the creation of a larger more liquid intermediate size company
- provides both companies shareholders with commodity and geographic diversity
as well as exposure to three emerging resource plays in Western Canada
- the majority of Gentry's production and future growth potential is on freehold
lands which allows Crew to maintain a royalty advantage in line with those in
British Columbia
TRANSACTION METRICS
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Acquisition Metrics
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Estimated purchase price (1) $238 million
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Price per flowing boe/d (5,000 boe/d) $47,600
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Price per proved plus probable boe(2) $19.05
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Debt-adjusted cash flow multiple(3) 3.4 times
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Proven plus probable recycle ratio 2.3 times
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Notes:
(1) Based on the five day volume weighted average price of Crew's common
shares on June 20, 2008, estimated net debt at closing of $60 million
and reduced by the value of undeveloped land independently valued at
$59.3 million.
(2) Based on Crew's internal estimate of Gentry's proved plus probable
reserve at June 1, 2008 of 12.5 mmboe.
(3) Based on Gentry's field netback using US$120 WTI and an AECO-C natural
gas price of C$10.10 per Mcf.
KEY OPERATING AND FINANCIAL INFORMATION AND UPDATED GUIDANCE
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Pro Forma Market Capitalization (1) $1,400 million
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Pro Forma Diluted Shares Outstanding 75.7 million
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Pro Forma Net Debt (2) $204 million
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Pro Forma Enterprise Value $1,604 million
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Pro Forma estimated Production at closing (boe/d) 16,500
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Pro Forma Run Rate Cash Flow (3) $246 million
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Pro Forma Net Debt to Run Rate Cash Flow 0.8 times
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Pro Forma Proved Plus Probable Reserves (Mboe) (4) 46,000
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Pro Forma Undeveloped Land (net acres) 614,000
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Notes:
(1) The market capitalization is calculated based on the June 20, 2008 Crew
share price of $18.70 and pro-forma diluted share capital.
(2) Estimated net debt at June 30, 2008 for Crew and the estimated net debt
at closing for Gentry including transaction costs.
(3) Run rate cash flow is based on US$120 WTI and an AECO-C price of C$10.10
per Mcf and uses estimated pro forma production at closing of 16,500
boe/d, a pro-forma 23% royalty rate, pro-forma $9.35 per boe operating
costs and pro-forma transportation of $2.40 per boe.
(4) Crew's year end 2007 reserves plus Crew's internal estimate of Gentry's
Proved plus probable reserves at June 1, 2008 of 12.5 mmboe.
OPERATIONAL UPDATE
Crew has recently expanded its controlled land in the northeast British Columbia
Montney play to 157 net sections. The Company is currently completing its first
horizontal well, drilling a second and has another three additional wells
licensed. Crew plans to drill up to an additional 11 wells targeting the Montney
in 2008. The Company is currently operating four drilling rigs and two service
rigs. Crew plans to drill 45 to 50 wells for the remainder of 2008 and with the
acquisition of Gentry, Crew will consider increasing the well count to 70 to 80
wells.
Crew's second quarter average production is currently expected to be
approximately 9,400 boe per day with the McMahon gas plant now down for a
scheduled three to four week turnaround and unscheduled facility downtime in six
other facilities during the quarter. A late start-up and higher than expected
declines in the Company's fourth quarter Hanlan, Alberta discovery reduced
budgeted volumes by approximately 350 BOE/d. Current productive capacity is
estimated at 11,300 boe per day.
Crew continues to focus on large gas and oil accumulations with the potential to
add materially to our production and reserve base. We believe technology will
continue to evolve in order to improve reservoir recoveries and economics. We
have amassed land positions on two exciting gas plays in Canada, the Montney and
Muskwa shale plays in British Columbia and now upon completion of this
Transaction a medium gravity 28 degrees API oil play in Alberta that is not
subject to the NRF. Gentry's Princess block in southern Alberta consists of 444
contiguous sections of freehold land. The block lies in a unique structural and
geological position that allows for trapping of hydrocarbons in multiple trends
southwest of the main Mississippian Pekisko sub-crop edge. Primary recovery
factors are currently at approximately 10%. An adjacent analogous pool under
water-flood is expected to recover approximately 30% of the original oil in
place. A third party reservoir simulation conducted on two of Gentry's Pekisko
pools at Princess conclude the ultimate recovery of oil to be approximately
three times greater under water-flood compared to primary recovery. Current
economics are robust with vertical well costs of approximately $550,000 which
could be expected to payout after only 8,500 barrels of oil production at
current commodity prices. To date these pools have been developed with vertical
wells. Horizontal drilling technology has not been used to date and Crew
believes the potential exists to develop the Pekisko using multi-lateral
horizontal wells.
The Gentry Transaction provides substantial free cash flow which has the
potential to be a catalyst for an expanded Montney drilling program. Crew now
has a large land position on this world class resource play in northeast B.C.
The current drilling program is proximal to production infrastructure with the
Company having priority access to three gathering systems and facilities. Crew
has mapped a resource potential of up to 11 TCF of natural gas on Company owned
lands in the Upper Montney in the Greater Septimus area of northeast B.C. The
size and scope of this play continues to evolve. Recent developments at Septimus
indicate the Lower Montney to be prospective with a thickness of approximately
540 feet.
Macquarie Capital Markets Canada Ltd. and Cormark Securities Inc. are acting as
financial advisors to Crew with respect to the Transaction.
GMP Securities Ltd. is acting as financial advisor to Gentry with respect to the
Transaction and has provided the Board of Directors of Gentry with its opinion
that, as of the date hereof, the consideration to be received by the Gentry
shareholders pursuant to the Transaction is fair, from a financial point of
view, to the Gentry shareholders.
Advisory Regarding Forward-Looking Statements
The information provided above includes references to discovered and
undiscovered natural gas resources. There is no certainty that any portion of
the resources will be discovered. If discovered, there is no certainty that it
will be commercially viable to produce any portion of the resource.
This press release contains forward-looking statements and forward-looking
information within the meaning of applicable securities laws. 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 or
statements. More particularly and without limitation, this press release
contains forward looking statements and information concerning the combined and
each of the company's petroleum and natural gas production reserves; undeveloped
land holdings; reserve life index; business strategy; future development and
growth opportunities; prospects; asset base; anticipated benefits from the
Transaction, including improved operating efficiencies, field optimizations and
cost reductions; future cash flows; value and debt levels; capital programs;
treatment under tax laws;and oil and natural gas prices. The forward-looking
statements and information are based on certain key expectations and assumptions
made by Crew and Gentry, including expectations and assumptions concerning
prevailing commodity prices and exchange rates, applicable royalty rates and tax
laws; future well production rates and reserve volumes; the timing of receipt of
regulatory and securityholder approvals, the performance of existing wells; the
success obtained in drilling new wells; and the sufficiency of budgeted capital
expenditures in carrying out planned activities; and the availability and cost
of labour and services. Although Crew and Gentry believe that the expectations
and assumptions on which such forward-looking statements and information are
based are reasonable, undue reliance should not be placed on the forward looking
statements and information because Crew and Gentry can give no assurance that
they will prove to be correct.
Since forward-looking statements and information address future events and
conditions, by their very nature they involve 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 oil and gas industry in general such as operational risks in
development, exploration and production; delays or changes in plans with respect
to exploration or development projects or capital expenditures; the uncertainty
of reserve estimates; the uncertainty of estimates and projections relating to
reserves, production, costs and expenses; health, safety and environmental
risks; commodity price and exchange rate fluctuations; marketing and
transportation; loss of markets; environmental risks; competition; incorrect
assessment of the value of acquisitions; failure to realize the anticipated
benefits of acquisitions; ability to access sufficient capital from internal and
external sources; failure to obtain required regulatory and other approvals; and
changes in legislation, including but not limited to tax laws, royalties and
environmental regulations. There are risks also inherent in the nature of the
proposed Transaction, including failure to realize anticipated synergies or cost
savings; risks regarding the integration of the two entities; incorrect
assessments of the values of the other entity; and failure to obtain the
required securityholder, court, regulatory and other third party approvals.
This press release also contains forward-looking statements and information
concerning the anticipated completion of the proposed Transaction and the
anticipated timing for completion of the Transaction. Crew and Gentry have
provided these anticipated times in reliance on certain assumptions that they
believe are reasonable at this time, including assumptions as to the time
required to prepare meeting materials for mailing, the timing of receipt of the
necessary regulatory and court approvals and the time necessary to satisfy the
conditions to the closing of the Transaction. These dates may change for a
number of reasons, including unforeseen delays in preparing meeting materials,
inability to secure necessary regulatory or court approvals in the time assumed
or the need for additional time to satisfy the conditions to the completion of
the Transaction. Accordingly, readers should not place undue reliance on the
forward-looking statements and information contained in this press release
concerning these times. Readers are cautioned that the foregoing list of factors
is not exhaustive. Additional information on these and other factors that could
affect Crew's, Gentry's or the combined company's operations or financial
results are included in reports on file with applicable securities regulatory
authorities and may be accessed through the SEDAR website (www.sedar.com), in
the case of Crew, at Crew's website (www.crewenergy.com), and in the case of
Gentry, at Gentry's website (www.gentryresources.com). The forward-looking
statements and information contained in this press release are made as of the
date hereof and Crew and Gentry undertake no obligation 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.
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.
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