CALGARY, May 16, 2019 /CNW/ - Highwood Oil Company Ltd.,
("HOCL", "Highwood" or the "Company") (TSXV:
HOCL) is pleased to announce that it has entered into an agreement
with a publicly traded oil and gas exploration and production
company (the "Vendor") to purchase high quality oil assets
in the Peace River Oil region of Northern
Alberta for a total transaction value of $93.8 million, comprised of cash
considerations of $88.8 million
and equity consideration of $5.0 million prior to customary closing
adjustments (the "Acquisition"). The Acquisition includes a
55% operated working interest ("WI") in the Peace River Oil
Partnership (the "PROP") (8,000 boe/d gross production,
4,400 boe/d net production to HOCL, 89% oil and liquids). The PROP
asset (the "Assets") is a world-class resource with a large
drilling inventory in the conventional Bluesky and emerging Clearwater oil plays where significant low
risk development opportunities exist. The Assets also include
access to a large 2D / 3D seismic database license, and extensive
egress and infrastructure in place to facilitate self-sustaining
operations.
![Highwood Oil Company Ltd. (CNW Group/Highwood Oil Company Ltd.) Highwood Oil Company Ltd. (CNW Group/Highwood Oil Company Ltd.)](https://mma.prnewswire.com/media/888842/Highwood_Oil_Company_Ltd__Highwood_Oil_Company_Ltd__announces_th.jpg)
The Acquisition will be funded with $61.5 million of cash, $19.0 million in deferred payment / vendor
take-back consideration, $3.0 million of oil price escalator
provisions, $5.3 million of
assumed working capital deficit and $5.0 million of HOCL equity. Closing of the
Acquisition is expected to occur prior to July 31, 2019, subject to the satisfaction of
customary closing conditions, and the Acquisition will be deemed
effective February 1, 2019.
STRATEGIC RATIONALE
The Acquisition is a continuation of the Company's strategy to
position itself as an area consolidator within oil-weighted
resource plays where its management team has the experience and
technical expertise to drive significant operating synergies. The
Acquisition adds size and scale that will transition HOCL to become
a strong intermediate oil weighted growth company. The Acquisition,
which is being purchased at an attractive 2.9x multiple of
operating funds flow and 3.8x multiple of free operating funds
flow, is >160% accretive to HOCL's estimated funds flow per
share, while adding lower decline production with high netbacks and
compelling new-drill capital efficiencies.
The base Bluesky production
requires minimal capital investment to maintain production volumes
allowing HOCL to generate highly sustainable free funds flow that
will provide non-dilutive funding for its existing exploration
portfolio and/or complementary strategic acquisitions. Furthermore,
the Acquisition adds >50 sections of prospective Clearwater inventory to HOCL's existing
>225 sections of undeveloped Clearwater lands. The Acquisition, in
combination with the Company's other core assets, provides HOCL
with diversified exposure to high quality upstream and midstream
assets that deliver strong economic returns at lower commodity
price levels and significant self-funded growth potential at
current strip prices.
Based on annualized second half 2019 internal estimates, pro
forma the Acquisition, HOCL is set to deliver 6,100 boe/d (93% oil
and liquids) with operating funds flow of $55 million. Highwood's balance sheet remains
strong with a projected debt to funds flow ratio of approximately
2.3x assuming the Acquisition is financed with debt.
ASSET OVERVIEW
The PROP was formed in 2010 when the non-operating partner
purchased a 45% WI in the Assets to develop what was mutually
heralded as a "world-class oil resource" in the Peace River area. The Peace River area has a large drilling
inventory, considerable secondary recovery potential, a moderate
base decline, strong operating netbacks and capital efficiencies;
collectively, providing a stable base for HOCL to grow from for
decades to come. Operationally, over the past year, the PROP
partners and industry have drilled 19 multi-lateral Bluesky horizontal wells (with 8-16 legs); the
IP30 rates from those wells range from 180 bbl/d to >800
bbl/d.
PROP is anticipated to provide a multi-year source of free
operating funds flow to fund sustainable growth and carries
meaningful near and long-term development opportunities:
- PROP has an extensive land position of >420 sections (incl.
>50 with Clearwater potential)
and an internally identified drilling inventory of >360
locations (incl. >215 in the Clearwater)
-
- Recent industry results validate improved Bluesky economics at PROP using open-hole
multi-lateral exploitation like HOCL's technique for its existing
Clearwater play
- Further potential Bluesky
upside exists in re-drilling existing producers as 8-legs (from
single-leg) & 38m (from
200m) inter-well spacing
- Industry has recently drilled two significant Clearwater step-outs (a six-leg producer and a
vertical well) just 5-15 miles north and northeast of PROPs
existing Nampa lands
- Extensive secondary EOR potential: polymer / thermal
application validated by two pilots
- Strong Bluesky / Clearwater pad well economics deliver an IRR
of ~157% / ~86% with payout achieved in 0.9 years / 1.3 years,
respectively
- Valuable infrastructure: a stake in the Harmon valley plant
(non-op, PROP 50% WI). Total estimated gross replacement cost of
$500-600 MM
- Seismic: access to 985 km of 2D and 359 km2 of 3D
data
- The Acquisition carries an attractive Liability Management
Rating of 6.6x
In summary, based on internal estimates of H2 2019E projections,
the key benefits to Highwood's shareholders pro forma the
Acquisition are as follows:
- Accretion per share: 163% on funds flow, 185% on production,
166% and 123% on proved developed producing and total proved plus
probable reserves, 31% on net asset value
- Improved sustainability ratio / free funds flow yield: 53%
(from 96%) / 14% (from 1%)
- Improved LMR Rating: 4.7x (from 1.3x)
SUMMARY OF THE TRANSACTION
The Acquisition has the following key characteristics:
Transaction
value
|
$93.8 million
|
Current
production
|
4,400 boe/d (89%
liquids)
|
Base production
decline
|
24%
|
Proved developed
producing reserves(1)
|
6,191 Mboe
|
Proved developed
producing NPV10(1)(2)
|
$80 million
|
Proved plus probable
reserves(1)
|
12,245 Mboe
|
Proved plus probable
NPV10(1)(2)
|
$137 million
|
Operating
netback(3)
|
$20/boe
|
|
Notes:
|
(1)
|
Gross reserves are
the total working interest reserves before the deduction of any
royalties and including any royalty interests receivable. Estimated
total proved and proved plus probable reserves attributable to the
PROP assets as evaluated by Sproule Associates Limited ("Sproule")
in a report with an effective date of December 31, 2018, in
accordance with the COGE Handbook and National Instrument 51-101 –
Standards for Disclosure for Oil and Gas Activities of the Canadian
Securities Administrators, using the Sproule December 31, 2018
price forecast.
|
(2)
|
Before tax net
present value based on a 10 percent discount rate and Sproule's
December 31, 2018 forecast prices. Estimated values of future
net revenues do not represent the fair market value of the
reserves.
|
(3)
|
Refer to the non-GAAP
measures section of this press release for additional disclosures
and assumptions.
|
Acquisition metrics are as follows:
Production
|
$21,000/boe/d
|
H2 2019E operating
funds flow multiple(1)
|
2.9x
|
Proved developed
producing reserves(2)
|
$15/boe
|
Proved plus probable
reserves(2)
|
$8/boe
|
Recycle
ratio(3)
|
2.7x
|
Free operating funds
flow yield(4)
|
26%
|
|
Notes:
|
(1)
|
Calculated as
$93.8 million transaction value / (current production of
4,400 boe/d x $20.39/boe x 365 days).
|
(2)
|
Calculated as
transaction value divided by the proved developed producing or
proved plus probable reserves.
|
(3)
|
Calculated as
operating netback of $20.39/boe divided by the cost of proved plus
probable reserves of $7.66/boe.
|
(4)
|
Calculated as
($32.7 million of operating funds flow – $7.9 million of
sustaining capital expenditures) / $93.8 million transaction
value.
|
INCREASED H2 2019E ESTIMATES
The following is HOCL's change in the company's annualized
internal estimates for the second half of 2019, after giving effect
to the Acquisition:
|
Pre-Acquisition(1)
|
Post-Acquisition(1)
|
% Change
|
Average production
(boe/d)
|
2,060
|
6,100
|
196%
|
% Liquids
|
100%
|
93%
|
(7)%
|
Operating funds
flow(2)
|
$28
million
|
$55
million
|
100%
|
Operating
netback(2)
|
$37/boe
|
$25/boe
|
(33)%
|
Funds
flow(2)
|
$16
million
|
$44
million
|
173%
|
Funds flow
netback(2)
|
$21/boe
|
$20/boe
|
(8)%
|
Free funds flow
yield(2)
|
1%
|
15%
|
14%
|
Net
debt(2)
|
$33
million
|
$102
million
|
210%
|
Net debt / Funds
flow(2)
|
2.0x
|
2.3x
|
13%
|
Proved developed
producing reserves(3)(4)
|
3,505 mboe
|
9,696 mboe
|
177%
|
Proved developed
producing NPV10%(3)(4)
|
$85
million
|
$166
million
|
95%
|
Proved plus probable
reserves(3)(4)
|
9,318 mboe
|
21,563
mboe
|
131%
|
Proved plus probable
NPV10%(3)(4)
|
$192
million
|
$329
million
|
71%
|
|
Notes:
|
(1)
|
Pricing assumptions:
WTI US$62/bbl, WCS differential US$19/bbl, Edmonton par
differential C$8/bbl, C$/US$ exchange rate $0.75, AECO C$1.35/Mcf;
the pricing assumptions do not apply to before tax reserve
evaluation of net present value discounted at 10
percent.
|
(2)
|
Refer to the non-GAAP
measures section of this press release for additional disclosures
and assumptions.
|
(3)
|
Gross reserves are
the total working interest reserves before the deduction of any
royalties and including any royalty interests receivable.
Pre-Acquisition estimated total proved and proved plus probable
reserves attributable to the Highwood assets are derived
from: the reserve report as evaluated by GLJ Petroleum
Consultants Ltd., in a report with an effective date of December
31, 2018, in accordance with the COGE Handbook and National
Instrument 51-101 – Standards for Disclosure for Oil and Gas
Activities of the Canadian Securities Administrators, using the
GLJ December 31, 2018 price forecast, and the recent Saskatchewan
acquisition reserve report as evaluated by GLJ Petroleum
Consultants Ltd., in a report with an effective date of March 31,
2019, in accordance with the COGE Handbook and National Instrument
51-101 – Standards for Disclosure for Oil and Gas Activities of the
Canadian Securities Administrators, using the GLJ March 31, 2019
price forecast. Estimated total proved and proved plus probable
reserves attributable to the PROP assets as evaluated by Sproule
Associates Limited in a report with an effective date of December
31, 2018, in accordance with the COGE Handbook and National
Instrument 51-101 – Standards for Disclosure for Oil and Gas
Activities of the Canadian Securities Administrators, using the
Sproule December 31, 2018 price forecast.
|
(4)
|
Pro forma before tax
net present value based on a 10 percent discount rate and Sproule's
December 31, 2018 forecast prices and GLJ's December 31, 2018
forecast prices. Estimated values of future net revenues do not
represent the fair market value of the reserves.
|
ADVISOR
National Bank Financial Inc. is acting as financial advisor to
Highwood with respect to the Acquisition. Cormark Securities Inc.
is acting as strategic advisor to Highwood with respect to the
Acquisition.
Oil and Gas Measures
Barrels of Oil Equivalent – This news release discloses
certain production information on a barrels of oil equivalent
("boe") basis with natural gas converted to barrels of oil
equivalent using a conversion factor of six thousand cubic feet of
gas (Mcf) to one barrel (bbl) of oil (6 Mcf:1 bbl). Condensate and
other NGLs are converted to boe at a ratio of 1 bbl:1 bbl. Boe may
be misleading, particularly if used in isolation. A boe conversion
ratio of 6 Mcf:1 bbl is based roughly on an energy equivalency
conversion method primarily applicable at the burner tip and does
not represent a value equivalency at sales point. Although the 6:1
conversion ratio is an industry-accepted norm, it is not reflective
of price or market value differentials between product types. Based
on current commodity prices, the value ratio between crude oil,
NGLs and natural gas is significantly different from the 6:1 energy
equivalency ratio. Accordingly, using a conversion ratio of 6 Mcf:1
bbl may be misleading as an indication of value.
Mcfe Conversions: Thousands of cubic feet of gas equivalent
("Mcfe") amounts have been calculated by using the conversion ratio
of one barrel of oil (1 bbl) to six thousand cubic feet (6 Mcf) of
natural gas. Mcfe amounts may be misleading, particularly if used
in isolation. A conversion ratio of 1 bbl to 6 Mcf 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
natural gas as compared to oil is significantly different from the
energy equivalent of 1:6, utilizing a conversion on a 1:6 basis may
be misleading as an indication of value.
Non-GAAP Measures
The flowing definitions 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.
"Free funds flow" is calculates as funds flow less capital
expenditures.
"Free funds flow yield" is calculated as free funds flow /
market capitalization.
"Funds flow" is calculated as operating funds flow less
general and administrative expenses and interest expenses.
"Funds flow netback" is calculated as revenues net of
royalties, less transportation and processing charges, operating
expenses, general and administrative expenses and interest expenses
and then divided by BOE of Mcf sold.
"Net debt" is calculated as total debt less current assets
plus current liabilities (excluding any amounts included in total
debt), and includes transaction costs and the completed debt and
equity financings. Total debt is calculated as long-term debt,
long-term debt due within one year and short-term debt.
"Operating free funds flow" is calculated as revenues net of
royalties, less transportation and processing charges and operating
expenses less capital expenditures.
"Operating free funds flow yield" is calculated as operating
free funds flow divided by transaction value.
"Operating funds flow" is calculated as revenues net of
royalties, less transportation and processing charges and operating
expenses.
"Operating netback" is calculated as revenues net of
royalties, less transportation and processing charges and operating
expenses and then divided by BOE or Mcf sold.
"Sustainability ratio" is calculated as Capital Expenditures
/ Funds Flow.
Forward Warning
Certain statements included or incorporated by reference in
this press release may constitute forward-looking statements under
applicable securities legislation. Forward-looking statements or
information typically contain statements with words such as
"anticipate", "believe", "expect", "plan", "intend", "estimate",
"propose", or similar words suggesting future outcomes or
statements regarding an outlook. Forward looking statements or
information in this press release may include, but are not limited
to:
- the anticipated closing date of the Acquisition;
- the actual amount of debt assumed upon closing of the
Acquisition;
- the number of Highwood shares issued upon closing of the
Acquisition;
- the sources of existing production and future development
drilling locations and opportunities;
- the annual decline rate of the Assets;
- the number and classification of future development drilling
locations and opportunities;
- the pricing received for production, and resulting operating
and after-tax cash flow netbacks for the Assets;
- the estimate of annualized 2019 fund flows from
operations;
- the anticipated acquisition metrics;
- the expectation that fiscal and regulatory policies in
Alberta remain supportive of
continued investment;
- exploration and development capital expenditure expectations
for 2019; and
- development plans and strategic objectives.
This news release contains estimates of the net present value
of the future net revenue from the reserves to be acquired pursuant
to the Acquisition. The estimated values of future net revenue
disclosed in this press release do not represent fair market value.
There is no assurance that the forecast prices and cost assumptions
used in the reserve evaluations will be attained and variances
could be material.
Estimates of reserves for individual properties may not
reflect the same confidence level as estimates of reserves for all
properties due to the effects of aggregation.
Statements relating to reserves are deemed to be
forward-looking statements as they involve the implied assessment,
based on certain estimates and assumptions, that the reserves
described exist in the quantities predicted or estimated, and can
be profitably produced in the future. Such forward-looking
statements or information are based on a number of assumptions all
or any of which may prove to be incorrect. In addition to any
other assumptions identified in this document, assumptions have
been made regarding, among other things:
- satisfaction of all conditions to the proposed Acquisition
and receipt of all necessary approvals;
- availability of credit facilities for the completion of the
Acquisition;
- the non-operating partner's intention to maintain its status
quo interest in respect of its rights of tag along or first refusal
contained in the PROP partnership agreement;
- the ability of Highwood to obtain equipment, services and
supplies in a timely manner to carry out planned development
activities;
- the ability of Highwood to market oil and natural gas
successfully to current and new customers;
- the timely receipt of required regulatory
approvals;
- currency, exchange and interest rates;
- future oil and natural gas prices; and
- management's expectations relating to the timing and results
of development activities.
Although Highwood believes that the expectations reflected in
such forward-looking statements or information are reasonable,
undue reliance should not be placed on forward looking statements
because Highwood can give no assurance that such expectations will
prove to be correct. Forward-looking statements or
information are based on current expectations, estimates and
projections that involve a number of risks and uncertainties which
could cause actual results to differ materially from those
anticipated by Highwood and described in the forward looking
statements or information. These risks and uncertainties
include but are not limited to:
- the ability of management to execute its business plan or
realize anticipated synergies or cost savings from the
Acquisition;
- the risks of not obtaining court, shareholder, regulatory
and other approvals for the Acquisition;
- the risks of the oil and gas industry, both domestically and
internationally, such as operational risks in exploring for,
developing and producing crude oil and natural gas and market
demand;
- risks and uncertainties involving geology of oil and natural
gas deposits;
- risks inherent in Highwood's marketing operations, including
credit risk;
- the uncertainty of reserves estimates and reserves
life;
- the uncertainty of estimates and projections relating to
production, costs and expenses;
- potential delays or changes in plans with respect to
proposed acquisitions (including the Acquisition), exploration or
development projects or capital expenditures;
- Highwood's ability to enter into or renew leases;
- fluctuations in oil and natural gas prices, foreign currency
exchange rates and interest rates;
- health, safety and environmental risks;
- uncertainties as to the availability and cost of
financing;
- the ability of Highwood to add production and reserves
through development and exploration activities;
- general economic and business conditions;
- the possibility that government policies or laws may change
or governmental approvals may be delayed or withheld;
- uncertainty in amounts and timing of royalty
payments;
- risks associated with existing and potential future law
suits and regulatory actions against Highwood; and
- other risks and uncertainties described elsewhere in this
document or in Highwood's other filings with Canadian securities
regulatory authorities.
The forward-looking statements or information contained in
this document are made as of the date hereof and Highwood
undertakes 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 required by
applicable securities laws.
SOURCE Highwood Oil Company Ltd.