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 Creekassets 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.
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