Twin Butte Energy to combine with Emerge Oil & Gas to create a sustainable model of income and production growth
/NOT FOR DISTRIBUTION OR DISSEMINATION IN THE UNITED STATES/
CALGARY, Nov. 13, 2011 /CNW/ - Twin Butte Energy Ltd.('Twin Butte' or the 'Company') and Emerge Oil & Gas Inc. ('Emerge') are pleased to announce that they have entered into an arrangement agreement providing for the acquisition by Twin Butte of all of the outstanding common shares of Emerge (the 'Emerge Shares') on the basis of 0.585 of a common share of Twin Butte ('Twin Butte Share') for each outstanding Emerge Share (the 'Transaction'). Based on the five day weighted average price of the Twin Butte Shares ended November 11, 2011 of $1.97, the exchange ratio for the Transaction represents a deemed price of $1.15 per Emerge Share, representing a 21 percent premium to the five day weighted average price of $0.95 for the Emerge Shares on November 11, 2011.
The deemed purchase price is approximately $170 million in value, comprised of the issuance of approximately 54 million Twin Butte Shares (at a deemed price of $1.97 per Twin Butte Share) and the assumption of approximately $63 million in net debt estimated at closing.
Twin Butte's existing executive team, led by Jim Saunders, will continue to manage the combined Company, supplemented by key technical and administrative personnel from Emerge. At closing, Twin Butte will have approximately 189.4 million shares outstanding with Twin Butte shareholders owning approximately 71 percent and Emerge shareholders owning approximately 29 percent of the combined Company. Tom Greschner, Emerge's Chairman, President and CEO, will be appointed to the Board of Directors of Twin Butte at closing.
The Opportunity to Create a Sustainable Model of Income and Production Growth
Management believes that oil and gas companies that can build a sustainable model of income and production growth represent attractive investments as they provide strong total returns for investors.
Management has reviewed the combined Twin Butte and Emerge asset base, and believes there is the opportunity to provide attractive total returns to investors by providing both sustainable income (via dividends) and moderate internal production growth. The oil leveraged combined assets have the potential to generate sufficient cash flow to pay strong dividend while leaving sufficient cash flow to fund internally generated annual production growth, targeted at approximately 3 to 5 percent.
Subject to the completion of the Transaction, the Twin Butte Board of Directors has approved an initial annualized dividend of $0.18 per share that is anticipated to be declared in the first month subsequent to completion of the Transaction. Based on Twin Butte's closing share price on November 11, 2011 of $1.94, this would provide a 9.3 percent yield. The dividend, on an annualized basis, would require $34.1 million or 34 percent of the combined Company's estimated 2012 pro-forma cash flow of approximately $100 million ($US90 WTI and $3.50/gj, AECO) based on estimated average pro-forma 2012 production of 13,700 boe/d. Twin Butte anticipates allocating approximately $66 million to capital expenditures. Twin Butte has significant tax pool coverage that is anticipated to provide shareholders with a tax efficient yield vehicle.
Twin Butte believes that reinvesting approximately 66 percent of its cash flow should provide the targeted growth production rates over the midterm. With a combined stable, predictable base decline of approximately 27 percent and a forecast capital efficiency of approximately $16,000 per producing boe per day, Twin Butte believes, the sustainability of the combined Company's cash flow and dividend will be predictable for the foreseeable future. The strong capital efficiency is driven by the combined Company's extensive low risk, high rate of return heavy oil drilling inventory which is in excess of 500 net wells. In the current price and cost environment, the combined company's typical heavy oil wells have excellent economics with typical individual well IRRs in excess of 200 percent and well payouts in less than 1 year. The Company believes the capital efficiencies are attainable due to its ability to high grade the large inventory of drilling locations.
The Company intends to allocate capital each year to advance some of its longer term projects such as EOR for heavy oil. The large pro-forma undeveloped land base in excess of approximately 250,000 net acres and approximately 280 net natural gas drilling locations are also anticipated to provide swap/farm out and other rationalization or monetization opportunities.
In addition, the combined Company will focus on acquiring stable, low decline, assets with reasonable netbacks. With a significant supply of oil & gas assets on the market, Twin Butte believes this portion of the strategy could prove very successful especially considering the experience and background of Twin Butte management. As a larger, dividend paying company, Twin Butte believes it will be well positioned to compete for such acquisitions.
Attributes of the Combined Company Include
-- An enterprise value in excess of $515 million (based on the
current trading price of the Twin Butte Shares and estimated
net debt at closing);
-- A strong balance sheet with approximately $146 million in net
debt estimated at closing, relative to an anticipated credit
facility of $203 million. Twin Butte may consider non-core
asset sales to focus operations and improve the quality of its
asset base, maintain cost control and further strengthen the
-- Tax pools of approximately $560 million;
-- Current production of approximately 13,500 boe/d (70% heavy
oil, 8% light oil and NGLs, and 22% natural gas);
-- Proved Reserves of 30.0 mmboe and Proved plus Probable Reserves
of 51.1 mmboe based on the independent reserve reports
disclosed in Twin Butte's and Emerge's respective annual
information forms for the year ended December 31, 2010;
-- A Proved plus Probable RLI in excess of 10 years, leading to a
predictable low decline production base;
-- A low risk, high rate of return portfolio of over 500 heavy oil
drilling locations in areas that have seen low recovery factors
to date providing significant upside potential for long term
-- Undeveloped lands in excess of 250,000 net acres;
-- Current combined hedge position of approximately 18 percent of
2012 oil volumes hedged at approximately $C83 Western Canadian
Select ('WCS') and another 8 percent hedged at approximately
$C98 WTI. The Company's present intention is to hedge upward of
50 percent of forecast 2012 production; and
-- Estimated annual G&A savings in excess of $4 million.
Strategic Benefits and Transaction Summary
The acquisition of Emerge is accretive to Twin Butte on most key metrics:
-- Attractive transaction metrics (before deducting undeveloped
land value of $7.5 million) are $29,250 per boe/d; $24.14 per
Proven boe and $13.05 per Proven plus Probable boe;
-- Increases liquids weighting of Twin Butte on both a production
and reserve basis to 78 and 64 percent, respectively; and
-- The operational and strategic fit in Western Saskatchewan and
the Eastern Plains of Alberta is significant.
The acquisition of Emerge is consistent with Twin Butte's historic strategy of acquiring quality assets, with large resource potential within focus areas where we have expertise. In October 2009, Twin Butte acquired Buffalo Resources Corp., whose key asset was Frog Lake, a heavy oil property where Twin Butte saw extensive development potential. In the past two years, Twin Butte has successfully developed Frog Lake with approximately 200 (100 net) wells, increasing its net production from 1,100 boe/day in October 2009 to its current 4,000 boe/day.
The Transaction materially increases the size and scope of heavy oil opportunities for Twin Butte. At greater Lloydminster, Emerge has a conventional heavy oil operation currently producing 5,800 boe/d, with an established, drill ready inventory in excess of 250 net locations. Both Twin Butte and Emerge are excited about the recent development drilling for heavy oil at Primate and see the potential for an extensive heavy oil development drilling program in 2012 and 2013. This, combined with Twin Butte's core assets at greater Frog Lake, establishes Twin Butte as a significant operator in the area, providing a competitive advantage.
Twin Butte management has experienced a successful history operating and growing heavy oil production and has extensive operational experience within Emerge's light and heavy oil fairway which will ensure a seamless transition and ultimately generate numerous operational efficiencies. As a larger, stronger company, Twin Butte will use its financial flexibility to capitalize on its low risk drilling inventory while paying an attractive dividend.
Twin Butte and Emerge believe that this strategic combination offers an exceptional opportunity to create substantial value for their respective companies and shareholders.
Transaction Terms and Conditions
The Transaction is to be effected by way of an arrangement under the Business Corporations Act (Alberta). Completion of the Transaction, which is anticipated to occur in mid January 2012, is subject to, among other things, the approval of at least 66⅔ percent of the Emerge shareholders voting on the Transaction, the approval of a majority of the Twin Butte shareholders voting on the issuance of the Twin Butte Shares pursuant to the Transaction, the approval of the Court of Queen's Bench of Alberta, the receipt of all necessary regulatory and stock exchange approvals, and certain closing conditions that are customary for a transaction of this nature.
The Boards of Directors of each of Twin Butte and Emerge have unanimously approved the Transaction and resolved to recommend that their respective shareholders vote in favour of the Transaction. Directors and officers of Emerge, who collectively hold approximately 11% of the outstanding Emerge Shares, have entered into support agreements with Twin Butte pursuant to which each has agreed to vote in favour of the Transaction. Directors and officers of Twin Butte, who collectively hold approximately 4% of the outstanding Twin Butte Shares, have entered into support agreements with Emerge pursuant to which each has agreed to vote in favour of the Transaction.
Emerge has agreed to not solicit or initiate any discussions regarding any other business combination or sale of material assets and has granted Twin Butte the right to match competing, unsolicited proposals. The arrangement agreement provides for a mutual $3.5 million non-completion fee and a mutual cost reimbursement fee of $700,000 payable by Twin Butte or Emerge, as the case may be, in certain circumstances if the Transaction is not completed.
Complete details of the terms of the Transaction are set out in the arrangement agreement, which will be filed by each of Twin Butte and Emerge and will be available for viewing under each of Twin Butte's and Emerge's profiles at www.sedar.com.
Peters & Co. Limited is acting as financial advisor to Emerge and has provided the Board of Directors of Emerge with its opinion, as of the date hereof and subject to the review of final documentation, that the consideration to be received by the Emerge shareholders pursuant to the Transaction is fair, from a financial point of view, to Emerge shareholders.
GMP Securities L.P. is acting as financial advisor to Twin Butte and has provided the Board of Directors of Twin Butte with its opinion that, as of the date hereof and subject to the review of final documentation, that the consideration payable by Twin Butte pursuant to the Transaction is fair, from a financial point of view, to Twin Butte shareholders.
About Twin Butte and Emerge
Twin Butte Energy Ltd. is a value oriented intermediate producer with a significant low risk, high rate of return drilling inventory focused on large original oil in place and large original gas in place play types. With a stable low decline production base, Twin Butte is well positioned to live within cash flow while providing shareholders a sustainable dividend with growth potential over both the short and long term. Twin Butte is committed to continually enhance its asset quality while focusing on the sustainability of its dividend. The common shares of Twin Butte are listed on the TSX under the symbol 'TBE'.
Emerge is engaged in the acquisition and exploration for and development and production of oil and natural gas in Western Canada. Emerge currently operates within two principal areas, namely, the Lloydminster area of west-central Saskatchewan and east-central Alberta and the Battlebend/Coronation area of east-central Alberta. The common shares of Emerge are listed on the TSX under the symbol 'EME'.
In the interest of providing Twin Butte's shareholders, Emerge's shareholders and potential investors with information regarding Twin Butte and Emerge, including management's assessment of the future plans and operations of Twin Butte and Emerge, certain statements contained in this joint news release constitute forward-looking statements or information (collectively 'forward-looking statements') within the meaning of applicable securities legislation. Forward-looking statements are typically identified by words such as 'anticipate', 'continue', 'estimate', 'expect', 'forecast', 'may', 'will', 'project', 'could', 'plan', 'intend', 'should', 'believe', 'outlook', 'potential', 'target' and similar words suggesting future events or future performance. In addition, 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. In particular, this document contains, without limitation, forward-looking statements pertaining to the following: expectations of management regarding the proposed acquisition of Emerge, including the timing of completion of the acquisition, operating and financial metrics of the acquisition, potential synergies resulting from the acquisition, cost savings as a result of the Transaction, pro-forma debts levels and available credit lines, the revised business focus of the Company subsequent to the Transaction to a dividend paying company with moderate growth targets, typical decline characteristics, IRRs and payout basis for heavy oil wells, future allocation of capital to capital expenditure programs, financial and operational metrics required to sustain the anticipated dividend, future acquisition, disposition and farm-out strategies, the appointment of an additional director to the Company's board, production growth targets and the effect of the acquisition on Twin Butte's production, cash flow, reserves, undeveloped land position, RLI and tax pools. Included in this document are estimates of the combined company's 2012 cash flow which are based on the various assumptions as to production levels, commodity prices, capital expenditures, capital efficiency, drilling inventories and other assumptions disclosed in this document. To the extent such estimates constitute a financial outlook, they were approved by management of Twin Butte on November 13, 2011 and are included to provide readers with an understanding of the combined company's anticipated cash flow based on the capital expenditures and other assumptions described herein and readers are cautioned that the information may not be appropriate for other purposes.
With respect to forward-looking statements contained in this joint news release, we have made assumptions regarding, among other things: future capital expenditure levels; future oil and natural gas prices and differentials between light, medium and heavy oil prices; future oil and natural gas production levels; future exchange rates and interest rates; our ability to obtain equipment in a timely manner to carry out development activities; our ability to market our oil and natural gas successfully to current and new customers; the impact of increasing competition; our ability to obtain financing on acceptable terms; the ability of the Company subsequent to the Transaction to pay a sustained dividend at the rates described herein and on the basis as described herein, or at all; the timing of receipt of regulatory and shareholder approvals, the performance of existing wells; the success obtained in drilling new wells; the sufficiency of budgeted capital expenditures in carrying out planned activities; the ability of Twin Butte to execute and realize the benefits of future acquisition, disposition and farm-out strategies and our ability to add production and reserves through our development and exploitation activities. Although Twin Butte and Emerge believe that the expectations reflected in the forward looking statements contained in this document, and the assumptions on which such forward-looking statements are made, are reasonable, there can be no assurance that such expectations will prove to be correct. Readers are cautioned not to place undue reliance on forward-looking statements included in this document, as there can be no assurance that the plans, intentions or expectations upon which the forward-looking statements are based will occur. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur, which may cause Twin Butte's or Emerge's actual performance and financial results in future periods to differ materially from any estimates or projections of future performance or results expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things, the following: that the Transaction may not close when planned or at all or on the terms and conditions set forth herein; the failure of Twin Butte and Emerge to obtain the necessary shareholder, Court, regulatory and other third party approvals required in order to proceed with the Transaction; volatility in market prices for oil and natural gas; incorrect assessment of the value of the acquisition; failure to realize the anticipated benefits and synergies of the acquisition; failure to implement the revised business plan of the Company subsequent to the Transaction; failure to accurately estimate the availability of future credit lines; the general economic conditions in Canada, the U.S. and globally; and the other factors described under 'Risk Factors' in Twin Butte's and Emerge's most recently filed Annual Information Form available in Canada at www.sedar.com. Readers are cautioned that this list of risk factors should not be construed as exhaustive.
The forward-looking statements contained in this joint news release speak only as of the date of this joint news release. Except as expressly required by applicable securities laws, Twin Butte and Emerge do not undertake any obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in this joint news release are expressly qualified by this cautionary statement.
Barrels of Oil Equivalent
Barrels of oil equivalent (boe) are calculated using the conversion factor of 6 Mcf (thousand cubic feet) of natural gas being equivalent to one barrel of oil. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf: 1 bbl (barrel) is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
This joint news 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.
Twin Butte Energy Ltd.
Twin Butte Energy Ltd. Emerge Oil & Gas Inc.
Jim Saunders Thomas J. Greschner
President and Chief Executive Chairman, President and Chief
Officer Executive Officer
Tel: (403) 215-2040 Tel: (403) 718-3852
Fax: (403) 215-2055 Fax: (403) 718-3851
R. Alan Steele Anita Tonn
Vice President, Finance, Chief Vice President, Finance and Chief
Financial Officer and Corporate Financial Officer
Secretary Tel: (403) 718-3855
Tel: (403) 215-2692 Fax: (403) 718-3851
Fax: (403) 215-2055
Website: www.twinbutteenergy.com Website: www.emergeoilandgas.com