NOT FOR DISTRIBUTION IN TO U.S. NEWS WIRE SERVICES OR DISSEMINATION IN THE
UNITED STATES
Crocotta Energy Inc. (TSX:CTA) ("Crocotta" or the "Company") is pleased to
announce that it has entered into an arrangement agreement (the "Agreement")
whereby Long Run Exploration Ltd. ("Long Run" or "LRE") will acquire all of the
issued and outstanding common shares of Crocotta in a transaction valued at
approximately $357 million (the "Arrangement") including debt and transaction
costs assumed by Long Run. Under the terms of the Arrangement each common share
of Crocotta will be exchanged for 0.415 of a common share of Long Run, 1.0
common share of a new Montney-focused exploration and production company
("ExploreCo") and 0.2 of an ExploreCo common share purchase warrant ("ExploreCo
Arrangement Warrants"). Each whole ExploreCo Arrangement Warrant will entitle
the holder to acquire one common share of ExploreCo ("ExploreCo Share") at an
exercise price of $1.70 per share at any time on or before 30 days following the
closing of the Arrangement. It is also proposed that in conjunction with the
Arrangement, certain officers, employees and directors will purchase up to 7.65
million units of ExploreCo ("ExploreCo Units") at $1.70 per ExploreCo Unit for
total proceeds of up to $13 million (the "Management Financing"). Additional
details are provided under the heading "Financings" below.
In addition, in conjunction with the Arrangement, Crocotta and ExploreCo have
entered into a letter agreement with a syndicate of underwriters lead by
National Bank Financial Inc. to raise $30 million through a private placement of
subscription receipts of ExploreCo ("Subscription Receipts") at a price of $1.70
per Subscription Receipt on a "bought-deal" basis (the "Subscription Receipt
Offering"). The gross proceeds raised under the Subscription Receipt Offering
will be held in escrow pending satisfaction of certain escrow release
conditions, including all of the conditions required to complete the Arrangement
having being satisfied or waived. Additional details are provided under the
heading "Financings" below.
STRATEGIC RATIONALE FOR TRANSACTION
Crocotta has two major assets that are very diverse and believes that separating
these two assets will ultimately result in maximizing value for all shareholders
of Crocotta. The Edson property is a low operating cost cash flow engine that
produces approximately 7,500 BOE/d of light oil and liquids-rich natural gas and
has extensive infrastructure and low-risk drilling inventory in the Bluesky and
Cardium formations. The Dawson-Sunrise Montney asset is an exciting exploration
asset that has significantly less production (2,300 BOE/d) and less established
infrastructure, but provides Crocotta shareholders with what Crocotta believes
to be a significant potential upside based on recent drilling in the area.
Crocotta believes that the benefits of separating the assets into two companies
(Edson as part of a larger established dividend-paying company in Long Run and
ExploreCo providing a pure-play Montney company with lands in the heart of the
Montney's liquids-rich gas fairway) are numerous, including:
-- allowing shareholders to participate in a larger entity (Long Run) that
pays a strong sustainable dividend with a low payout ratio;
-- reducing shareholders' risk and volatility on the Long Run portion given
it is a balanced producer (approximately 50/50 Liquid to Gas ratio) with
a diversified asset base; and
-- exposing shareholders to a new pure play liquids-rich Montney producer
(ExploreCo) that will be able to allocate capital and manpower
exclusively to accelerate the growth of this asset.
EXPLORECO
ExploreCo is anticipated to be a new junior exploration and production company
led by Robert Zakresky as President and CEO and certain members of Crocotta's
current management team. ExploreCo will be a growth-oriented,
exploration-focused entity with approximately 2,300 BOE/d of liquids-rich
natural gas. The assets will be focused in the highly prolific Montney gas
resource trend of northeast British Columbia predominantly in the Dawson-Sunrise
area where drilling results have been exceptional. Crocotta recently drilled a
Montney well that has been on-stream for over 60 days with an IP30 of 920 BOE/d
(32% oil and liquids) and and IP60 of 880 BOE/d (32% oil and liquids). Based on
initial results, ExploreCo estimates the rate of return on this well to be over
200% with payback of approximately 7 months and a net present value of greater
than $12 million based on certain capital estimates and forward strip pricing.
ExploreCo will hold a large land base in the Dawson-Sunrise area consisting of
over 60 net sections (38,400 acres) of land with potential for Montney.
Currently, ExploreCo anticipates having greater than 80 Montney locations and
will continue with delineation drilling to possibly prove up an additional 200
locations on its current land base.
The Agreement contemplates that ExploreCo will assume approximately $15 million
of existing Crocotta debt, however, based on the Management Financing, the
Subscription Receipt Offering and exercise of ExploreCo Arrangement Warrants
noted above, expects to be fully financed to carry out a significant drilling
program and a material expansion of its current gas plant. ExploreCo has
estimated that it will achieve a production rate of over 5,000 BOE/d (20-25% oil
and liquids) by the end of 2015. ExploreCo estimates it will spend approximately
$90 million in 2015 that includes drilling approximately 8 horizontal multi-frac
Montney wells and the expansion of its current gas plant from 20 MMcf/d capacity
to 60 MMcf/d capacity.
Assuming all private placements are fully subscribed for and all ExploreCo
Arrangement Warrants are exercised, ExploreCo will have the following
characteristics:
-- 2,300 BOE/d (projected 5,000 BOE/d by exit 2015);
-- $67 million cash (no debt);
-- over 60 net sections (38,400 acres) of land in the highly prolific
liquids-rich Montney fairway;
-- a development drilling inventory of over 80 locations (IP60
approximately 880 BOE/d) with potential to prove up an additional 200
locations; and
-- 155 million ExploreCo Shares outstanding.
SUMMARY
Crocotta's board of directors and management view the Arrangement as an
advantageous transaction for Crocotta shareholders. Through the Long Run
transaction, existing Crocotta shareholders will benefit from the
diversification of the Long Run asset base and liquidity in its shares as well
as access to a monthly dividend stream (current average dividend yield of Long
Run is approximately 7.6% per annum). Additionally, Crocotta shareholders will
retain ownership in ExploreCo following the completion of the Arrangement, which
will own certain assets that Crocotta's management believe to contain
significant upside and growth potential which can be accelerated through focused
exploration and development in a well-capitalized entity.
Consideration Received by Crocotta Shareholders:
1.0 ExploreCo Share (ExploreCo financing price) $ 1.70/share
0.415 common share of Long Run $ 2.28/share(1)
Total Value (not including ExploreCo Arrangement
Warrants) $ 3.98/share
-- Based on June 11, 2014 trading price of Long Run of $5.50
DESCRIPTION OF THE TRANSACTION
Arrangement
The Arrangement is a culmination of over seven years of exploration and
development over which the Company grew production from approximately 100 BOE/d
to current production of approximately 9,800 BOE/d. Management views the
Arrangement as an opportunity for Crocotta shareholders to realize value for a
large portion of the Company's assets while retaining significant upside
exposure associated with the Montney focused ExploreCo.
Based on the above expectations for the Arrangement and the consideration
offered by Long Run (excluding ExploreCo component) the Arrangement has the
following operational characteristics:
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Long Run total consideration (1) $ 357 million
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Current production 7,500 BOE/d (30% oil &
NGLs)
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Proved reserves (2) 19.9 MMBOE
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Proved plus probable reserves (2) 32.6 MMBOE
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Estimated run-rate funds flow (3)(4) $ 82 million
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The acquisition metrics are as follows:
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Long Run total consideration / Current
Production $ 47,600/BOE/d
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Long Run total consideration / Run rate funds
flow (3)(4) 4.4x
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Long Run total consideration / Proved reserves $ 17.93/boe
----------------------------------------------------------------------------
Long Run total consideration / Proved plus
probable reserves $ 10.95/boe
----------------------------------------------------------------------------
1. Total consideration based on Long Run's June 11, 2014 trading price of
$5.50.
2. Independent evaluation prepared by GLJ Petroleum Consultants Ltd.
("GLJ") with an effective of December 31, 2013.
3. Estimated run rate funds flow is equal to Crocotta's current production
annualized, excluding production related to ExploreCo, multiplied by the
current operating netback of $30.00. Operating netback calculated by
subtracting royalties, transportation and operating costs from revenues
divided by total production.
4. Funds flow and operating netback are non-GAAP measures. See "Non-GAAP
Measures".
The Arrangement also allows ExploreCo management to immediately apply its
expertise at creating value in a growth-oriented, exploration-focused entity
following completion of the Arrangement. ExploreCo will be well-capitalized at
inception with a cash balance, no debt, and highly focused assets primarily
located in northeast British Columbia. Prior to the proposed private placements
and the exercise of the ExploreCo Arrangement Warrants, the net asset value
("NAV") of ExploreCo is estimated to be $1.37 per share as calculated below:
BT NPV 10% - Reserves Value(1) $ 101.2 million
Plus: Undeveloped Land, and Other(2) $ 58.4 million
Less: Assumed debt $ 15.0 million
Net Asset Value ("NAV")(3) $ 144.6 million
Fully diluted ExploreCo Shares(4) 105.6 million shares
Net Asset Value per Share(3) $ 1.37/share
1. Independent evaluation prepared by GLJ dated December 31, 2013 related
to the Northeast British Columbia properties which represent all of the
properties being transferred into ExploreCo as part of the Arrangement.
The estimated net present value does not represent fair market value and
the estimates of reserves and future net revenue for individual
properties may not reflect the same confidence level as estimates of
reserves and future net revenue for all properties, due to the effects
of aggregation.
2. Internal Crocotta estimate of the fair market value of undeveloped land,
facilities, and other assets not included in the December 31, 2013
reserves report being transferred into ExploreCo as part of the
Agreement.
3. Assuming all currently "in the money" dilutive securities are taken up
prior to closing of the Arrangement.
FINANCINGS
ExploreCo has proposed, in addition to approximately 21.1 million ExploreCo
Arrangement Warrants exercisable at $1.70 per share, raising additional capital
via the Management Financing and the Subscription Receipt Offering as described
below. If all ExploreCo Arrangement Warrants are exercised, the Management
Financing is fully subscribed and upon closing of the Subscription Receipt
Offering (including full exercise of the Underwriters Option (as defined
below)), ExploreCo would have a positive cash position of approximately $67
million after accounting for $15 million of assumed debt under the Arrangement.
Description of Management Financing
The Management Financing is an offering of up to 7.65 million ExploreCo Units to
certain officers, employees and directors. Each ExploreCo Unit is comprised of
one ExploreCo Share and one ExploreCo Share purchase warrant (a "Warrant"). The
ExploreCo Units will be priced at $1.70 per ExploreCo Unit (24% above per share
NAV) with the Warrant exercise price being priced at $2.04 (49% above per share
NAV). The Warrants will vest equally over 3 years and will have a 5 year term
from the date of issuance.
Description of Subscription Receipt Offering
In connection with the Arrangement, ExploreCo has entered into a letter
agreement with a syndicate of underwriters led by National Bank Financial Inc.
and including Haywood Securities Inc., Macquarie Capital Markets Canada Ltd.,
GMP Securities L.P., Paradigm Capital Inc., Acumen Capital Finance Partners
Limited, Dundee Securities Ltd., BMO Nesbitt Burns Inc., Scotia Capital Inc.,
Clarus Securities Inc., Jennings Capital Inc., Canaccord Genuity Corp., Cormark
Securities Inc. and Desjardins Securities Inc. (collectively, the
"Underwriters"), pursuant to which the Underwriters have agreed to purchase for
resale to the public, on a bought deal private placement basis, 17.7 million
Subscription Receipts at a price of $1.70 per Subscription Receipt for gross
proceeds of approximately $30 million. The gross proceeds from the sale of
Subscription Receipts will be held in escrow pending certain escrow release
conditions being met, which includes all outstanding conditions to the
completion of the Arrangement being met or waived and receipt of all necessary
approvals for the Subscription Receipt Offering and the Arrangement having been
obtained on or before October 31, 2014. Upon all escrow release conditions being
met and the required notices being given to the escrow agent, the net proceeds
from the Subscription Receipt Offering will be released to Exploreco and the
holders of Subscription Receipts will receive, without any additional
consideration, one ExploreCo Share for each Subscription Receipt held. If all of
the escrow release conditions are not met on or before October 31, 2014, then
the gross proceeds under the Subscription Receipt Offering will be returned to
the subscribers, together with a pro rata portion of interest earned on the
gross proceeds.
In addition, the Underwriters have been granted an option (an "Underwriters
Option"), which may be exercised in whole or in part up until 48 hours prior the
closing of the Subscription Receipt Offering, to purchase up to an additional
2.9 million Subscription Receipts at a price of $1.70 per Subscription Receipt.
If the Underwriters Option is fully exercised, gross proceeds from the
Subscription Receipt Offering will be approximately $35 million.
The Subscription Receipts will be distributed by way of private placement in all
provinces of Canada and in the United States and certain other jurisdictions as
the Company and the Underwriters may agree. Completion of the Arrangement and
the Subscription Receipt Offering is subject to certain conditions including the
receipt of approvals from shareholders of Crocotta and Long Run and all
necessary regulatory approvals, including the approval of the Toronto Stock
Exchange ("TSX"). Closing of the Subscription Receipt Offering is expected to
occur in early-mid July 2014 and the Arrangement is expected to close in early
to mid-August 2014. The offered Subscription Receipts will be subject to a 4
month hold period, which is expected to expire on the date that is 4 month and
one day after the closing of the Subscription Receipt Offering.
This press release is not an offer of the securities for sale in the United
States. The securities have not been registered under the U.S. Securities Act of
1933, as amended, and may not be offered or sold in the United States absent
registration or an exemption from registration. This press release shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of the securities in any state in which such offer,
solicitation or sale would be unlawful.
COMPENSATION ARRANGEMENT
ExploreCo proposes to issue an aggregate of 7.5 million performance warrants to
certain officers, directors and employees of ExploreCo as part of a compensation
arrangement. The performance warrants will vest equally over 3 years and have a
5 year term. Each performance warrant will entitle the holder thereof to acquire
one ExploreCo Share at an exercise price of $1.70 per ExploreCo Share. The total
number of ExploreCo Shares issuable under the performance warrants would
comprise 5% of the proforma shares outstanding of ExploreCo and would be part of
the 10% maximum restriction on evergreen stock options imposed by the TSX.
BOARD OF DIRECTORS RECOMMENDATION AND FINANCIAL ADVISORS
The Board of Directors of Crocotta constituted a special committee (the "Special
Committee") comprised of independent directors to consider the Arrangement and
the transactions contemplated by the Arrangement. Based upon the recommendation
of the Special Committee, the opinion of the financial advisors to the Special
Committee and the opinion of the financial advisor to the Board of Directors of
Crocotta, the Board of Directors of Crocotta has determined that the Arrangement
is in the best interests of Crocotta and the Crocotta shareholders; (ii)
determined that the consideration to be received by the Crocotta shareholders
under the Arrangement is fair, from a financial point of view, to Crocotta
Shareholders; (iii) approved the Agreement and the transactions contemplated
thereby; and (iv) resolved to recommend that the Crocotta shareholders vote in
favour of the Arrangement, the Management Financing and the Subscription Receipt
Offering.
The Agreement has the support of all of Crocotta's management and directors who
collectively own approximately 13% of Crocotta's fully diluted shares.
Directors, officers and entities owned or controlled by JOG Capital Corp.
exercising control or direction over approximately 31% of Crocotta's fully
diluted shares have entered into support agreements in favour of the
Arrangement. It is expected that a management information circular and proxy
statement detailing the Arrangement and the ExploreCo private placements, and
containing a copy of the written fairness opinions will be mailed to Crocotta's
shareholders in early-mid July 2014 with a shareholder meeting to be scheduled
for early to mid-August 2014. The closing of the Arrangement is subject to the
receipt by Long Run and Crocotta of all Court, TSX and other regulatory
approvals, receipt of the requisite shareholder approvals of Crocotta regarding
the Arrangement and the ExploreCo private placements, approval by Long Run
shareholders of the Long run share issuance under the Arrangement, no material
adverse change having occurred in Crocotta and a number of other conditions
customary in a transaction of the nature of the Arrangement.
The Agreement provides that Crocotta will pay Long Run a non-completion fee of
$10.5 million under certain circumstances. The Agreement also provides for
customary non-solicitation covenants in favour of Long Run, including that
Crocotta has the right to respond to superior proposals and that Long Run has
the right to match any such proposal.
National Bank Financial Inc. acted as financial advisor to the Board of
Directors of Crocotta with respect to the Arrangement and has provided the
Special Committee and the Board of Directors of Crocotta with its verbal opinion
that, subject to its review of the final form of documentation effecting the
Arrangement, the consideration to be received by Crocotta shareholders pursuant
to the Arrangement is fair, from a financial point of view, to the Crocotta
shareholders. National Bank Financial Inc. is expected to provide a written
fairness opinion relating to the Arrangement to the Special Committee and the
Board of Directors of Crocotta in addition to the verbal opinion which has
already been provided to the independent committee.
Haywood Securities Inc. ("Haywood") acted as financial advisor to the Special
Committee with respect to ExploreCo. Haywood has provided the Special Committee
its verbal opinion that, subject to its review of the final form of
documentation effecting the Arrangement, the consideration to be received by
Crocotta shareholders under the Arrangement, specifically related to the
ExploreCo Shares and the ExploreCo Arrangement Warrants to be issued to Crocotta
shareholders, is fair, from a financial point of view, to Crocotta and the
Crocotta shareholders. Haywood is expected to provide a written fairness opinion
relating to the ExploreCo consideration to be received by Crocotta shareholders
under the Arrangement.
GMP Securities L.P. acted as strategic advisor to Crocotta and Paradigm Capital
Inc. acted as strategic advisor to the ExploreCo.
FORWARD LOOKING STATEMENTS:
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", "may", "will",
"should", "believe", "intends", "forecast", "plans", "guidance" and similar
expressions are intended to identify forward-looking statements or information.
More particularly and without limitation, this document contains forward looking
statements and information relating to the terms of the Arrangement and the
ExploreCo private placements, the anticipated closing date of the Arrangement
and the Subscription Receipt Offering, anticipated mailing date of the
management information circular and proxy materials in connection with the
Arrangement, ExploreCo's anticipated future rate of return on and the net value
of the latest Montney well to be owned by ExploreCo following the completion of
the Arrangement and anticipated timing related thereto, number of Montney
locations that ExploreCo is anticipated to have in the future, anticipated
production rate of ExploreCo as at the end of 2015, anticipated capital
expenditure by ExploreCo by end of 2015, increase in gas plant capacity to be
held by ExploreCo, ExploreCo's drilling plans, future growth plans, reserves and
values attributable thereto, ExploreCo's growth strategy, the nature of
ExploreCo's assets and capital programs. The forward-looking statements and
information are based on certain key expectations and assumptions made by the
Company and ExploreCo, including expectations and assumptions relating to the
Company and ExploreCo being able to receive all required regulatory approvals to
consummate the Arrangement and the two private placements, level of exercise of
the ExploreCo Arrangement Warrants to be issued under the Arrangement,
anticipated participation of officers, employees and directors in the management
private placement, Crocotta receiving the requisite shareholder approvals of
Crocotta and Long Run, prevailing commodity prices and exchange rates,
applicable royalty rates and tax laws, future well production rates, the
performance of existing wells, the success of drilling new wells, the
availability of capital to undertake planned activities and the availability and
cost of labour and services.
Although the Company and ExploreCo believes that the expectations reflected in
such forward-looking statements and information are reasonable, it can give no
assurance that such expectations 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 may 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
estimates and projections relating to production rates, costs and expenses,
commodity price and exchange rate fluctuations, marketing and transportation,
environmental risks, competition, the ability to access sufficient capital from
internal and external sources and changes in tax, royalty and environmental
legislation. The forward-looking statements and information contained in this
document are made as of the date hereof for the purpose of providing the readers
with the Company's expectations for the coming year. The forward-looking
statements and information may not be appropriate for other purposes. The
Company 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 so required by applicable
securities laws.
The well-flow tests disclosed in this press release are not necessarily
indicative of long-term performance or ultimate recovery.
Meaning of BOE: When used in this press release, BOE means a barrel of oil
equivalent on the basis of 1 BOE to 6 thousand cubic feet of natural gas. BOE
per day means a barrel of oil equivalent per day. BOE's may be misleading,
particularly if used in isolation. A BOE conversion ratio of 1 BOE for 6
thousand cubic feet of natural gas is based on an energy equivalency conversion
method primarily applicable at the burner tip and does not represent a value
equivalency at the wellhead.
Non-GAAP Measures: The reader is also cautioned that this news release contains
the terms funds flow, net debt and operating netback which are not a recognized
measures under Canadian generally accepted accounting principles ("GAAP").
Management believes that these measures are useful supplemental measures.
Management uses funds flow to analyze performance and considers it a key measure
as it demonstrates the Company's ability to generate the cash necessary to fund
future capital investments and to repay debt. Funds flow is a non-GAAP measure
and has been defined by the Company as net earnings plus non-cash items
(depletion and depreciation, asset impairments, share based compensation,
non-cash finance expenses, unrealized gains and losses on risk management
contracts, and deferred income taxes) and excludes the change in non-cash
working capital related to operating activities and expenditures on
decommissioning obligations. Net debt is calculated as current liabilities less
current assets, excluding the current portion of future tax assets and
derivative assets and liabilities. Operating netback is calculated as revenue
minus royalties, operating expenses and transportation expenses. Operating
netback is specific to a point in time and therefore will be unique to the
period stated. Readers are cautioned, however, that these measures should not be
construed as an alternative to other terms determined in accordance with GAAP as
a measure of performance. Crocotta's method of calculating these measures may
differ from other companies, and accordingly, they may not be comparable to
measures used by other companies.
This press release shall not constitute an offer to sell, nor the solicitation
of an offer to buy, any securities in the United States, nor shall there be any
sale of securities mentioned in this press release in any state in the United
States in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such state.
NEITHER THE TORONTO STOCK EXCHANGE NOR ITS REGULATION SERVICES PROVIDER (AS THAT
TERM IS DEFINED IN THE POLICIES OF THE TORONTO STOCK EXCHANGE) ACCEPTS
RESPONSIBILITY FOR THE ADEQUACY OR ACCURACY OF THIS RELEASE.
FOR FURTHER INFORMATION PLEASE CONTACT:
Crocotta Energy Inc.
Mr. Robert J. Zakresky
President and Chief Executive Officer
(403) 538-3736
Crocotta Energy Inc.
Mr. Nolan Chicoine
Vice President, Finance and Chief Financial Officer
(403) 538-3738
Crocotta Energy Inc.
Suite 700, 639 - 5th Avenue SW
Calgary, Alberta T2P 0M9
(403) 538-3737
(403) 538-3735 (FAX)
www.crocotta.ca
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