CALGARY, ALBERTA–(Marketwired – May 31, 2016) – Eagle Energy Inc. (“Eagle“) (TSX:EGL) announced today that, effective June 1, 2016, it will assume operatorship of the Dixonville properties in which Eagle has a 50% working interest.
Eagle also announced today that it has finalized its semi-annual borrowing base redetermination and amendments to its credit agreement (the “Credit Agreement“) held with a syndicate of Canadian banks. A summary of the significant amendments to the Credit Agreement is set forth below. A redacted version of the Credit Agreement will be filed by Eagle under its issuer profile on SEDAR at www.sedar.com.
This news release contains non-IFRS financial measures and statements that are forward-looking. Investors should read “Non-IFRS Financial Measures” and “Note about Forward-looking Statements” near the end of this news release. Figures within this news release are presented in Canadian dollars unless otherwise indicated.
Appointment as Operator of Dixonville Properties
Effective June 1, 2016, under the joint operating agreement between Eagle and Spyglass Resources Corp. (“Spyglass“), Eagle will be appointed operator of the Dixonville properties in which Eagle has a 50% working interest.
Mr. Richard Clark, President and Chief Executive Officer of Eagle, stated, “Eagle has been working with the receiver for Spyglass since last November when Spyglass was placed into receivership. We are pleased to finally have operational control over what is a key, legacy asset for Eagle. We expect to move quickly to bring on ‘behind pipe’ production that requires infrastructure upgrades, which Spyglass was not capitalized to complete. We expect that, by the end of 2016, Eagle will have added approximately 200 to 250 barrels of oil equivalent per day of production (gross to the entire field). In addition, Eagle will commence a field study to improve the effectiveness of the waterflood and develop a more efficient artificial lift strategy. Eagle has extensive waterflood expertise and expects that, in the medium term, a number of improvements can be made.”
Amendments to Credit Agreement due to Semi-Annual Borrowing Base Redetermination
Eagle’s Credit Agreement is subject to semi-annual redeterminations of the borrowing base by its lenders. The last semi-annual redetermination of the borrowing base was finalized on October 7, 2015, resulting in the borrowing base being set at $US 80 million. Since then, sustained weakness in global commodity prices has resulted in downward pressure on the price decks used by lenders to determine borrowing base levels. Results of the semi-annual redetermination finalized on May 31, 2016 set the borrowing base level at $CA 70 million.
Eagle’s 2016 guidance previously announced on May 5, 2016 for its capital budget, production and operating costs remains unchanged.
At the end of the first quarter of 2016, Eagle’s bank debt, net of positive working capital, was $CA 66.7 million. Eagle accelerated a portion of its capital program into the first quarter. The results were a successfully executed two well Salt Flat drilling program, with costs coming in under budget and full year 2016 capital spending guidance remaining unchanged at $CA 5 million. For subsequent quarters of 2016, it is therefore expected that funds flow from operations will exceed capital expenditures, with funds flow also being supported by operating cost improvements in the field (the latter resulted in a reduction in Eagle’s full year 2016 operating cost guidance on May 5, 2016).
“Typical of oil and gas companies our size, Eagle has a reserves-based lending facility that is reviewed twice annually by the lending syndicate. Having a reserves-based lending facility means our borrowing capacity is based on, among other things, the following factors; our oil and gas reserves, the commodity price forecast used by our banks to ascribe their value to those reserves, and the commodity hedges we have in place to manage price uncertainty,” said Mr. Clark.
Mr. Clark continued, “Eagle posted solid results in our year-end 2015 report on oil and gas reserves. We increased year-over-year proved developed producing reserves by 10%, and total proved reserves by 14%, not including the additional reserves associated with our January 2016 acquisition of Maple Leaf Royalties Corp. However, our borrowing capacity is being adversely impacted by the drop in oil prices, which, in turn, has caused the banks to lower their internal price decks used to calculate their customers’ asset values.”
“Although current and forward crude oil prices have recovered from their previous lows, the price forecasts used by the banks remain conservative. However, we anticipate that a sustained rebound in oil price levels will be incorporated into lenders’ evaluations as we go forward, thereby providing increased liquidity and flexibility for our company. Our next credit review is in October 2016.”
Mr. Clark concluded, “In addition, our October borrowing base review will include the additional reserves, production and cash flow associated with our January 27, 2016 acquisition of Maple Leaf Royalties Corp., which had no debt on its balance sheet.”
Summary of Significant Amendments to Covenants, Terms and Conditions of Credit Facility
Under the Credit Agreement, Eagle is required to satisfy certain customary affirmative and negative covenants, including financial covenants. The following is a summary of the significant amendments made to the Credit Agreement’s covenants, terms and conditions and is qualified in its entirety by reference to the full text of the Credit Agreement.
- The borrowing base is set at $CA 70 million (previously, $US 80 million).
- The covenant that restricts Eagle from paying dividends to its shareholders if any default, event of default or borrowing base deficiency has occurred and is continuing or would result from such dividend, or if the cash dividend payments made for the trailing four quarters exceeds the Available Distributable Cash Flow (as defined by the Credit Agreement) for the trailing four quarters, remains unchanged.
- A new covenant was added that restricts Eagle from paying dividends in an amount that exceeds $0.005 (half a cent) per share per month, beginning with any dividend that may be declared in July 2016 (which would be payable in August 2016) and ending with any dividend that may be declared in June 2017 (which would be payable in July 2017). Based on the number of shares currently outstanding, $0.005 (half a cent) per share would equate to a maximum total monthly dividend payment of approximately $212,000.
- The covenant requiring Eagle to maintain, as at the end of each fiscal quarter, a maximum debt to four quarter trailing EBITDAX ratio of 3.00 to 1.00, has been amended. This has been done to proactively manage the effect that the precipitous drop in oil prices will have on this trailing covenant calculation. As at March 31, 2016, the most recently completed quarter, there were no covenant violations under or in connection with the Credit Agreement. Beginning with the fiscal quarter ending June 30, 2016, and for five quarters through to and including the fiscal quarter ending June 30, 2017, the maximum ratios are amended as follows: for the fiscal quarter ending June 30, 2016 – 4.00 to 1.00; for the fiscal quarter ending September 30, 2016 – 5.00 to 1.00; for each fiscal quarter ending December 31, 2016 through to the fiscal quarter ending June 30, 2017 – 6.00 to 1.00; and for each fiscal quarter ending after June 30, 2017, 3.00 to 1.00. The definition of EBITDAX remains unchanged from that disclosed in Eagle’s 2015 annual financial statements.
- The covenant requiring Eagle to maintain, as at the end of each fiscal quarter, a minimum current ratio of not less than 1.00 to 1.00 remains unchanged.
- The covenant requiring Eagle to maintain, as at the end of each fiscal quarter, a minimum four quarter trailing interest expense coverage ratio of 3.00 to 1.00 has been deleted.
- The maturity date of the Credit Agreement remains at May 27, 2017. The Credit Agreement also remains subject to semi-annual (October and May) redeterminations of the borrowing base by the lenders. In addition, amounts drawn on the credit facility continue to be available in either U.S. or Canadian dollars and may be used for activities in either the U.S. or Canada.
Commenting on the amendments, Mr. Clark said, “In February 2016, Eagle reduced its monthly dividend to $0.01 (one cent) per share, concurrent with announcing a 51% reduction in our 2016 capital program, both of which were in response to the significant and ongoing uncertainty and volatility in commodity prices at that time. Assuming an average WTI oil price for the full 2016 year of $US 45.00, a 2016 capital budget of $5.0 million and a monthly dividend of $0.01 per common share, Eagle’s corporate payout ratio was expected to be at or below 100%, keeping us on track to conduct our business within cash flow. However, it was the requirement of our bankers that we further reduce our dividend to not exceed half a cent per month at this time.
We remain dedicated to monitoring key performance metrics, exercising capital discipline, improving cost efficiency and applying innovative thinking to our financing strategies, all of which should help drive a significant wedge of free cash flow under escalating oil prices.”