CALGARY, ALBERTA–(Marketwired – June 1, 2017) – Cardinal Energy Ltd. (“Cardinal” or the “Company”) (TSX:CJ) is pleased to announce that it has entered into an agreement (the “Acquisition”) to purchase high quality, low decline light oil assets in Western Canada (the “Assets”) for cash consideration of $330 million (the “Purchase Price”) before closing adjustments. The Assets to be acquired are in the Weyburn/Midale area of southeast Saskatchewan and in the House Mountain area of Alberta. The Assets will add 5,000 boe/d (100% oil and NGL’s) of low decline light oil production (99% operated) that generate significant free cash flow and include a significant light oil development drilling inventory.
The Acquisition will be funded with a $170 million bought deal financing (the “Financing”) and by Cardinal’s credit facilities. We expect that the available lending limit under our credit facilities will be increased to $325 million following the closing of the Acquisition.
Cardinal is focused on keeping our debt to adjusted funds flow ratio to less than 1X.
Cardinal anticipates selling royalty interests and fee title lands (the “RI”) associated with the Assets prior to year end, the proceeds of which will be applied to repay all or part of the Purchase Price funded by our credit facilities.
The Acquisition is consistent with Cardinal’s strategy and business plan and will add $55 million of annualized operating income (revenue less royalties and operating expenses) to Cardinal based on the Assets Q1 2017 production and realized prices. Minimal capital has been spent on the Assets over the past few years and Cardinal believes that there are numerous optimization opportunities available as well as a potential to reduce operating costs per boe. The multiple of adjusted funds flow for the Acquisition based on the Purchase Price less estimated adjustments and the operating income above is 5.8X. Cardinal anticipates the adjusted funds flow multiple will fall below 4.0x after giving effect to the RI sales.
Benefits to Cardinal
- Is 42% accretive to Q1 2017 adjusted funds flow per share (basic).
- On a pro forma look forward, our annualized second half adjusted funds flow will increase to $1.38/share.
- Increases our pro forma Q1 2017 netback by 19% to $19.64/boe (based on the Q1 2017 average WTI price of $51.90).
- Increases our light oil weighting by 20% to 45% of our oil production and our oil and NGL’s weighting by 4% to 86%.
- Initially reduces our operating costs per boe by 3% which we believe will be further reduced in 2018.
- Decreases the decline of our base assets (not including our 2016/17 drill programs) to less than a 10% decline per year.
- Improves the percentage of Cardinal’s producing reserves as of a percentage of total proved and probable (“2P”) reserves from 86% to 90%.
- Adds a new light oil sales point which has opportunities for further consolidation.
- Adds over 300 light oil drilling locations.
- Together with the Financing, increases Cardinal’s overall market capitalization moving the Company towards index inclusion and increasing overall adjusted funds flow and relevance.
Southeast Saskatchewan
Pursuant to the Acquisition, Cardinal will acquire a small working interest and RI in the Weyburn Unit and both a RI and a operated (68.84%) interest in the Midale Unit, both located in southeast Saskatchewan. All of these properties are under enhanced recovery schemes (“EOR”) which are currently CO2/water floods. The Midale and Weyburn Units are two of the lowest decline oil units in Western Canada (below 6%) and both units have significant development drilling upside.
The Midale Unit has been under exploited as compared to the Weyburn Unit. Approximately one-third of the Midale Unit is under CO2/water flood and Cardinal believes there are significant upside opportunities with EOR optimization and expansion, infill drilling and recompletions. We estimate that there are up to 250 drilling locations in Midale.
The southeast Saskatchewan assets consist of production of 2,850 boe/d (100% light oil and NGL’s) and 2P reserves effective as of December 31, 2016 of 18.4 MMboe, which includes 1.3 MMboe of royalty interest reserves. This long life reserve property has an 18 year reserve life index (“RLI”) on a 2P basis (based on the production of 2,850 boe/d).
Historical operating costs for the southeast Saskatchewan assets have averaged $18.00/boe for 2016 and Q1 2017 and at $50 WTI (USD) and an exchange rate of 0.74, the assets have a $30.00/boe netback.
House Mountain Assets
The House Mountain property is operated and is located approximately 50 kilometres from our existing Mitsue field and will benefit from operational synergies in the area. The property includes an average 80% operated interest in 4 light oil producing units as well as a 100% interest in various non unit lands.
These assets produce light oil from the Beaverhill Lake formation. Numerous optimization and field operating cost reduction opportunities are available on these assets. Additionally there are over 25 un-fractured wells that can be multi-staged fractured to increase production. Cardinal has also identified in excess of 50 light oil drilling locations that will add to our future growth plans.
The House Mountain assets consist of production of 2,150 boe/d (100% light oil and NGL’s) and 2P reserves of 10.2 MMboe, with a resultant 13 year RLI on a 2P basis (based on the production of 2,150 boe/d).
Total Reserves to be Acquired
This Acquisition adds to Cardinal’s already high RLI properties. Cardinal’s pro forma 2P RLI will increase from 12.7 to 13.4 years and the percentage of its 2P producing reserves will increase from 86% at year end 2016 to 90%. The Acquisition’s 2P producing reserves represent 99% of the total 2P reserves being acquired.
Based on the report prepared by GLJ Petroleum Consultants Ltd. (“GLJ”) as of December 31, 2016, the Acquisition will add significant reserves, increasing Cardinal’s pro forma 2P producing reserves by 49%. The Acquisition’s company interest reserves are as follows:
Company Interest Reserves(1)(5) |
|
Proved developed producing | 21.9 MMboe |
Proved plus probable producing reserves | 28.3 MMboe |
Proved plus probable reserves (2) | 28.6 MMboe |
Proved plus probable net present value (3) | $413 million |
RLI (4) | 16 years |
- Company Interest reserves are gross reserves before deduction of royalties but include royalty benefits to be received.
- Includes 1,348 Mboe of 2P royalty interest reserves, of which 1,300 Mboe are associated with the SE Saskatchewan assets.
- Before tax net present value based on a 10 percent discount rate and Sproule Associates Limited’s January 1, 2017 forecast prices.
- Based on 2P reserves and current production of 5,000 boe/d.
- See “Advisory Regarding Oil and Gas Information” below.
Summary of Transaction
(Millions of dollars) | Without RI Sales |
With RI Sales |
|||||
Purchase Price | $ | 330 | $ | 330 | |||
Closing Adjustments (estimated) (1) | $ | (10 | ) | $ | (10 | ) | |
$ | 320 | $ | 320 | ||||
Net Proceeds from Financing (2) | $ | 163 | $ | 163 | |||
$ | 157 | $ | 157 | ||||
Anticipated RI Sales Proceeds | $ | 0 | $ | 130 | |||
Increase in Bank Debt | $ | 157 | $ | 27 |
- The effective date of the Acquisition is January 1, 2017.
- Does not include proceeds from the exercise of the Over-Allotment Option (as defined below), if any.
Without RI Sales
Based on the adjusted closing purchase price of $320 million, the deal metrics would be:
- $64,000 per flowing boe;
- Recycle ratio of 2.0X (1);
- Adjusted funds flow multiple of 5.8X;
- Net bank debt to annualized adjusted funds flow ratio of 1.48 (2).
- See “Advisory Regarding Oil and Gas Information” below.
- See “Non-GAAP Measures” below.
Potential RI Disposition
Cardinal plans to market the sale of the RI following completion of the Acquisition. The funds from these dispositions, anticipated to be approximately $130 million, will be applied to our credit facilities. After giving effect to the RI disposition, the deal metrics would be:
- $38,000 per flowing boe;
- Recycle ratio of 2.5X (1);
- Adjusted funds flow multiple of < 4X;
- Net bank debt to annualized adjusted funds flow ratio of 0.63 (2).
- See “Advisory Regarding Oil and Gas Information” below.
- See “Non-GAAP Measures” below.
Liability Management Rating
Cardinal will improve its Liability Management Rating (“LMR”) after the completion of the Acquisition. Our LMR in Saskatchewan will be an estimated 2.91 and our Alberta LMR improves to 2.17. The Acquisition includes estimated abandonment and reclamation liability costs of $8.9 million discounted at 10%.
Financing
In connection with the Acquisition, Cardinal has entered into an agreement with a syndicate of underwriters led by RBC Capital Markets, and including CIBC Capital Markets, GMP First Energy, National Bank Financial Inc., Scotiabank, BMO Capital Markets, Canaccord Genuity Corp., Cormark Securities Inc., Peters and Co. Limited and TD Securities Inc. (collectively the “Underwriters”), pursuant to which the Underwriters have agreed to purchase for resale to the public, on a bought deal basis, 30,910,000 subscription receipts (“Subscription Receipts”) of Cardinal at a price of $5.50 per share for gross proceeds of approximately $170 million. The Underwriters have been granted an option to purchase up to an additional 3,091,000 Subscription Receipts issued under the Offering to cover over-allotments (the “Over-Allotment Option”), if any, exercisable in whole or in part at any time until 30 days after the closing date. Members of Cardinal’s Board of Directors, management and employees intend on participating in the Financing.
The gross proceeds from the sale of Subscription Receipts will be held in escrow pending the completion of the Acquisition. If all outstanding conditions to the completion of the Acquisition (other than funding) are met and all necessary approvals for the Acquisition have been obtained on or before August 31, 2017, the net proceeds from the sale of the Subscription Receipts will be released from escrow to Cardinal and each Subscription Receipt will be exchanged for one common share (“Common Share”) of Cardinal for no additional consideration. If the Acquisition is not completed on or before August 31, 2017, then the purchase price for the Subscription Receipts will be returned to subscribers, together with a pro rata portion of interest earned on the escrowed funds. The Subscription Receipts will be distributed by way of a short form prospectus in all provinces of Canada except Quebec and Prince Edward Island and in the United States, the United Kingdom and certain other jurisdictions as Cardinal and the Underwriters may agree on a private placement basis. Completion of the Acquisition and the Financing is subject to certain conditions including the receipt of all necessary regulatory approvals, including the approval of the Toronto Stock Exchange. Closing of the Financing is expected to occur on June 21, 2017 and the Acquisition is expected to close on or about June 30, 2017.
This press release is not an offer of the Subscription Receipts or underlying Common Shares for sale in the United States. The Subscription Receipts and underlying Common Shares may not be offered or sold in the United States absent registration or an exemption from registration. The Subscription Receipts and underlying Common Shares will not be publicly offered in the United States. The Subscription Receipts and underlying Common Shares have not been and will not be registered under the U.S. Securities Act, or any state securities laws.
2017 Updated Guidance
2017 Original Guidance |
2017 Guidance with the Acquisition and the Financing (1) |
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Production | |||
Oil and NGL’s (bbl/d) | 13,900 – 14,300 | 16,300 – 16,700 | |
Natural Gas (mcf/d) | 17,400 – 18,000 | 17,400 – 18,000 | |
Average production (boe/d) | 16,800 – 17,300 | 19,200 – 19,700 | |
Operating costs per boe | $19.75 – $20.25 | $19.75 – $20.25 | |
G&A per boe | $2.10 – $2.30 | $2.05 – $2.25 | |
Adjusted funds flow (000s) (2)(3) | $92,000 | $120,000 | |
Adjusted funds flow per share (basic) (2)(3) | $1.18 | $1.28 | |
Dividend per share annualized | $0.42 | $0.42 | |
Development capital expenditures (000s) | $58,000 | $68,000 | |
Acquisitions (000s) | $41,000 | $356,000 | |
Simple payout ratio (2)(4) | 33% | 32% | |
Total payout ratio (2)(4) | 95% | 89% |
- Guidance after giving effect to the Financing not including the exercise of the Over-Allotment Option.
- See “Non-GAAP Measures” below.
- Based on 2017 estimated WTI $55.00 US per bbl, FX rate of 0.74 $US/$CAD and a differential to WCS of $19.00 CAD, AECO $3.00 CAD, including existing hedges.
- Net of dividend re-investment plan and stock dividend program participation which was suspended in April 2017.
2017 Second Half Guidance Sensitivities
The following are sensitivities for the second half of 2017 at varying oil prices both before and after giving effect to the anticipated RI disposition:
2nd Half 2017 Sensitivities Post $130 MM Royalty Disposition (6 months) |
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WTI Oil price (USD) | $45 | $50 | $55 | $60 | ||||||||
FX (USD/CAD) | 0.70 | 0.72 | 0.74 | 0.76 | ||||||||
OPERATING STATISTICS | ||||||||||||
Operating costs per boe | $ | 20.03 | $ | 20.03 | $ | 20.03 | $ | 20.03 | ||||
Netback per boe | $ | 17.50 | $ | 20.63 | $ | 23.58 | $ | 26.38 | ||||
FINANCIAL | ||||||||||||
Operating income (millions) | $ | 72 | $ | 84 | $ | 97 | $ | 108 | ||||
Adjusted funds flow (millions) (1) | $ | 57 | $ | 66 | $ | 74 | $ | 81 | ||||
Net bank debt, end of period (millions) (1) | $ | 121 | $ | 108 | $ | 95 | $ | 84 | ||||
Adjusted funds flow per share, basic (1)(2) | $ | 0.53 | $ | 0.60 | $ | 0.67 | $ | 0.74 | ||||
Adjusted funds flow per share, diluted (1)(2)(3) | $ | 0.51 | $ | 0.58 | $ | 0.65 | $ | 0.71 | ||||
RATIOS | ||||||||||||
Net bank debt to annualized adjusted funds flow (1) | 1.05 | 0.82 | 0.65 | 0.52 | ||||||||
Simple payout ratio (1)(2) | 40 | % | 35 | % | 31 | % | 29 | % | ||||
Total payout ratio (1)(2) | 96 | % | 84 | % | 75 | % | 68 | % |
- See “Non-GAAP Measures” below.
- After giving effect to the Financing not including the exercise of the Over-Allotment Option.
- Does not include Common Shares issuable upon conversion of outstanding convertible debentures.
2nd Half 2017 Sensitivities No Royalty Sale (6 months) |
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WTI Oil price (USD) | $45 | $50 | $55 | $60 | ||||||||
FX (USD/CAD) | 0.70 | 0.72 | 0.74 | 0.76 | ||||||||
OPERATING STATISTICS | ||||||||||||
Operating costs per boe | $ | 20.03 | $ | 20.03 | $ | 20.03 | $ | 20.03 | ||||
Netback per boe | $ | 18.35 | $ | 21.50 | $ | 24.47 | $ | 27.29 | ||||
FINANCIAL | ||||||||||||
Operating income (millions) | $ | 75 | $ | 88 | $ | 100 | $ | 112 | ||||
Adjusted funds flow (millions) (1) | $ | 59 | $ | 68 | $ | 76 | $ | 83 | ||||
Net bank debt, end of period (millions) (1) | $ | 249 | $ | 236 | $ | 223 | $ | 211 | ||||
Adjusted funds flow per share, basic (1)(2) | $ | 0.54 | $ | 0.62 | $ | 0.69 | $ | 0.76 | ||||
Adjusted funds flow per share, diluted (1)(2)(3) | $ | 0.52 | $ | 0.60 | $ | 0.67 | $ | 0.73 | ||||
RATIOS | ||||||||||||
Net bank debt to annualized adjusted funds flow (1) | 2.10 | 1.75 | 1.47 | 1.28 | ||||||||
Simple payout ratio (1)(2) | 39 | % | 34 | % | 30 | % | 28 | % | ||||
Total payout ratio (1)(2) | 93 | % | 81 | % | 73 | % | 66 | % |
- See “Non-GAAP Measures” below.
- After giving effect to the Financing not including the exercise of the Over-Allotment Option.
- Does not include Common Shares issuable upon conversion of outstanding convertible debentures.