CALGARY, ALBERTA–(Marketwired – June 7, 2016) – Gear Energy Ltd. (“Gear“) (TSX:GXE) and Striker Exploration Corp. (“Striker“) (TSX VENTURE:SKX) are pleased to announce that they have entered into a definitive agreement (the “Arrangement Agreement“) providing for the acquisition by Gear of all the issued and outstanding common shares of Striker (the “Striker Shares“) pursuant to a plan of arrangement under the Business Corporations Act (Alberta) (the “Arrangement“). In addition, Gear has entered into an agreement for a $15 million bought deal financing and has received a term sheet for a pro forma $50 million senior secured revolving credit facilities to be provided on closing of the Arrangement. The bought deal financing is not subject to the completion of the Arrangement. In addition, the board of directors of Gear has approved an increase in the capital budget to $12.5 million for 2016 conditional upon completion of the Arrangement.
Combination of Gear and Striker
Under the terms of the Arrangement, Striker shareholders will receive, for each Striker Share held, 2.325 Gear common shares (“Gear Shares“). The aggregate transaction value is approximately $63.7 million based on the bought deal financing price for the Gear Shares as set out below and the assumption of net debt of Striker of $10 million, after taking into account expected Striker transaction costs (including legal, accounting and financial advisory fees), expected proceeds from the exercise of in-the-money options to purchase Striker Shares and severance costs.
Management and the board of directors of both Gear and Striker believe that the combined asset bases will provide significant benefits to Gear shareholders and Striker shareholders. Notably, the Arrangement creates a diversified, stable, low-cost, growth oriented oil company with a strong balance sheet poised for future value creation.
On a pro forma basis, the combined company has the following attributes:
|Production(1)||6,000 boe/d (84% oil & liquids)|
|Proved Reserves(2)||14.8 mmboe (81% oil & liquids)|
|Proved Plus Probable Reserves(2)||27.7 mmboe (80% oil & liquids)|
|Proved Plus Probable RLI(2)||12.6 years|
|Drilling Locations(3)||450 locations|
|Undeveloped Land(4)||177,500 net acres|
|Outstanding Shares(5)||183.5 million|
|Fully Diluted Outstanding Shares(5)||185.0 million|
|Bank Debt Under syndicated Credit Facilities(6)||$38 million|
|Convertible Debentures(6)||$15 million|
|Positive Working Capital Estimate(6)||($5 million)|
|Total Net Debt(5)||$48 million|
|(1)||June 2016 monthly average field estimate.|
|(2)||Gross interest before royalties; based on the independent reserves evaluation of Gear’s reserves effective December 31, 2015, prepared by GLJ Petroleum Consultants Ltd. (“GLJ“) and dated February 3, 2016 (the “Gear Report“) and the independent reserves evaluation of Striker’s reserves effective December 31, 2015, prepared by GLJ and dated March 2, 2016 (the “Striker Report“); Reserve Life Index (“RLI“) based on June 2016 monthly average field production estimate for Gear and Striker.|
|(3)||Gear internal estimate. See “Drilling Locations” in the advisories at the end of this press release.|
|(4)||As estimated at June 30, 2016.|
|(5)||Upon completion of the Arrangement and the bought deal financing, (prior to any exercise of the over-allotment option granted the underwriters).|
|(6)||As estimated at July 31, 2016, including expected transaction costs, option proceeds for exercise of in-the-money options of Striker and assuming the completion of the bought deal financing (prior to any exercise of the over-allotment option granted the underwriters). See “Non-GAAP Measures” in the advisories at the end of this press release.|
The combination of Gear and Striker provides the combined company with an additional 2,000 boe/d of 60% light and medium oil production, approximately 90 net sections of undeveloped land, a new core focus area in the emerging Belly River light oil resource play and a materially strengthened balance sheet. The combination creates a diversified, low-cost, low-decline, oil-weighted growth company with a deep inventory of approximately 450 economic heavy and light oil drilling opportunities. Upon completion of the Arrangement and the bought deal financing, the combined company will have a strong balance sheet with an estimate of approximately $38 million drawn on the new $50 million credit facilities, providing significant optionality to act upon numerous strategic opportunities that are prevalent during this period of low commodity prices. Under current forward strip oil prices, the combined company is expected to have a run-rate net debt to cash flow ratio of under 1.4 times by July of 2016 and will be capable of growing production by over 10% per year while spending within cash flow. In addition, the management team believes that Striker’s light oil assets in Wilson Creek, Thorsby, Chigwell and Brazeau, Alberta are amenable to water flood implementation and/or expansion. This strategic combination builds on the successes of both management teams in their respective areas of operations and the combined company will continue to aggressively target further strategic acquisition opportunities within the existing and new core areas.
The Gear team concluded 2015 development activity with a 100% success rate on its drilling program and record capital efficiencies. In 2016, Gear is forecasting to expand upon that success with a strongly economic 10 well horizontal heavy oil program to be initiated in July 2016. After reporting record low operating costs and royalties in the first quarter of 2016, Gear is excited to now apply these operating and capital efficiencies to a more diversified asset base that results from the business combination with Striker. Striker’s flagship Wilson Creek asset is synergistic with Gear’s expertise in economically developing vertical resource plays with horizontal technology. Over half of the approximate 50 drilling locations currently recognized from Striker are Basal Belly River horizontal locations in Alberta. These locations are forecast to provide economics that are competitive, and in some cases are expected to be superior, to the existing inventory of Gear’s organic opportunities.
Gear’s management team, led by Ingram Gillmore, President and Chief Executive Officer, will manage the combined company. Gear is also pleased to announce that three current directors of Striker; Neil Roszell, President and Chief Executive Officer of Raging River Exploration Inc., John O’Connell, Chairman and Chief Executive Officer of Davis-Rea Ltd. and Kevin Olson, President of Kyklopes Capital Management Ltd. are expected to join the board of directors of Gear upon completion of the Arrangement. Additionally, in connection with the completion of the Arrangement, Mr. Greg Bay, President of Cypress Capital Management Ltd. will be retiring from the board of directors of Gear. Assuming the exercise of all of the in-the-money options of Striker, the cancellation of all of the out-of-the money options of Striker and warrants of Striker (excluding 650,000 warrants of Striker held by certain directors of Striker who will be appointed to the board of directors of Gear at the effective time of the Arrangement that will remain in place following the completion of the Arrangement) and closing of the financing (before any exercise of the over-allotment option granted to the underwriters), there will be approximately 183.5 million Gear Shares issued and outstanding (185.0 million Gear Shares on a fully-diluted basis, including all in the money dilutives) and Gear shareholders will hold approximately 58% of the pro forma company’s shares and Striker shareholders will hold 42% of the pro forma company’s shares following completion of the Arrangement.
The board of directors of Striker has, based upon, among other things, a verbal fairness opinion from FirstEnergy Capital Corp., unanimously approved the Arrangement and the entering into of the Arrangement Agreement, determined that the Arrangement is in the best interests of Striker and its shareholders and recommends that Striker shareholders vote in favour of the Arrangement. All directors and officers of Striker, and certain shareholders of Striker, representing approximately 33.2% of the issued and outstanding Striker Shares, have entered into support agreements with Gear pursuant to which they have agreed to vote their Striker Shares in favour of the Arrangement.
The board of directors of Gear has, based upon, among other things, a verbal fairness opinion from Peters & Co. Limited, unanimously approved the Arrangement and the entering into of the Arrangement Agreement, determined that the Arrangement is in the best interests of Gear and recommends that Gear shareholders vote in favour of the issuance of the Gear Shares pursuant to the Arrangement. All of the directors and officers of Gear, and certain shareholders of Gear, representing approximately 7.0% of the issued and outstanding Gear Shares have entered into agreements with Striker pursuant to which they have agreed to vote their Gear Shares in favour of the issuance of the Gear Shares to be issued pursuant to the Arrangement.
Pursuant to the Arrangement Agreement, Gear and Striker have agreed that the Arrangement will be completed by way of plan of arrangement under the Business Corporations Act (Alberta).
The Arrangement Agreement provides for non-solicitation covenants, subject to the fiduciary obligations of the board of directors of Striker, and the right of Gear to match any Superior Proposal (as defined in the Arrangement Agreement) within 72 hours. The Arrangement Agreement provides for mutual non-completion fees of $1.8 million in the event that the Arrangement is not completed or is terminated by either party in certain circumstances.
The Arrangement Agreement provides that the completion of the Arrangement is subject to certain conditions, including the receipt of all required regulatory approvals, including the approval of the Toronto Stock Exchange, the approval of the holders of Gear Shares, the approval of holders of Striker Shares including the approval of disinterested Striker shareholders, and the approval of the Court of Queen’s Bench of Alberta.
A joint management information circular outlining the details of the Arrangement Agreement and the Arrangement will be mailed to the holders of Striker Shares and Gear Shares in June 2016 for meetings to be held in July 2016 where holders of Striker Shares will vote on the Arrangement and holders of Gear Shares will vote on the issuance of Gear Shares pursuant to the Arrangement. Closing of the Arrangement is expected to occur in July 2016.
Concurrently with entering into the Arrangement Agreement, Gear entered into a bought deal financing agreement with Peters & Co. Limited on behalf of a syndicate of underwriters. Pursuant to the financing, Gear will issue 21.4 million Gear Shares at a price of $0.70 per Gear Share for gross proceeds of $15.0 million. Gear has also granted the underwriters an option to purchase up to an additional 3.2 million Gear Shares at a price of $0.70 per Gear Share to cover over-allotments, exercisable in whole or in part at any time until 30 days after the closing date of the financing. The maximum gross proceeds that could be raised under the financing is approximately $17.3 million should the over-allotment option be exercised in full. Certain directors and officers of Gear and Striker and their associates have indicated their intention to participate in the Gear financing by investing approximately $3.0 million, representing approximately 19.3% of the gross proceeds (approximately 17% if the over-allotment is exercised in full).
The net proceeds from the financing will initially be used to repay outstanding bank indebtedness thereby freeing up borrowing capacity which may be used to fund a portion of the combined company’s ongoing capital program and for working capital purposes.
The financing will be completed by way of short form prospectus to be filed in certain provinces of Canada and on a private placement basis in the United States pursuant to exemptions from the registration requirements of the U.S. Securities Act of 1933, as amended. The financing is subject to normal regulatory approvals and is expected to close on or about June 29, 2016. Completion of the bought deal financing is not conditional on the closing of the Arrangement.
New Credit Facilities
Gear has also entered into a term sheet with Alberta Treasury Branches on behalf of a syndicate of lenders in respect to a new credit agreement expected to be entered into concurrently with closing of the Arrangement (and subject to the closing of the Arrangement). The term sheet contemplates that the credit agreement will provide Gear with new $50,000,000 senior secured revolving credit facilities, consisting of a $42,500,000 syndicated credit facility and a $7,500,000 operating credit facility. The credit facilities are expected to be available on a fully revolving basis until May 31, 2017. The borrowing base under the credit facilities will be subject to a semi-annual borrowing base review. The new credit facilities are expected to be available following closing of the Arrangement to finance Gear’s ongoing capital expenditures and for general corporate purposes. Concurrently with closing of the Arrangement, it is anticipated that both Gear’s existing credit facilities and Striker’s existing credit facilities will be repaid in full and terminated.
Revised 2016 Capital Budget and Guidance
Conditional upon the completion of the Arrangement, the board of directors of Gear has approved an increase in the 2016 capital budget to $12.5 million to allow for the addition of two Wilson Creek Basal Belly River light oil horizontal wells to the annual program. These wells will be added to the 10 low risk, horizontal heavy oil wells already approved for development. Conditional upon completion of the Arrangement, Gear’s revised guidance for 2016 is as follows:
|Revised 2016 Guidance||Previous 2016 Guidance|
|Percent oil and liquids (%)||88||95|
|Royalty rate (%)||11||10|
|Operating costs ($/boe)||14.00 – 16.00||15.50 – 16.50|
|G&A, net of deal transaction costs ($/boe)||2.80||2.95|
|Interest expense ($/boe)||1.25||1.50|
|Capital expenditures ($ millions)||12.5||10|
|Net debt to cash flow (x)||1.5|
Peters & Co. Limited is acting as financial advisor to Gear with respect to the Arrangement and has provided the board of directors of Gear with its verbal opinion that, subject to the assumptions, limitations and qualifications set forth therein and review of the final form of the documents effecting the Arrangement, the consideration to be paid to Striker shareholders pursuant to the terms of the Arrangement is fair, from a financial point of view, to the Gear shareholders.
FirstEnergy Capital Corp. is acting as financial advisor to Striker with respect to the Arrangement. FirstEnergy Capital Corp. provided a verbal opinion to the board of directors of Striker that, as at the date hereof and subject to the assumptions, limitations and qualifications set forth therein and review of final documentation effecting the Arrangement, the consideration to be received by Striker shareholders pursuant to the Arrangement is fair, from a financial point of view, to shareholders of Striker.