CALGARY, ALBERTA–(Marketwired – Feb. 14, 2017) – Prairie Provident Resources Inc. (“Prairie Provident” or the “Company”) (TSX:PPR) is pleased to announce that it has entered into an agreement to acquire strategic assets in the Greater Red Earth area of northern Alberta (the “Assets”) for cash consideration of $41 million, subject to customary adjustments (the “Acquisition”). The Assets include high quality and low decline oil production which is highly complementary to Prairie Provident’s existing operations at Evi in the Peace River Arch area of northern Alberta and further enhances the Company’s size and competitive position. The Acquisition represents a continuation of Prairie Provident’s strategy to maintain a balanced asset base that generates steady cash flows to fund its growth-oriented development in Wheatland and Princess, while maintaining financial flexibility.
The Acquisition will be funded through Prairie Provident’s current credit facility of $55 million, which is expected to be increased following the closing of the Acquisition, and through proceeds from an $8.0 million bought deal equity financing, details of which are provided below. Upon closing of the Acquisition and taking into effect the equity financing, Prairie Provident’s debt to 12-month forward adjusted EBITDAX ratio is expected to be approximately 1.3 times, and the Company plans to reduce that ratio to approximately 1.0 time in the second half of 2017.
The Acquisition reinforces Prairie Provident’s growth profile by adding a stable and predictable base cash flow that is capable of funding repeatable growth. Pro forma the Acquisition, Prairie Provident’s production will be approximately 6,500 boe/d (64% oil and liquids). A mechanical update was internally prepared by Prairie Provident for the Assets’ proved developed producing (“PDP”) and total proved plus probable developed producing (“2PDP”) reserves using the reserves report prepared by Sproule Associates Limited (“Sproule”) as of December 31, 2015, adjusted for production and applying the Company’s area operating costs and Sproule’s January 1, 2017 forecast price deck, all effective March 1, 2017. Based on this update, the Acquisition is expected to increase Prairie Provident’s 2PDP reserves by 3.8 MMboe, or 40%.
The Company’s working interest ownership and operatorship in Evi are consolidated through the Acquisition which is also expected to create synergistic opportunities to reduce area operating costs. The Assets are characterized by a low base decline which is expected to fall further with a large suite of waterflood expansion opportunities, thereby extending the reserve life index (“RLI”) and supporting long-term sustainability. After giving effect to the Offering, the Acquisition is expected to be accretive on several key measures, including 27% on 2PDP reserves per share as well as forward 12-months’ funds flow per share. The Acquisition is expected to close in March 2017 subject to court and regulatory approvals.
Mackie Research Capital Corporation acted as strategic advisor to Prairie Provident in respect of the Acquisition.
STRATEGIC RATIONALE AND BENEFITS
Highlights of the Acquisition and the anticipated associated benefits include the following:
Significantly Increases Production and Funds Flow
- The Assets have a stable and low-decline production base, reflecting an average decline rate of approximately 10% over the past 12 months. The impact of this low decline rate is expected to take Prairie Provident’s corporate base decline to approximately 20% upon completion of the Acquisition.
- Pro forma current production is approximately 6,500 boe/d (64% oil and liquids). Using the higher end of the Company’s 2017 capital budget range of $35 million, exit production is expected to range between 7,500 boe/d and 8,000 boe/d.
- Pro forma funds flow from operations for the next 12 months is expected to increase by approximately $12 million after the impact of the Acquisition, based on the commodity price assumptions outlined in Note 2 under “Asset Summary” below.
- Steady funds flow from Evi provides Prairie Provident with a solid foundation to pursue accretive growth-oriented development in other core areas, including the Company’s large inventory on the Mannville trend.
Consolidation of Existing Core Area in Evi Creates Synergistic Opportunities
- Proximity to Prairie Provident’s existing asset base provides operational and technical synergies, while economies of scale and operational optimization in the area are expected to reduce operating costs by $2.00/boe while improving the Company’s ability to compete for services.
- The Acquisition solidifies Prairie Provident’s operatorship in Evi where the Company currently operates the key infrastructure.
- Prairie Provident’s existing liability licensee rating (“LLR”) is expected to improve to approximately 2.0 as a result of the Assets’ attractive LLR of 3.0.
High Quality Waterflood Expansion Upside
- The Assets include an emerging waterflood scheme that is showing promising response. Consolidation of Evi provides meaningful upside potential by enabling the expansion and optimization of Prairie Provident’s existing waterflood projects.
- Reservoir simulations anticipate a three-fold increase in recoveries at Evi as a result of enhanced oil recovery initiatives. This supports Prairie Provident’s expectations for significant long-term value accretion as production and reserves are increased.
Reserve Base Expansion Improves Sustainability
- Based on internally updated reserves estimates with an effective date of March 1, 2017, using the Sproule reserves report on the Assets as of December 31, 2015, adjusting for production and applying the Company’s area operating costs and Sproule’s January 1, 2017 forecast price deck, the Acquisition is expected to add:
- 2.9 MMboe of PDP reserves, which represents a 41% increase over Prairie Provident’s existing PDP reserves; and
- 3.8 MMboe of 2PDP reserves, which represents an increase of 40% over the Company’s existing 2PDP reserves.
|Total purchase price(1)||$41 million|
|Current production||1,100 boe/d (98% oil and liquids)|
|Recent 12-month decline rate||10%|
|Forecast 2017 operating netback(2)||$31.00/boe|
|Run rate cash flow(6)||~$12 million annually|
|PDP reserves(3)||2.9 MMboe|
|PDP NPV10(3)||$62.1 million|
|2PDP reserves(3)||3.8 MMboe|
|2PDP NPV10(3)||$77.0 million|
|2PDP RLI(4)||9.5 years|
|Current production||$37,273 per boe/d|
|2PDP recycle ratio(5)||2.9x|
|Run rate cash flow(6)||3.3x|
|1. Subject to normal adjustments for a transaction of this nature.|
|2. Operating netback does not have any standard meaning prescribed by IFRS or the COGE Handbook and therefore may not be comparable with the calculation of similar measures for other entities. The Company calculates “operating netbacks” using production revenues, excluding realized and unrealized gains and losses on commodity hedging, less royalties and operating expenses, calculated on a per boe basis. Prairie Provident considers operating netback as an important measure to evaluate its operational performance as it demonstrates its field level profitability relative to current commodity prices. The estimated operating netback was derived using the Company’s 2017 commodity price forecast of USD$54.00/bbl WTI, CAD$2.93/GJ AECO, and a Canadian/US dollar exchange rate of $0.76.|
|3. Reserves information was internally prepared by Prairie Provident with an effective date of March 1, 2017, and were estimated by updating the reserves report on the Assets prepared by Sproule effective December 31, 2015 and applying Sproule’s January 1, 2017 forecast price deck, Prairie Provident’s area operating costs and adjusted for production. Estimated values of future net revenues do not represent the fair market value of the reserves. Management has only attributed value to producing reserves and no value has been ascribed for undeveloped upside.|
|4. The reserve life index (“RLI”) is calculated by dividing 2PDP reserves estimated as at March 1, 2017 with estimated current production of 1,100 boe/d.|
|5. Recycle ratio is based on the operating netback for the Assets of $31.00/boe (see Note 2 above) and purchase price per boe of 2PDP reserves acquired of $10.72/boe. Recycle ratio is used to measure the Company’s operational performance in terms of sustainability.|
|6. Run rate cash flow is based on annualized current production of 1,100 boe/d and the operating netback for the Assets of $31.00/boe (see Note 2 above).|
UPDATED 2017 GUIDANCE
Given the complementary and synergistic nature of the Assets, Prairie Provident is maintaining its 2017 capital budget range of $25 million to $35 million. Using the upper end of the capital range of $35 million, Prairie Provident anticipates exiting 2017 between 7,500 to 8,000 boe/d, with all 2017 forecasts based on the commodity price assumptions outlined within Note 2 under “Asset Summary” above.
In connection with the Acquisition, Prairie Provident has entered into an agreement with Mackie Research Capital Corporation (“MRCC”) for an $8.0 million bought deal equity financing, pursuant to which MRCC has agreed to purchase from the Company, on a bought deal basis, for resale to the public through a syndicate of underwriters to be led by MRCC, 5,971,000 subscription receipts (“Subscription Receipts”) at a price of $0.67 per Subscription Receipt, and 5,195,000 common shares issued on a “flow-through” basis pursuant to the Income Tax Act (Canada) (“Flow Through Shares”) at a price of $0.77 per Flow-Through Share, for total gross proceeds to the Company of approximately $8.0 million (the “Offering”). The underwriters will have an option to purchase up to an additional 15% of the number of Subscription Receipts and Flow-Through Shares sold at closing of the Offering, at the same Offering prices of $0.67 per Subscription Receipt and $0.77 per Flow-Through Share, respectively, for total additional gross proceeds of up to $1,200,000, solely to cover over-allotments. This over-allotment option will be exercisable in whole or in part at any time until 30 days after the closing of the Offering.
The gross proceeds from the sale of Subscription Receipts pursuant to the Offering will be held in escrow pending completion of the Acquisition. If the Acquisition is completed at or before 5:00 p.m. (Calgary time) on March 31, 2017 (or such later date as MRCC may agree), the net proceeds from the sale of the Subscription Receipts will be released from escrow to the Company, and the purchasers of the Subscription Receipts will automatically receive, for no additional consideration and without any action on their part, for every Subscription Receipt held, one unit of Prairie Provident (a “Unit”) comprised of one common share of the Company (a “Common Share”) and one-half of one Common Share purchase warrant (each whole Common Share purchase warrant, a “Warrant”). Each Warrant will entitle the holder to acquire one Common Share (a “Warrant Share”) at an exercise price of $0.87 per share for a period of 24 months following closing of the Offering. If the Acquisition is not completed at or before 5:00 p.m. (Calgary time) on March 31, 2017 (or such later date as MRCC may agree), then the purchase price for the Subscription Receipts will be returned pro rata to subscribers, together with a pro rata portion of interest earned on the escrowed funds.
The Company will use commercially reasonable efforts to obtain the necessary approvals to list the Flow-Through Shares, the Common Shares, the Warrants and the Warrant Shares on the Toronto Stock Exchange (“TSX”).
Tim Granger, CEO of Prairie Provident, has advised that he intends to participate in the Offering for a minimum of 3% and up to 5% of the base offering amount described above.
For each Flow-Through Share, the Company will covenant to incur and renounce to the subscriber, effective for the fiscal year ended December 31, 2017, qualifying “Canadian exploration expenses” within the meaning of the Income Tax Act (Canada) in an amount equal to the purchase price of the Flow-Through Share.
The Subscription Receipts and Flow-Through Shares will be offered by way of a short form prospectus in all provinces of Canada other than Québec. Completion of the Offering is subject to certain closing conditions, including the receipt of all necessary approvals of the TSX. Subject to satisfaction or waiver of all such conditions, closing of the Offering is expected to occur on or about March 6, 2017.