CALGARY, April 16, 2018 /CNW/ – Vermilion Energy Inc. (“Vermilion”, the “Company”, “We” or “Our”) (TSX, NYSE: VET) is pleased to announce that we have entered into an arrangement agreement (the “Arrangement”) to acquire Spartan Energy Corp. (“Spartan”), a publicly traded southeast Saskatchewan oil and gas producer, with annual production of approximately 23,000 boe/d (91% oil). Total consideration for Spartan is approximately $1.40 billion, comprised of $1.23 billion in Vermilion shares plus the assumption of approximately $175 million in debt.
Under the terms of the Arrangement, Vermilion has agreed to acquire all of the common shares of Spartan issued and outstanding at the effective time of the Arrangement (the “Acquisition”). Spartan shareholders will receive 0.1476 of a Vermilion share for each Spartan common share. Based on Vermilion’s closing price of $44.04 on April 13, 2018, the exchange ratio translates to $6.50 per Spartan common share, representing a 5% premium to Spartan’s closing price. All of the officers and directors of Spartan have entered into voting support agreements and agreed to vote their Spartan shares in favour of the Arrangement. The Arrangement includes a reciprocal break fee of $40 million.
The Board of Directors of Vermilion and Spartan have unanimously approved the Arrangement and recommended that Spartan shareholders vote in favour of the Arrangement. The Arrangement remains subject to customary closing conditions, including receipt of applicable court, Spartan shareholder, TSX and NYSE, and other regulatory approvals, and is expected to close on or about June 15, 2018.
Vermilion focuses on high-netback producing areas with favourable fiscal and regulatory regimes. We entered southeast Saskatchewan with the acquisition of Elkhorn Resources in 2014, and have since continuously evaluated opportunities to expand our position in this area. We added approximately 30 sections of land to our southeast Saskatchewan core area through the end of 2017, and further augmented our asset base with the acquisition of a private southeast Saskatchewan oil producer in early 2018. The acquisition of Spartan is a value-adding investment which meets our disciplined M&A criteria. The Acquisition significantly increases our position in southeast Saskatchewan, and aligns with our sustainable growth-and-income model by appending high-netback, low decline assets with free cash flow and strong capital efficiencies on future development.
Making no deduction for undeveloped land value, transaction metrics equate to $12.33 per boe of proved plus probable (“2P”) reserves (based on Spartan’s reserve report(1)), and $60,900 per flowing barrel of production. Based on April 13, 2018 WTI strip pricing of US$65.19/bbl, the operating netback for the acquired assets is estimated at approximately $38.42 (2) per boe. Using a 2P finding, development and acquisition cost of $19.48 per boe (including future development capital) based on the Acquisition consideration and Spartan’s reserve report, the acquired assets are expected to deliver a 2P operating recycle ratio of 2.0 times (including the Acquisition cost).
Using the same strip pricing assumption, the total Acquisition cost (including assumed debt) is approximately 4.7 times estimated annualized 2018 fund flows from operations (“FFO”), after deducting incremental interest expense. Pro-forma including the Acquisition, our year end 2018 net debt-to-FFO ratio is forecast to be 1.7 times based on current strip pricing, as compared to 2.0 times prior to the Acquisition.
The Acquisition is accretive on a fully-diluted per share basis for all pertinent metrics including production, fund flows from operations(2), and reserves:
We believe that this business combination will significantly benefit both Vermilion’s existing shareholders and Spartan’s shareholders. The acquired assets’ netback, base decline, and capital efficiency characteristics give them the capability to grow while generating significant free cash flow, and are therefore well-suited to our growth-and-income capital markets model. In addition, we believe that both shareholder groups will benefit from increased scale in both our operations and in the capital markets. We look forward to integrating Spartan employees into our organization, and believe our combined enterprise will have the operating, technical and financial capability to maximize the value of these southeast Saskatchewan assets.
SPARTAN ASSET SUMMARY
The Spartan assets are comprised of high-netback, light oil producing properties covering approximately 480,000 net acres of land (80% average working interest), including 400,000 net acres in southeast Saskatchewan with multi-zone potential. In addition, the Acquisition includes approximately 80,000 net acres of land in other areas of Saskatchewan, Alberta and Manitoba. Production from the assets is projected to be approximately 23,000 boe/d (91% oil) during 2018. The Acquisition also includes ownership and control of producing infrastructure that are synergistic with our existing assets, as well as significant 2D and 3D seismic data.
Total proved (“1P”) and 2P reserves attributed to the assets at December 31, 2017 are 73 mmboe(1) (92% crude oil and natural gas liquids) and 113.5 mmboe(1) (92% crude oil and natural gas liquids), respectively, based on an independent evaluation by Sproule Associates Limited. Vermilion has internally evaluated Spartan’s reserves, and we expect to have the capability to book similar volumes of reserves. We have identified over 1,000 development locations targeting the Ratcliffe, Midale, Frobisher/Alida, Bakken, and Three Forks/Torquay formations. Most of the future drilling targets are inexpensive open-hole completions not requiring hydraulic fracturing, generating rapid payouts. There are also a large number of identified drilling locations in the hydraulically-fractured Midale play. In addition, there are significant waterflood development opportunities in the Ratcliffe and Midale zones. The assets demonstrate a current base decline rate of approximately 23% for the first year, and decreasing thereafter. Under the current commodity strip, we expect the assets to generate cash flow in excess of capital requirements for continued growth plus the incremental gross dividends associated with the new shares issued.
2018 GUIDANCE AND REDUCED DRIP DISCOUNT
As a result of the Acquisition, and based on an expected June 15, 2018 closing date, we are revising our 2018 production guidance to a range of 86,000 to 90,000 boe/d (from 75,000 to 77,500 boe/d previously). In addition, we are increasing our 2018 capital budget to $430 million (from $325 million previously) to reflect additional capital activity associated with the acquired assets. Upon closing of the Acquisition, we also intend to eliminate the 2% discount associated with our Dividend Reinvestment Plan, beginning with the June 2018 dividend payable on July 16, 2018.
CONFERENCE CALL AND AUDIO WEBCAST DETAILS
Vermilion will discuss the Acquisition in a conference call on Monday, April 16, 2018 at 9:00 am MT (11:00 am ET). To participate, call 1-888-231-8191 (Canada and US Toll Free) or 1-647-427-7450 (International and Toronto Area). The conference call will be available on replay until Monday, April 30, 2018 at 9:59 PM MST by calling 1-855-859-2056 and using conference ID number 2054718.
To listen to the audio webcast, click https://event.on24.com/wcc/r/1658611/C20057B8D39D2389E5BC8BFBC09ACE58 or visit Vermilion’s website at http://www.vermilionenergy.com/invest-with-us/events–presentations.cfm. An investor presentation providing an overview of this acquisition can also be found on our website at http://www.vermilionenergy.com/invest-with-us/events–presentations.cfm.
Vermilion is an international energy producer that seeks to create value through the acquisition, exploration, development and optimization of producing properties in North America, Europe and Australia. Our business model emphasizes organic production growth augmented with value-adding acquisitions, along with providing reliable and increasing dividends to investors. Vermilion is targeting growth in production primarily through the exploitation of light oil and liquids-rich natural gas conventional resource plays in Canada and the United States, the exploration and development of high impact natural gas opportunities in the Netherlands and Germany, and through oil drilling and workover programs in France and Australia. Vermilion currently holds an 18.5% working interest in the Corrib gas field in Ireland. Vermilion pays a monthly dividend of Canadian $0.23 per share, which provides a current yield of approximately 6.0%.
Vermilion’s priorities are health and safety, the environment, and profitability, in that order. Nothing is more important to us than the safety of the public and those who work with us, and the protection of our natural surroundings. We have been recognized as a top decile performer amongst Canadian publicly listed companies in governance practices, as a Climate Leadership level (A-) performer by the CDP, and a Best Workplace in the Great Place to Work® Institute’s annual rankings in Canada, France and the Netherlands. In addition, Vermilion emphasizes strategic community investment in each of our operating areas.
Employees and directors hold approximately 6.5% of our fully diluted shares, are committed to consistently delivering superior rewards for all stakeholders, and have delivered over 20 years of market outperformance. Vermilion trades on the Toronto Stock Exchange and the New York Stock Exchange under the symbol VET.