CALGARY, Alberta – Return Energy Inc. d.b.a. Spartan Delta Corp. (“Spartan” or the “Company”) (RTN: TSXV) is pleased to announce that it has entered into an asset purchase agreement (the “APA”) with Bellatrix Exploration Ltd. (“Bellatrix”) to acquire substantially all of Bellatrix’s assets (the “Assets”) for cash consideration of $87.4 million plus the assumption of certain liabilities estimated to be approximately $14.8 million, for a total purchase price of $102.2 million (the “Acquisition”). The Assets, located in west-central Alberta, include high-quality, multi-zone, oil and gas operated production alongside a large land base and strategic infrastructure footprint. The Acquisition advances Spartan’s strategy to acquire and develop underexploited and undercapitalized assets that provide material upside and sustainable free cash flow under current commodities prices.
The Acquisition will be funded through cash on hand and a committed senior-secured revolving reserves-based lending facility with a syndicate of lenders in the amount of $100.0 million (the “Credit Facility”). Spartan will also complete a confirmed and committed concurrent equity financing for aggregate gross proceeds of $20.0 million (the “Private Placement”). The details of the Credit Facility and the Private Placement are provided below.
Contemporaneous with the closing of the Acquisition, Spartan will complete: (a) a change of the Company’s name to “Spartan Delta Corp.” (the “Name Change”); and (b) a consolidation of the common shares in the capital of the Company (the “Common Shares”) on the basis of one post-consolidation Common Share for every 100 pre-consolidation Common Shares (the “Consolidation”).
The Acquisition is transformational for Spartan and will create a strong intermediate exploration and development company, focused on opportunities to grow through a targeted consolidation strategy. Pro forma the Acquisition, Spartan will produce over 25,000 boe/d (30% oil and NGLs). The Assets are characterized by a low base decline of approximately 19% with a deep location inventory that can support over 10 years of economic drilling on current strip pricing from multiple horizons with various product mixes across an extensive land base. The Assets represent stacked rights in the heart of the Alberta Deep Basin at Ferrier and Willesden Green, providing meaningful exposure to the Spirit River, Cardium and other Cretaceous target formations. The Assets also include strategic working interest ownership in three gas plants, including one operated deep cut facility, with excess capacity to allow for immediate production optimization.
The Assets are being acquired for cash consideration of $87.4 million and the assumption of $14.8 million of estimated liabilities.
On October 2, 2019, Bellatrix commenced restructuring proceedings under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”). As a result, the Acquisition is subject to the granting of an “Approval and Vesting Order” by the Court of Queen’s Bench of Alberta (the “CCAA Court”), providing that the Assets will be acquired free and clear of any security interests and any other encumbrances (subject to certain limited permitted encumbrances). Closing of the Acquisition, which is expected to occur on or about May 29, 2020 (the “Closing Date”), is also subject to certain closing conditions that are customary for a transaction of this nature. As the Acquisition constitutes a “Fundamental Acquisition” under Policy 5.3 of the TSX Venture Exchange (the “TSXV”), it is also subject to TSXV approval. The effective date of the Acquisition will be the Closing Date.
National Bank Financial Inc. is acting as Financial Advisor and TD Securities Inc. is acting as Strategic Advisor to Spartan with respect to the Acquisition.
Strategic Rationale and Benefits
The Acquisition strengthens Spartan’s business model and provides an asset base with strategic infrastructure to facilitate further consolidation in west-central Alberta, an area Spartan’s management team has successfully developed, consolidated and monetized over the course of the past two decades. Spartan is confident that its industry-leading cost model will revitalize this high-quality asset base. The Acquisition will also further Spartan’s strategy of developing an asset base that can deliver repeatable, low-risk growth while generating sustainable free cash flow in a variety of commodity price environments.
The highlights of the Acquisition and the anticipated benefits associated with the Assets include, but are not limited to, the following:
Introduction of Spartan’s Low-Cost Model
- Through the CCAA process and transition of the Assets to Spartan’s ownership, Spartan expects to achieve approximately $70.0 million per year of fixed cost reductions and an approximately $320.0 million reduction in total debt previously associated with Bellatrix and the Assets, corresponding with an approximately $30.0 million per year reduction in debt service costs.
- Spartan’s cost structure will drive further efficiencies as the operation of the Assets will be appropriately sized for the current economic climate.
- The CCAA process has eliminated burdensome take or pay offtake and processing contracts, allowing Spartan the flexibility to utilize various tied-in sales outlets which will further optimize revenue generation.
Consolidation Opportunities in West-Central Alberta
- Following the completion of the Acquisition, Spartan will control approximately 130,000 net acres of concentrated land in key development plays of west-central Alberta, including Spirit River, Cardium and Lower Mannville.
- Spartan’s management team is experienced in west-central Alberta, building two successful Cardium focused companies in the fairway, namely Spartan Exploration Ltd. and Spartan Oil Corp.
- Production from the Assets, which is expected to be approximately 25,000 boe/d as of the Closing Date, sets Spartan on a path of growth in an asset fairway that can yield greater than 100,000 boe/d of high-netback production through consolidation and high quality development drilling.
- The Acquisition positions Spartan with a core operating foothold and an extensive infrastructure network near future consolidation opportunities, yielding both incremental G&A and operational synergies for follow-on transactions.
- The Assets’ industry-leading liability management rating of 7.3 reflects Spartan’s corporate commitment to be a leader in environmental stewardship, responsible development and environmental accountability to our stakeholders. The Company intends to continue this leadership by addressing environmental liabilities head-on as part of its future consolidation strategy.
Significantly Increases Production and Funds Flow
- The Assets have a stable, low decline production base of approximately 19%, which will be maintained throughout the year with field optimization and planned development drilling in the fall.
- The Assets deliver sustainable free cash flow at $1.75/GJ AECO and US$35/bbl WTI prices. At the current 12-month forward strip (as at April 14, 2020) of $2.13/GJ AECO and US$35.00/bbl WTI, Spartan estimates the Assets can deliver $14.0 million of free cash flow per year on a run rate basis (see “Reader Advisory – Non-IFRS Measures”, below).
Includes Strategic Infrastructure and Relationships
- The Assets include working interest ownership in three area gas plants, including operatorship of the 10-9 Alder Flats Gas Plant, which is characterized by nameplate capacity of 230 MMcf/d and 96 MMcf/d of available excess capacity.
- The Assets include interests in seven operated compressor stations with working interest capacity of 208 MMcf/d and 550 kilometres of gas gathering lines that are connected to significant third-party area processing with excess capacity.
- Spartan will assume a successful joint venture with the O’Chiese First Nation, which is entering its ninth year; a leading example of how industry and First Nations can work together for the benefit of all stakeholders.
- The Acquisition includes ownership of 1,496 kilometres of 2D and 681 square kilometres of 3D proprietary seismic data.
Significantly Increases Spartan’s Reserve Base and Drilling Inventory
- Based on the independent reserves report in respect of the Assets prepared by InSite Petroleum Consultants Ltd. (“InSite”) for Bellatrix effective December 31, 2019 (see “Reader Advisory – Reserves Disclosure”), the Acquisition adds material reserves as follows:
º 69.8 MMboe of proved developed producing (“PDP”) reserves;
º 185.5 MMboe of total proved reserves; and
º 268.0 MMboe of total proved plus probable (“TPP”) reserves.
- The Assets are characterized by 296 net booked drilling locations from a total inventory of 637 net identified locations (see “Reader Advisory – Drilling Locations”, below) in the Sprit River and Cardium formations, of which Spartan believes there is greater than 10 years of economic drilling at current strip pricing (in excess of 135 locations).
Strengthening Natural Gas Pricing Environment
- North American natural gas forward pricing fundamentals have improved through the global slowdown as a result of a reduction in drilling activity, specifically in North American shale, setting the stage for a material reduction in supply to the North American gas market.
- Natural gas is a key contributor to creating a cleaner and sustainable energy future and will play an increasing role in helping the world meet clean energy targets.
Asset Acquisition Summary
|Total Net Consideration (including assumed liabilities)||$102.2 million|
|Current production(1)||25,000 boe/d (30% oil and NGLs)|
|Annual decline rate(2)||19%|
|Land(3)||130,000 net acres|
|Net horizontal locations(4)||296 booked (340 unbooked)|
|Forecast 12 month forward operating netback (strip)(5)||$4.87/boe|
|Run rate net operating income(6)||$44.4 million|
|PDP reserves(7)||69.8 MMboe|
|Proved reserves(7)||185.6 MMboe|
|Total proved + probable reserves(7)||268.0 MMboe|
|TPP RLI(7)(8)||29 years|
|Current production(9)||$4,088 per boe/d|
|PDP Reserves(7)||$1.46 per boe|
|Total proved reserves(7)||$0.55 per boe|
|Total proved + probable reserves(7)||$0.38 per boe|
|Run rate net operating income multiple(6)||2.3x|
|(1)||25,000 boe/d is the expected production on the Closing Date. The oil and NGLs yield of 30% is comprised of 7% oil and condensate and 23% propane, ethane and butane.|
|(2)||Decline rate based on 2021 versus 2020 PDP reserves. See “Reader Advisory – Reserves Disclosure”, below.|
|(3)||130,000 net acres in west-central Alberta, forming part of the Assets. Additional non-core acreage not included.|
|(4)||296 net booked horizontal locations (220.6 proved undeveloped plus 74.9 probable undeveloped), which excludes 11.38 vertical locations and 2.0 Rock Creek horizontal locations. See “Reader Advisory – Drilling Locations” for additional details.|
|(5)||The estimated operating netback was derived using estimated go-forward royalties and operating costs utilizing April 14, 2020 strip pricing which averages US$35.00/bbl WTI, $34.54/bbl Edmonton Condensate and $2.13/GJ AECO, all for the forecasted 12-month period from the Closing Date to May 31, 2021, and a US dollar /Canadian exchange rate of 1.39. The operating cost and royalty utilized for the operating netback calculation is $9.19/boe and $1.39/boe (or 9% of oil and gas revenue), respectively. See “Reader Advisory – Non-IFRS Measures” for additional details.|
|(6)||Run rate net operating income is based on expected production of 25,000 boe/d on the Closing Date and an operating netback in respect of the Assets of $4.87/boe. See Note (5), above, and “Reader Advisory – Non-IFRS Measures” for additional details.|
|(7)||Working interest before royalty reserves. Per boe metrics are calculated by dividing the Total Net Consideration by the reserves. See “Reader Advisory – Reserves Disclosure”.|
|(8)||The reserve life index (“RLI”) is calculated by dividing TPP reserves as of December 31, 2019 (267.98 MMboe) by estimated production on the Closing Date of 25,000 boe/d. RLIs are not necessarily comparable between different issuers as there may be variation in calculation methodology. Management views RLI as a useful measure of the length of time the reserves would be produced at the estimated rate of production. See “Reader Advisory – Reserves Disclosure”.|
|(9)||Calculated by dividing the Total Net Consideration by the estimated production on the Closing Date of 25,000 boe/d.|
The Credit Facility
Spartan has executed a commitment letter in respect of the Credit Facility. The revolving period of the Credit Facility will end on May 31, 2021, with an additional one-year term out period thereafter if the revolving period is not extended. The borrowing base on the facility will be redetermined bi-annually in the spring and fall of each year. The syndicate is comprised of National Bank of Canada, ATB Financial and Canadian Western Bank (together, the “Lenders”).
The commitments of the Lenders are subject to the execution of mutually acceptable credit documentation giving effect to the terms provided in the commitment letter, and the satisfaction of the other customary conditions to closing, including the satisfaction of all conditions to the completion of the Acquisition.
On the Closing Date, Spartan’s net debt position is estimated to be approximately $65.0 million.
The Private Placement
Spartan is pleased to announce that certain institutional investors have confirmed and committed to purchase, on a non-brokered private placement basis, 1,000,000,000 subscription receipts of the Company (the “Subscription Receipts”) at a price of $0.02 per Subscription Receipt for aggregate gross proceeds of $20.0 million. The completion of the Private Placement is subject to customary closing conditions, including the receipt of all necessary regulatory approvals, including the approval of the TSXV. Closing of the Private Placement is expected to occur on or about May 8, 2020.
The gross proceeds from the sale of Subscription Receipts pursuant to the Private Placement will be held in escrow pending the completion of the Acquisition. If the Acquisition is completed on or before 5:00 p.m. (Calgary time) on June 30, 2020, the proceeds from the sale of the Subscription Receipts will be released from escrow to Spartan and each Subscription Receipt will be exchanged for one Common Share for no additional consideration and without any action on the part of the holder. If the Acquisition is not completed on or before 5:00 p.m. (Calgary time) on June 30, 2020, 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 net proceeds from the Private Placement will be used to fund the development of the Assets and for general working capital purposes.
National Bank Financial Inc. and TD Securities Inc. are acting as Co-Financial Advisors to Spartan with respect to the Private Placement.
In connection with the closing of the Acquisition, Spartan will amend the terms of the Common Share purchase warrants (the “Warrants”) issued pursuant to the private placement completed on December 19, 2019, such that the Warrants will vest and become exercisable as to one-third upon the 10-day weighted average trading price of the Common Shares (the “Market Price”) equally or exceeding $0.02, an additional one-third upon the Market Price equally or exceeding $0.025 and a final one-third upon the Market Price equalling or exceeding $0.03 (all shown on a pre-Consolidation basis, an increase from $0.01, $0.015 and $0.02, respectively). All other terms of the Warrants will remain unchanged.
Name Change and Consolidation
On March 4, 2020, the shareholders of Spartan approved, at a special meeting of shareholders, the Name Change and the Consolidation. Contemporaneous with the closing of the Acquisition (subject to TSXV acceptance), the Company will effect the Name Change and complete the Consolidation on the basis of one post-Consolidation Common Share for every 100 pre-Consolidation Common Shares.
The issued and outstanding Common Shares will be reduced from 3,610,551,651 Common Shares (including Common Shares issued pursuant to the Private Placement) to approximately 36,105,517 Common Shares on a post-Consolidation basis. No fractional shares will be issued. Any fractional interest in Common Shares that is less than 0.5 resulting from the Consolidation will be rounded down to the nearest whole Common Share and any fractional interest in Common Shares that is 0.5 or greater will be rounded up to the nearest whole Common Share.
The Company expects that the trading of its Common Shares on the TSXV under the name “Spartan Delta Corp.” and symbol “SDE” will commence on a consolidated basis at the opening of business two or three trading days after the Closing Date.
The Consolidation will not affect the validity of currently outstanding share certificates of the Company. However, once the Consolidation is implemented, registered shareholders will be required to exchange their share certificates for share certificates evidencing the post-Consolidation Common Share amount. Upon completion of the Consolidation, registered shareholders will be sent a letter of transmittal containing instructions on how to surrender share certificates evidencing the pre-Consolidation Common Share amount to Computershare Investor Services Inc. (the “Depositary”). The Depositary will forward to each registered shareholder who has sent the required documents new share certificates evidencing the new post-Consolidation Common Share amount. Until surrendered, each share certificate representing pre-Consolidation Common Shares will be deemed for all purposes to represent the post-Consolidation Common Shares to which the holder is entitled following the Consolidation. Beneficial shareholders holding Common Shares through an intermediary (a securities broker, dealer, bank or financial institution) should be aware that the intermediary may have different procedures for processing the Consolidation than those that will be put in place by the Company for registered shareholders. If shareholders hold their Common Shares through an intermediary and they have questions in this regard, they are encouraged to contact their intermediaries.
For more information on the Consolidation and the Name Change, shareholders are encouraged to refer to the management information circular of the Company dated February 12, 2020, which is available on the Company’s SEDAR profile at www.sedar.com.
Return Energy Inc. d.b.a. Spartan Delta Corp. is a Calgary, Alberta based company engaged in oil and gas exploration and development. The Common Shares are currently listed on the TSXV under the trading symbol “RTN”.