i3 Energy plc, an independent oil and gas company with assets and operations in the UK and Canada, is pleased to announce the execution of a strategic acquisition in its core Simonette area, taking operatorship and doubling its position in a premium light oil asset in the Lower Montney.
- Acquired an additional 49.5% position plus operatorship in the Company’s South Simonette oil property, increasing i3’s interest to 99%.
- Cost to exercise the Right of First Refusal (“ROFR“) of USD 4.2mm (CAD 5mm) plus planned capital investment of USD 0.58mm to reactivate two suspended wells in July results in effective acquisition at 1.49x next twelve months (“NTM“) forecasted net operating income (“NOI” = revenue minus royalty, opex, transportation and processing costs) of USD 3.2mm.
- Operational control and direction of capital deployment to reactivate two currently suspended wells at South Simonette in July estimated to result in an incremental increase to i3’s corporate production and NOI of 720 boepd (41% oil, 4% NGLs, 55% gas) and USD 5.2mm, respectively, increasing i3’s overall exposure to oil by approximately 20% and increasing i3’s expected NTM NOI by over 16%.
- Additional estimated net production associated with the acquired 49.5% operated working interest of circa 430 boepd and USD 3.2mm in NTM NOI.
- Estimated incremental production and NOI associated with i3’s current 49.5% interest of circa 290 boepd and USD 2.0mm.
- Proved plus Probable (2P) reserves addition of 4.9 mmboe with before-tax NPV10 of USD 30.9mm.
- Doubles i3’s working interest position in over 70 potential Lower Montney development well locations at South Simonette.
- Brings i3 ownership at its North and South Simonette properties to almost 100% (connected by i3’s Middle Montney acreage over which it has gross overriding royalty interest positions ranging between 5% and 15%) allowing the Company to control investment and development timing in these assets.
- Contributes a deemed asset value of approximately CAD 26.5mm and a correspondingly high Licensee Liability Rating (“LLR“) ratio of 46.1 to i3’s asset portfolio.
Majid Shafiq, CEO of i3 Energy plc, commented:
“The acquisition of this operated working interest in South Simonette is not only a very accretive addition to our production portfolio, but also highly strategic for i3. Following completion, we will be close to a 100% owner and operator of our North and South Simonette properties, which are significant contributors to our current production base, and provide significant, incremental oil-focussed growth potential during a sustained period of higher oil prices. Together with recent acquisitions and advancement of development opportunities in our growing Clearwater position and other assets in our portfolio, this acquisition provides significant optionality in terms of where we choose to allocate our development capital.”
i3 Energy has exercised its pre-emptive right, as provided for under the head agreements governing the assets, to acquire the entire 49.5% operated interest held by Anegada Oil Corporation (“Anegada“) in its South Simonette property (the “Anegada Interest“). On 3 May 2021, Anegada executed a purchase and sale agreement (“PSA“) to sell the Anegada Interest to a third party. i3 is exercising a ROFR that it held over the Anegada Interest which was activated by Anegada’s execution of said PSA.
Upon completion, i3 Canada will control a 99% operated interest in the associated land base, which has a gross area of 64 km2. The acquisition of the Anegada Interest has an effective date of 1 April 2021, and closing is expected to occur in Q2 (subject to regulatory approval). The ROFR is being exercised by i3 at a cost of USD 4.2mm, subject to normal closing adjustments, and will be financed from the Company’s existing cash resources. Gain Energy Ltd (whose assets were entirely purchased by i3 in 2020) and Anegada acquired this acreage in December 2017 for USD 2.9mm, subsequently spending a total of USD 30.7mm to drill and complete three Lower Montney oil wells, a water disposal well, and to construct associated facilities and pipelines (for their collective 99% working interest). Of the three production wells, one currently produces circa 317 boepd gross and the other two are suspended.
Post-acquisition and as Operator, i3 will bring the two suspended wells back onto production in July at a total estimated cost of USD 1.16mm (USD 0.58mm for each of i3’s current and acquired Anegada Interest) by installing gas lift in one and repairing an electrical submersible pump in the other, resulting in an expected increase to i3’s corporate production of 720 boepd (41% oil, 4% NGLs, 55% gas) and NTM NOI of USD 5.2mm; effectively increasing the Company’s exposure to oil by 20% and expected NTM NOI by over 16%.
The combined rate associated with the Anegada Interest for the three wells is estimated to be 430 boepd. The 2P reserves and associated valuation estimate for the Anegada Interest are 4.9 mmboe and USD 30.9mm, respectively, based on GLJ’s YE 2020 reserves evaluation, reflecting the high-impact potential oil resource identified in the Lower Montney formation at South Simonette. With all three wells on production, the forecasted next twelve months net operating income for the Anegada Interest is estimated at USD 3.2mm. At a total cost to i3 of USD 4.78mm for the acquisition and two well reactivation in July, the Company is acquiring the Anegada Interest and reinstating production for 1.49x NTM forecasted NOI of USD 3.2mm, USD 11,111/boepd, and USD 0.95/boe (2P), materially below the averages since Q4 2020 for similar Western Canadian transactions of 4.53x NTM NOI, USD 32,067/boepd, and USD 5.61/boe. For i3’s already-owned 49.5% South Simonette interest (and incremental to i3’s current share of production from the existing producing well) the reactivation of the two wells is estimated to increase i3’s production and by 290 boepd and NTM NOI by USD 2.0mm. The Anegada Interest has a LLR of 46.1.
The operating income statement of the Anegada Interest for the twelve months to 31 December 2020 are presented below:
Anegada Interest Operating Statement of Income Before Depletion and Taxation
Twelve Months Ended 31 December 2020 (unaudited)
Net Income Before Depletion and Taxation
Strategic Rationale for the Transaction
The North and South Simonette areas are core and strategic components of i3’s Canadian asset portfolio, encapsulating a broadly contiguous land base representing a large contingent of i3’s highest rate of return development locations supported by an existing network of infrastructure. South Simonette development commenced in 2018 targeting light oil in a thick Lower Montney stratigraphic interval, while at North Simonette development has focussed on Middle Montney light oil, additional potential in the Lower Montney interval, and production from the Dunvegan and deeper Devonian formations.
Having previously received a 49.5% non-operated working interest through its acquisition of all the assets of Gain Energy Ltd in 2020, i3 is a current owner of the majority of the assets subject to the ROFR. The acreage being acquired increases i3’s working interest in the South Simonette area to 99%, with i3 also becoming operator. GLJ has assigned in its YE 2020 reserves evaluation undeveloped reserves to 12 future locations offsetting the existing development wells, consisting of 6 Proved and 6 Probable locations, and i3 believes there is potential for more than 60 additional development drilling locations on the acreage. The wells drilled at South Simonette have exhibited initial oil production rates as high as 740 bopd, in line with GLJ’s 2P expectation for wells from this zone. If fully exploited, i3 believes South Simonette could deliver peak net production of over 16,000 boepd. Such a development would utilize components of i3’s owned and operated North Simonette Y-Battery, described below.
At North Simonette, i3 owns an operated 100% working interest in 20.5 sections (53 km2) of land, with current net production of approximately 825 boepd, booked Proven reserves of 2.1 mmboe and Proven plus Probable reserves of 3.6 mmboe. i3 has modelled a potential 38-well North Simonette Montney oil development which could deliver peak net production of over 10,000 boepd, with further development potential from the currently producing Dunvegan formation. Importantly at North Simonette, i3 owns key infrastructure, including a 50% operated working interest in the Y-Battery, an oil and gas processing facility with liquid handling capacity of 12,000 bbl/d. The Company also owns a 100% working interest in a water disposal well and the rights to a 7.0 mmbbl stream-fed, freshwater reservoir. In addition to handling i3’s current production from North Simonette, and generation of stable third-party processing income, this infrastructure provides capacity to accommodate production resulting from i3’s future development activity in the area.
In addition to the above, i3 owns gross overriding royalties of between 5% and 15% on any production from the Middle Montney stratigraphic interval, which targets proven, liquids-rich gas in a contiguous 16 section (41 km2) area, between its North and South Simonette acreage.
Ryan Heath, President of i3 Canada, commented:
“The recent increase in global oil prices has resulted in a significant increase in M&A activity in offsetting Montney acreage, as competitors seek to grow their exposure to this prolific play. In this environment i3 is very pleased to capture a near 100% operated and contiguous working interest in over 120 km2 of Montney acreage in Simonette which includes strategically located processing infrastructure. This is now a very attractive package.
- i3’s Proved plus Probable (2P) reserves calculations are based on GLJ’s year-end 2020 reserves evaluation, adjusted to reflect that i3 will no longer receive a gross overriding royalty on the interest it is acquiring from Anegada.
- The Licensee Liability Rating, or LLR, is the licensee’s deemed asset to deemed liability ratio as determined under Directive 006 (Licensee Liability Rating (LLR) Program and Licence Transfer Process) of the Alberta Energy Regulator (AER). The deemed asset value is calculated by multiplying the licensee’s reported production of oil and gas for the prior 12 months by the rolling 3-year provincial industry average netback (determined by the AER). The deemed liability is the total cost for the future abandonment and site reclamation of all a licensee’s wells and upstream facilities based on provincial industry average costs (determined by the AER).
- Reserves estimates have been prepared by GLJ in accordance with standards contained in the Canadian Oil and Gas Evaluation (COGE) Handbook.
Proved reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated proved reserves. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal to or exceed the estimate.
Probable reserves are those additional reserves that are less certain to be recovered than proved reserves. It is equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated Proved plus Probable (2P) reserves. When probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal to or exceed the 2P estimate.
Undeveloped reserves are those reserves expected to be recovered from known accumulations where a significant expenditure (for example, when compared to the cost of drilling a well) is required to render them capable of production. They must fully meet the requirements of the reserves category (for example proved or probable) to which they are assigned.