CALGARY, Alberta – The Boards of Directors and the largest shareholders of each of Kiwetinohk Resources Corp. (“Kiwetinohk”) and Distinction Energy Corp. (“Distinction”) have agreed to combine the businesses of Kiwetinohk and Distinction under a plan of arrangement pursuant to applicable corporate law (the “Arrangement”). Through the Arrangement, Kiwetinohk will acquire all shares of Distinction that it does not already own (approximately 50%) by way of an exchange of 20 Kiwetinohk shares for each Distinction share. Under the Arrangement, Kiwetinohk will succeed to the reporting issuer status of Distinction. The combined company will operate under the name Kiwetinohk Resources Corp.
The Arrangement is subject to approval by the shareholders of both Kiwetinohk and Distinction. Separate agreements with Kiwetinohk’s largest shareholders, funds managed by ARC Financial Corp. (“ARC”), and Distinction’s largest shareholders (other than Kiwetinohk), including Luminus Energy IE Designated Activity Company (“Luminus”), ensure that the companies will have the necessary shareholder support to complete the transaction. The Arrangement is subject to conditions, including shareholder and court approval, that are typical of transactions of this nature and is expected to be completed in the third quarter. A joint information circular will be sent to Kiwetinohk’s and Distinction’s shareholders in late July or early August, with the Arrangement expected to be completed in late August or early September. The joint information circular will contain more detailed information regarding the Arrangement and the expected benefits of the transaction, and will include the written fairness opinions of Peters & Co. Limited, financial advisor to Kiwetinohk, and ATB Capital Markets, financial advisor to Distinction.
Kiwetinohk is a private energy transition company seeking to produce clean energy by both capturing renewables and producing oil and gas and then converting gas to carbon-free forms of consumer energy: electricity and hydrogen. The scope of Kiwetinohk’s business includes acquiring and developing high-netback oil and gas properties, generating electricity and manufacturing hydrogen from natural gas, while capturing associated carbon dioxide, storing and using carbon dioxide for valuable purposes such as enhancing oil recovery. Kiwetinohk also plans to capture solar and wind renewable energy directly and convert it to electricity and potentially hydrogen. In pursuit of its business plan, Kiwetinohk has already acquired an attractive array of oil and gas assets and has started to position to build power generation. Its approximately 50% ownership of Distinction and its 50% partnership with Distinction in a recent acquisition of Duvernay and Montney property in the Simonette area (as previously announced by Distinction) (the “Simonette Acquisition”) is part of Kiwetinohk’s collection of high netback gas property. In addition to property held through and/or in partnership with Distinction, Kiwetinohk has land in the early stages of resource validation in the Clearwater play of Northern Alberta and elsewhere in the Montney and Duvernay.
Kiwetinohk is a Canadian private company backed by ARC Financial Corp., Canada’s largest energy-focused private equity investment manager. Kiwetinohk is led by CEO Pat Carlson who along with founding partners, built four previous very successful petroleum development and production companies. ARC was also the lead investor in all four previous companies. The most notable of these previous companies were North American Oil Sands Corporation, which was sold to Norwegian state-owned oil company Statoil (now Equinor), and Seven Generations Energy Ltd., which entered the public equity market via an IPO in 2014 and was acquired by ARC Resources Ltd. in April 2021.
Commenting on the Arrangement, Mr. Carlson said, “The combination of Kiwetinohk and Distinction will better position the resulting business to compete in the provision of energy products that have significantly reduced greenhouse gas emissions intensity relative to oil and gas industry norms of recent years. The global market requires more energy while ecosystems cannot tolerate emissions associated with the way the petroleum business has delivered energy in the past. The public is demanding a transition to energy with reduced carbon dioxide and methane emissions. Half of the challenge is to assemble very high-quality properties that enable the company to develop and produce gas at low cost. The other half is to convert that gas to clean forms of energy that enable consumers to use energy without emitting carbon dioxide. Our hope is to build a power generator and hydrogen manufacturer with significance in the Alberta market. If we are to be successful in that pursuit we will need sufficient, profitable gas production and resources. The condensate associated with the gas in Distinction’s property bolsters the economics and provides a supply of gas that we expect to be among the lowest cost supplies in the Alberta market. The Arrangement with Distinction delivers an excellent platform for the combined entity to consolidate similar properties in the region with the goal of profitably delivering hydrocarbons into the volatile commodity market.”
Under its former name, Delphi Energy Corp., Distinction accumulated property in the Montney resource near Fox Creek, Alberta. The property has qualities which have demonstrated potential to result in high-netback development. These qualities include a high ratio of condensate to natural gas, a high pressure to depth ratio and high initial production rates. Through its new well program in 2019 and 2020, Delphi added three wells with performance suggesting potential for development with top quartile netbacks for the Montney play. Just as the results of the new wells were realized Delphi went into a restructuring process under the Companies’ Creditors Arrangement Act (“CCAA”). A group of senior debt holders led by Luminus guided Delphi through CCAA including striking an arrangement whereby Kiwetinohk could invest to secure up to a 50% plus one share interest in Delphi and provide services through a management services agreement as Delphi emerged from the CCAA process.
In light of the potential for high-netback development of Distinction’s remaining Montney resource, Kiwetinohk has invested in Distinction and assumed key management roles since the Court decision regarding the CCAA process. Investment in Distinction by some of the first lien creditors along with cash invested by Kiwetinohk to acquire its equity ownership of Distinction put Distinction in a strong cash position, possessing approximately $87.5 million in cash at the end of the first quarter of this year.
Having a strong combined cash position the two companies commenced searching for opportunities to consolidate high netback producing and development property. On April 28 Distinction and Kiwetinohk closed a previously announced transaction to acquire, on a 50% / 50% basis the Simonette Acquisition, which included a producing property with gathering and processing facilities, near Distinction’s Montney property, from a major international resource developer. The transaction was the first step toward the objective of regional consolidation of high-quality, liquids-rich gas that both companies share.
The combined entity
The table below briefly presents First Quarter 2021 sales results.
|Oil and natural gas liquids sales (Mbbl/d)||2.6||0.5||4.0||7.1|
|Natural gas sales net of purchases (MMcf/d)||22.6||1.2||31.6||55.4|
Mr. Timothy Schneider, Chairman of Distinction, commented, “The Arrangement results in an entity that is much simpler in its management and ownership structure making it more efficient and nimble and well-suited to attract investors and deliver strong performance to its shareholders. The combined company, with its quality assets and experienced and respected management team, is an excellent platform to continue consolidating high quality property in the region.”
Mr. Kevin Brown, Chairman of Kiwetinohk and Co-Chair of ARC stated, “Kiwetinohk is ARC’s fifth investment with Pat Carlson and his teams. Many of the combined company’s management team members have worked together in one or more of Pat’s previous companies. All of those companies were leaders in then emerging sectors of the energy business: liquids-rich shale gas in the case of Seven Generations, extraction of bitumen by Steam Assisted Gravity Drainage in the case of North American Oil Sands. These companies had strong performance in both stakeholder satisfaction and investment returns. We are excited to be backing Kiwetinohk in consolidating high quality upstream assets to support an important investment thrust for ARC: the energy transition and the focus on decarbonization and energy sustainability.”
In order to give effect to the Arrangement, Kiwetinohk and Distinction have entered into a business combination agreement (the “Business Combination Agreement”) whereby Kiwetinohk will acquire all of the common shares of Distinction it does not already own (approximately 50%) by way of an exchange of 20 Kiwetinohk shares for each Distinction share pursuant to a statutory plan of arrangement under the Canada Business Corporations Act.
The board of directors of Distinction (the “Distinction Board”) formed a committee of independent directors (the “Independent Committee”) to consider the Arrangement and subsequently supervise and/or negotiate the Business Combination Agreement. The Independent Committee engaged ATB Capital Markets Inc. (“ATB”) as financial advisor. Following receipt of the opinion of ATB that, as of the date thereof and subject to the assumptions, limitations and qualifications contained therein, the exchange ratio received by the Distinction shareholders (other than Kiwetinohk) under the Arrangement is fair from a financial point of view to Distinction shareholders (other than Kiwetinohk), the Independent Committee unanimously recommended to the Distinction Board that the Arrangement be approved.
The Distinction Board (with interested directors abstaining), after receiving the unanimous recommendation of the Independent Committee, consideration of other available alternatives and reviewing the terms of the Arrangement and the Business Combination Agreement, has determined that the Arrangement is fair to Distinction shareholders (other than Kiwetinohk) and that the Arrangement is in the best interests of Distinction. Accordingly, the Distinction Board has approved the Arrangement and resolved to recommend that all Distinction shareholders vote in favour of the Arrangement.
The Kiwetinohk Board (with interested directors abstaining), after receiving the verbal opinion of Peters & Co. Limited that, as of the date thereof and subject to the assumptions, limitations and qualifications contained therein, the exchange ratio is fair from a financial point of view to Kiwetinohk, has determined that the Arrangement is in the best interests of Kiwetinohk. Accordingly, the Kiwetinohk Board has approved the Arrangement and resolved to recommend that all Kiwetinohk shareholders vote in favour of certain matters related to the transaction.
All directors and officers of Kiwetinohk and all directors and certain officers of Distinction that hold shares of Kiwetinohk or Distinction, as applicable, have entered into support agreements (“Support Agreements”) whereby they have agreed to vote their common shares of Kiwetinohk or Distinction, as applicable, in favor of the Arrangement. In addition, the major shareholder of Kiwetinohk, ARC Financial Corp., and shareholders of Distinction totaling approximately 84% of non-Kiwetinohk owned common shares have also entered into Support Agreements.
The Arrangement is subject to approval of the Distinction and Kiwetinohk shareholders, including in respect of Distinction approval of (i) at least 66 2/3% of the votes cast in person or by proxy at the Distinction shareholder meeting, and (ii) the majority of the votes cast by Distinction shareholders excluding votes cast by Kiwetinohk and other Distinction shareholders that may not be included in determining if minority approval is obtained pursuant to Multilateral Instrument 61-101 – Protection of Minority Securityholders in Special Transactions (“MI 61-101”). Kiwetinohk expects to hold approximately 50% of the outstanding Distinction common shares at the date of the Distinction shareholder meeting. The Arrangement is also subject to approval by the Court of the Queen’s Bench of Alberta and involves a determination by such court that the Arrangement, and the procedures relating thereto, are fair and reasonable, substantively, and procedurally, to the shareholders of Distinction. The Arrangement is also subject to approval by the Kiwetinohk shareholders.
A joint information circular, which will include details of the Arrangement, is expected to be mailed to Distinction and Kiwetinohk shareholders in late July or early August 2021. The Arrangement will be voted upon by the Distinction and Kiwetinohk shareholders at special shareholder meetings expected to be held in late August or early September 2021.
The Arrangement constitutes a “business combination” under MI 61-101 pursuant to which an interested party of Distinction will acquire Distinction. However, the Arrangement is exempt from the formal valuation requirements set out in MI 61-101 as at the time of the transaction, the securities of Distinction were not listed or quoted on one of the exchanges or markets specifically identified in MI 61-101.