CALGARY, Alberta – InPlay Oil Corp. (TSX: IPO) (OTCQX: IPOOF) (“InPlay” or the “Company”) is pleased to announce that it has entered into a definitive agreement (the “Agreement“) to acquire Prairie Storm Resources Corp. (“Prairie Storm“) (TSXV: PSEC), a light-oil Cardium focused producer with operations primarily in the Willesden Green area of central Alberta (the “Prairie Storm Assets“) for total net consideration of approximately $40.5 million(1) (the “Acquisition“).
The highly accretive Acquisition will be funded by a combination of a $10 million bought deal equity financing led by Eight Capital, as sole bookrunner, together with ATB Capital Markets as co-lead underwriters (the “Financing“), available borrowings under InPlay’s Senior Credit Facility and the issuance to shareholders of Prairie Storm of approximately 8.3 million common shares of InPlay (“InPlay Shares“) at a deemed price of $1.20 per InPlay Share. InPlay has received a commitment letter from its senior lenders (the “Lenders“) with respect to an increase in the aggregate available borrowing capacity of its Senior Credit Facility from $65.0 million to $85.0 million, subject to and conditional upon the completion of the Acquisition.
- Average production from the Prairie Storm Assets is expected to be approximately 1,800 boe/d(2) upon completion of the Acquisition.
- Drilling after closing of the Acquisition is anticipated to increase production from the Prairie Storm Assets to approximately 2,755 boe/d(2)(3) in 2022. This is expected to result in approximately $31.0 to $33.0 million of operating income(3) and approximately $16.5 to $18.5 million of free adjusted funds flow (“FAFF”)(3) after incorporating capital expenditures and additional general and administrative and interest expense from the Acquisition.
- The current production decline rate on the Prairie Storm Assets of approximately 10% per annum is accretive to InPlay’s decline rate.
- Attractive acquisition metrics:
- 2.5 times run rate operating income(5)(6); 1.3 times 2022 operating income(5)(6)
- $8.26/boe(4) of 2020 YE PDP reserves; $1.90/boe(4) of 2020 YE TP reserves; $1.51/boe(4) of 2020 YE TPP reserves
- The Acquisition is expected to deliver the following accretion metrics(15):
- 15% accretive to forecast 2022 production per share(6);
- 12% accretive to targeted 2022 Adjusted Funds Flow (“AFF”) per share(5)(6);
- 17% accretive to targeted 2022 FAFF per share(5)(6); and
- 21% accretive to PDP reserves per share(10); 60% accretive to TP reserves per share(10) and 46% accretive to TPP reserves per share(10).
- Pro forma completion of the Acquisition, InPlay is targeting 2022 production to average between 8,900 and 9,400 boe/d(2) which is anticipated to generate $106.5 to $111.5 million(5) of AFF and $55.0 to $59.0 million(5) of FAFF.
- Strengthens InPlay’s balance sheet with 2022 targeted net debt to earnings before interest, taxes and depletion (“EBITDA”)(5) improving to 0.2 times – 0.3 times.
- Adds proved developed producing (“PDP”) reserves of 4.9 million boe(4), total proved (“TP”) reserves of 21.3 million boe(4) and total proved plus probable (“TPP”) reserves of 26.8 million boe(4). Production from January 1, 2021 to November 30, 2021 on the Prairie Storm Assets is estimated to be approximately 0.6 million boe.
- Includes approximately 37,995 net acres(8) of high working interest (77%) Cardium land, making InPlay one of the largest acreage holders in the Willesden Green Cardium play.
- Adds over 86 net booked drilling locations(9). InPlay plans to commence drilling on the Prairie Storm Assets immediately post-closing of the Acquisition. The Company will focus on wells in a targeted Cardium oil area that delivers better than average production rates due to higher associated gas concentrations, with initial production rates benefitting from the anticipated strong winter gas prices.
- The Acquisition provides significant improvements to the Company’s sustainability: low decline production; strong FAFF; sizeable drilling inventory; the addition of material scale to the Company with significant anticipated cost savings through synergies; and a strengthened balance sheet with improvements to net debt/EBITDA in 2022.
Summary of the Acquisition and Prairie Storm Assets
|Total net consideration(1)||$40.5 million|
|2022E annual average production(2)(3)||2,755 boe/d|
|Cardium land(8)||37,995 net acres|
|Net booked drilling locations(9)||86.2|
|Reserves (December 31, 2020)|
|PDP reserves(4)||4.9 MMboe|
|TP reserves(4)||21.3 MMboe|
|TPP reserves(4)||26.8 MMboe|
|2022E Operating Netback(2)(3)||$31.75/boe|
|2022E Operating Income(3)||$31.0 – $33.0MM|
|2022E Capital Expenditures(3)(12)||$10.0 – $12.0MM (4.6 net wells)|
|2022E FAFF(3)||$16.5 – $18.5MM|
|2022E Operating Income Multiple(3)||1.3x|
|2022E Flowing barrel(3)||$14,700/boe/d|
|2022E Production per share(6)||15%|
|2022E AFF per share(5)(6)||12%|
|2022E FAFF per share(5)(6)||17%|
|2022E Enterprise Value / Debt Adjusted Cash Flow (5)(6)||8%|
|Reserves Per Share(4)(10)||21% (PDP) / 60% (TP) / 46% (TPP)|
Benefits of the Acquisition
Production from the Prairie Storm Assets is expected to be approximately 1,800 boe/d(2) at close, consisting of approximately 505 bbl/d of light and medium crude oil (28%), 453 boe/d of NGLs (25%) and 5,050 Mcf/d of natural gas (47%). Significant growth opportunities have been identified on the 49,120 gross (37,995 net)(8) acres of Cardium lands associated with the Prairie Storm Assets, including 80.1 net(9) identified Cardium drilling locations. Pro-forma independently evaluated reserves effective as of December 31, 2020 are 14.5 MMboe(4) (PDP), 42.8 MMboe(4) (TP) and 59.5 MMboe(4) (TPP).
The Acquisition provides attractive metrics and is highly accretive to InPlay. A 1.3x multiple of targeted 2022 operating income(3), $14,700/boe/d per flowing barrel(3) in 2022 and $1.90/boe(4) per TP reserves are all strong acquisition metrics in the current market. Significant synergies are expected from the consolidation of assets resulting from the Acquisition, with approximately $3.0 – $3.5 million in estimated annual cost savings after closing and the potential for additional savings in a short time frame. The accretion per share generated by the Acquisition on a production, AFF and FAFF basis enhances shareholder value significantly and places InPlay in an increasingly strong position for future success.
The Acquisition is representative of the Company’s continued Cardium consolidation and sustainability strategy, positioning InPlay as a sizable producer and acreage holder with significant drilling inventory in the light oil window of central Alberta’s Cardium fairway. Willesden Green will be a focus area for continued development and growth as the wells drilled to date are some of the most prolific Cardium oil wells in Alberta. The production profile characteristics of the Prairie Storm Assets complement InPlay’s current suite of assets in its core areas.
Doug Bartole, President and Chief Executive Officer of InPlay, commented: “The Acquisition is a significant achievement for InPlay and further solidifies the Company as a premier Cardium operator. Prairie Storm has built a very focused Cardium asset in an area that InPlay has a great deal of experience. The Acquisition is complementary to InPlay’s existing asset base and adds material scale to the Company’s existing Cardium focused core development area. The low decline of the Prairie Storm assets and large drilling and land inventory enhances the sustainability of InPlay to continue to deliver strong free adjusted funds flow.”
Hugh Ross, President and Chief Executive Officer of Prairie Storm, commented: “I am very excited to be combining Prairie Storm’s top-tier Cardium asset base with a high quality Cardium player. InPlay has established itself as a leader in the Cardium achieving some of the strongest capital efficiencies and I am confident they will continue this success with our Cardium assets added to their portfolio. We are excited to become InPlay shareholders given the operational and financial outlook for the company.”
Updated Pro-forma 2021 Corporate Guidance and Preliminary 2022 Outlook
The following table summarizes InPlay’s pro forma operating and financial guidance for 2021 and preliminary outlook for 2022. The pro forma guidance for 2021 includes the Prairie Storm Assets for the one month period in 2021 following the anticipated closing of the Acquisition on or about November 30, 2021. The capital expenditures in the table below includes amounts planned to be spent on wells drilled on the Prairie Storm Assets (approximately $4.0 million on 1.6 net wells in 2021; approximately $10.0 – $12.0 million on 4.0 – 5.0 net wells in 2022).
|Average production (boe/d)(2)||5,750 – 6,000||8,900 – 9,400|
|% Oil and NGLs||67%||64%|
|Operating Netback ($/boe)(5)||$34.00 – $37.00||$34.25 – $37.25|
|Adjusted Funds Flow ($MM)(5)||$51.0 – $54.0||$106.5 – $111.5|
|Capital expenditures ($MM)(11)(12)||$32.5 – $34.5||$51.0 – $53.0|
|Net wells drilled||10.0||17.0 – 18.0|
|Free Adjusted Funds Flow ($MM)(5)||$17.5 – $20.5||$55.0 – $59.0|
|Free Adjusted Funds Flow Yield(5)||17% – 20%||54% – 58%|
|Net Debt ($MM)(13)||$76.5 – $79.5||$20.0 – $25.0|
|InPlay Shares outstanding, end of year (MM)(14)||85.0||85.0|
An increase/(decrease) of US $7.50 WTI pricing would impact 2022 targeted AFF by $14.1 million/($13.8 million) respectively. An increase/(decrease) of $0.50 AECO pricing would impact 2022 targeted AFF by $4.0 million/($3.1 million) respectively.
Details of the Acquisition
Pursuant to the Agreement, InPlay will acquire all issued and outstanding shares of Prairie Storm (the “Prairie Storm Shares“) from the holders thereof (the “Prairie Storm Shareholders“) for aggregate consideration of $50 million comprised of: (a) the payment of an aggregate of $40 million in cash; and (b) the issuance of an aggregate of approximately 8.3 million common shares of InPlay (“InPlay Shares“) at a deemed issuance price of $1.20 per InPlay Share. In addition, InPlay will assume Prairie Storm’s working capital surplus(5) (estimated to be approximately $9.5 million at closing), after payment of Prairie Storm’s estimated transaction costs for total net consideration of $40.5 million. Approximately 5.7 million InPlay Shares representing 68% of the shares issuable to Prairie Storm pursuant to the Acquisition will be subject to escrow, with 50% of the escrowed shares releasable three months from closing of the Acquisition and the remaining 50% releasable six months from closing of the Acquisition.
Concurrent with the execution of the Agreement, holders of more than 68% of the issued and outstanding Prairie Storm Shares have executed support agreements pursuant to which such holders have agreed to vote in favour of the Acquisition.
The Equity Financing
InPlay has entered into a bought deal agreement with a syndicate of underwriters led by Eight Capital and ATB Capital Markets (the “Underwriters“), pursuant to which the Underwriters have agreed to purchase for resale to the public, on a bought deal basis, 8.3 million subscription receipts (“Subscription Receipts“) of InPlay at a price of $1.20 per Subscription Receipt for aggregate gross proceeds of approximately $10 million. The Underwriters will have an option to purchase up to an additional 15% of the Subscription Receipts issued under the Financing at a price of $1.20 per Subscription Receipt to cover over allotments exercisable in whole or in part at any time until 30 days after the closing of the Financing. The gross proceeds from the sale of Subscription Receipts pursuant to the Financing will be held in escrow pending the completion of the Acquisition. If all conditions to the completion of the Acquisition are satisfied or waived and InPlay has confirmed the same to the Underwriters (other than funding the portion of the purchase price therefor to be paid with the net proceeds of the Financing) before 5:00 p.m. (Calgary time) on December 31, 2021, the net proceeds from the sale of the Subscription Receipts will be released from escrow to InPlay and each Subscription Receipt will automatically be exchanged for one InPlay Share for no additional consideration and without any action on the part of the holder. If the Acquisition is not completed at or before 5:00 p.m. (Calgary time) on December 31, 2021, 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 Subscription Receipts issued pursuant to the Financing will be distributed by way of a short form prospectus in all provinces of Canada (excluding Québec) and may also be placed privately in the United States to Qualified Institutional Buyers (as defined under Rule 144A under the United States Securities Act of 1933, as amended (the “U.S. Securities Act“)) pursuant to an exemption under Rule 144A, and may be distributed outside Canada and the United States on a basis which does not require the qualification or registration of any of the Company’s securities under domestic or foreign securities laws. Completion of the Financing is subject to customary closing conditions, including the receipt of all necessary regulatory approvals, including the approval of the TSX. Closing of the Financing is expected to occur on or about October 20, 2021.
The net proceeds from the Financing will be used to fund part of the cash portion of the purchase price under the Acquisition.
Senior Credit Facility
In connection with the Acquisition, the Company has entered into a commitment letter agreement with its current syndicate of Lenders pursuant to which the Lenders have agreed to increase the aggregate available borrowing capacity of InPlay’s Senior Credit Facility from $65.0 million to $85.0 million, subject to and conditional upon the completion of the Acquisition and the Financing (the “Senior Credit Facility Amendments“). In addition to InPlay’s current syndicated fully conforming, revolving Senior Credit Facility totaling $65 million, under the Senior Credit Facility Amendments the Lenders have committed to provide InPlay with an additional $20 million syndicated term facility maturing November 30, 2022 (the “Senior Term Facility“). The Senior Term Facility will require mandatory repayments as follows: (i) $6 million by May 31, 2022; (ii) $7 million by August 31, 2022; and (iii) $7 million by November 30, 2022.
The Senior Term Facility is expected to be utilized as a short-term solution with attractive lending rates to provide the Company with liquidity in a timely manner to capitalize on this accretive Acquisition in a strong market. As our borrowing base and lending values are determined based on reserves and commodity prices, expected increases to our PDP and TP reserve levels from the Acquisition (2020 pro-forma reserves of 14.5 MMboe (PDP) and 42.8 MMboe (TP)) and well results above expectations, in addition to increased commodity prices compared to December 31, 2020, should be favorable at renewal of the borrowing base. This in addition to InPlay’s significant forecasted FAFF for 2022 and available credit capacity on the revolving portion of the Senior Credit Facility are expected to provide InPlay with more than sufficient liquidity to make the mandatory repayments required by the Senior Term Facility.
Conditions and Timing
Completion of the Acquisition remains subject to satisfaction of certain conditions including the receipt of all necessary regulatory approvals, the approvals of the Toronto Stock Exchange and the TSX Venture Exchange, respectively, the approval of the Alberta Court of Queen’s Bench, the requisite approval of the shareholders of Prairie Storm, completion of the InPlay financings described herein and the satisfaction of certain other conditions that are customary for a transaction of this nature.
Under the terms of the Agreement, Prairie Storm has agreed that it will not solicit or initiate any inquiries or discussions regarding any other alternative acquisition proposal, subject to the fiduciary duty of the Board of Directors of Prairie Storm in the event that an unsolicited superior proposal is received by Prairie Storm. InPlay has been granted a 72 hour right to match any superior proposal. The Agreement provides for mutual non-completion fees of $2.0 million in the event that the Acquisition is not completed or is terminated by either party in certain circumstances.
An Information Circular outlining details of the Acquisition is expected to be mailed to holders of Prairie Storm Shares in advance of the meeting of the shareholders to be scheduled for mid to late November, 2021. Closing of the Acquisition is expected to occur shortly following the meeting of Prairie Storm Shareholders.
ATB Capital Markets and Eight Capital are acting as financial advisors to InPlay with respect to the Acquisition and the Financing. Based upon and subject to certain assumptions, qualifications and limitations, Eight Capital has provided a fairness opinion to the Board of Directors of InPlay (the “Board“) that, as of September 28, 2021, and subject to review of final documentation, the consideration to be paid by InPlay pursuant to the Acquisition is fair, from a financial point of view, to InPlay. Burnet, Duckworth & Palmer LLP is acting as legal counsel to InPlay in respect of the Acquisition and the Financing.
Tudor, Pickering, Holt & Co. and National Bank Financial Inc. are acting as financial advisors to Prairie Storm with respect to the Acquisition. Blake, Cassels & Graydon LLP is acting as legal counsel to Prairie Storm in respect of the Acquisition.
About InPlay Oil Corp.
InPlay Oil is a junior oil and gas exploration and production company with operations in Alberta focused on light oil production. The Company operates long-lived, low-decline properties with drilling development and enhanced oil recovery potential as well as undeveloped lands with exploration possibilities. The common shares of InPlay trade on the Toronto Stock Exchange under the symbol IPO and the OTCQX under the symbol IPOOF.
For further information please contact:
President and Chief Executive Officer
InPlay Oil Corp.
Telephone: (587) 955-0632
Chief Financial Officer
InPlay Oil Corp.
Telephone: (587) 955-0634
- The aggregate consideration to be paid by InPlay to Prairie Storm Shareholders in respect of the Acquisition is $50 million, comprised of approximately $40 million of cash consideration and the issuance of 8.3 million InPlay Shares at a deemed issuance price of approximately $1.20 per InPlay Share. The working capital surplus(5) of Prairie Storm being assumed by InPlay upon closing of the Acquisition is estimated to be $9.5 million, after payment of Prairie Storm’s estimated transaction costs resulting in net consideration ascribed to the Acquisition of $40.5 million. See “Reader Advisories – Non-GAAP Financial Measures” for additional details.
- See “Reader Advisories – Production Breakdown by Product Type”
- The estimated Operating Income, Operating Netback, AFF and FAFF for the Prairie Storm Assets in 2022 is based on strip pricing as of September 27, 2021. The key underlying assumptions used in the development of these estimates are as follows: US $69.75/bbl WTI; $3.70/GJ AECO; $33.40/boe NGL realized price; FX rate CA$/US$ 0.79; MSW Differential US $5.60/bbl; royalties – $4.25 – $4.75/boe; operating expenses – $8.25 – $10.25/boe; interest – $0.65 – $1.15/boe; capital expenditures – $10 – $12 million. See “Reader Advisories – Non-GAAP Financial Measures” and “Reader Advisories – Forward-Looking and Cautionary Statements” for additional details.
- Proved developed producing reserves of 4.9 MMboe at December 31, 2020 consisting of 1.5 MMbbl of light and medium crude oil (31%), 1.2 MMbbl of NGLs (24%) and 13.3 MMcf of natural gas (45%). Total proved reserves of 21.3 MMboe at December 31, 2020 consisting of 8.3 MMbbl of light and medium crude oil (39%), 4.0 MMbbl of NGLs (19%) and 54.2 MMcf of natural gas (42%). Total proved plus probable reserves of 26.8 MMboe at December 31, 2020 consisting of 10.6 MMbbl of light and medium crude oil (39%), 5.0 MMbbl of NGLs (19%) and 67.7 MMcf of natural gas (42%). See “Reader Advisories – Reserves Disclosure” for additional details.
- See “Reader Advisories – Non-GAAP Financial Measures” for additional details.
- See “Reader Advisories – Forward Looking Information and Statements” for additional details regarding underlying assumptions used in forecast 2021 and targeted 2022 operating income, operating netback, AFF, FAFF, net debt, capital expenditures and production.
- Assumes a November 30, 2021 closing date for the Acquisition.
- Total land holdings to be acquired is 68,905 gross (49,811 net) acres, of which approximately 49,120 gross (37,995 net) acres represent lands in the Cardium formation.
- See “Reader Advisories – Drilling Locations” for additional details regarding drilling locations.
- See “Reader Advisories – Reserves Disclosure” for additional details regarding reserves estimates.
- Capital expenditures exclude acquisitions.
- InPlay’s plans for 2022 and associated targets and outlook, including the plans for the Prairie Storm Assets, remain preliminary in nature and do not reflect a Board approved capital expenditures budget. See table in the “Forward Looking Information and Statements” section for underlying material assumptions related thereto.
- Inclusive of the working capital surplus of Prairie Storm being assumed by InPlay upon closing of the Acquisition, estimated to be $9.5 million after payment of Prairie Storm’s estimated transaction costs.
- Based on the issuance of 8.3 million InPlay Shares to the shareholders of Prairie Storm and the issuance of 8.3 million InPlay Shares under the Financing.
- AFF, FAFF and EV/DACF accretion metrics are based on the pro-forma 2021 forecast and 2022 outlook information (for which the material underlying assumptions are disclosed in the “Forward Looking Information and Statements” section) compared to the 2021 guidance and 2022 outlook information within the “Forward Looking Information and Statements” section updated for strip pricing as of September 27, 2021 as follows: US $69.75/bbl WTI; $3.70/GJ AECO; $33.40/boe NGL realized price; FX rate CA$/US$ 0.79; MSW Differential US $5.60/bbl.