ROK Resources Inc. announces transformational $72 million acquisition of sustainable, producing, oil-weighted assets, including a strategic Interest in the world-class Weyburn CCUS EOR project, and $75 million in financing

REGINA, SK – ROK Resources Inc. (“ROK” or the “Company“) (TSXV: ROK) is pleased to announce that it has entered into an arms-length definitive agreement to acquire certain oil & gas assets (the “Assets“), primarily in Saskatchewan and Alberta, from Federated Co-operatives Limited and its wholly-owned subsidiary 2214896 Alberta Ltd. (collectively, “FCL“), for total consideration of approximately $72 million (“Transaction Value” or “TV“), before closing adjustments (the “Acquisition“).

The Assets include approximately 2,962 boe/d (72% liquids)¹ of low-decline, oil-weighted production in Southern Saskatchewan and Alberta which, at US$75/bbl WTI pricing, is expected to generate an operating netback of $37/boe resulting in annualized net operating income (“NOI“) of $40 million, implying a 1.8x TV / NOI multiple. Based on a Reserve Report prepared by McDaniel & Associates, effective October 31, 2021 (the “Reserve Report“)², the Assets have a before-tax Proved Developed Producing (“PDP“) NPV_10% of $96 million, implying a 0.75x TV / PDP multiple, and a before-tax Total Proved Plus Probable (“TPP“) NPV_10% of $168 million, implying a 0.43x TV / TPP multiple.

The Assets include a working interest in the Weyburn-Midale Enhanced Oil Recovery (“EOR“) Project (“Weyburn“), which is one of the largest Carbon Capture, Utilization, and Storage (“CCUS“) projects in the world. Weyburn sequesters nearly two million tonnes of CO₂ per year and has sequestered a total of 36 million tonnes of CO₂ since inception³. Based on the Reserve Report, the Company’s interest in the Weyburn asset alone carries a PDP NPV_10% of $44 million.

“The Acquisition materially transforms ROK’s financial and operational strength through the addition of a high-quality, low decline, environmentally sustainable, oil-weighted asset base that is expected to generate substantial free funds flow at current commodity prices. Weyburn is a world-class asset capable to organically fund what we have identified as a deep inventory of drilling opportunities at Southeast Saskatchewan and Kaybob, and we expect it will uniquely position ROK to be a net-negative CO₂ emitter by 2023″ said Cameron Taylor, Chairman and Chief Executive Officer of ROK.

The total consideration, before certain closing adjustments, for the Acquisition is approximately $72 million and is comprised of: (i) $69 million in cash (the “Cash Consideration“); and (ii) approximately $3 million, subject to certain adjustments, in the form of Units (as defined herein). Upon completion of the Acquisition, it is expected that FCL will own, up to, approximately 9.9% of the issued and outstanding class “B” common shares in the capital of ROK (each a “Common Share“). The Cash Consideration and related transaction expenses will be funded through the proceeds from a new $65 million Senior Loan Facility (as defined herein) and a $10 million Bought Public Offering (as defined herein) led by Echelon Capital Markets (“Echelon“) as the sole lead underwriter and sole bookrunner, on behalf of a syndicate of underwriters. Details of the Senior Loan Facility and Bought Public Offering are provided below.

Acquisition Highlights

The Acquisition is completely aligned with ROK’s long-term business strategy to grow into a premier, publicly traded energy producer through the acquisition and responsible exploration and development of diversified and sustainable assets in strategic locations, including in Alberta and Saskatchewan, where the management team has a deeply rooted track record of value creation through successfully building and exiting four prior private companies.

The highlights of the Acquisition and the anticipated benefits associated with the Assets include the following:

• Desirable Land Positions within Highly Economic Conventional and Unconventional Resource Plays
  • Large land position of 1,380,556 gross (333,347 net) acres of land within four core areas in Saskatchewan (Dodsland, Butte Shaunavon, and Southeast Saskatchewan) and Alberta (Kaybob)
  • Recent offsetting industry drilling activity is focused on the Midale, Frobisher, Shaunavon and Viking, and the Cardium, Bluesky, Dunvegan, and Montney
  • No significant near-term expiries and unrestricted year-round access
  • Average working interest of nearly 50% (excluding Weyburn)
  • Interest in several conventional low decline units, including the Weyburn CCUS EOR project
    
    
• Significant Booked Reserves & Substantial Long-Term Resource Development Upside
  • Significant remaining PDP reserves of 6.7 million boe, valued at an NPV_10% of $96 million⁴
  • Substantial TPP reserves of 13.5 million boe, valued at an NPV_10% of $168 million⁵
  • Estimated PDP and TPP Reserve Life Index of over 6 and 12 years, respectively
  • Over 100 identified drilling locations identified by ROK management (including 40 booked locations)
  • Historically under-capitalized; ample primary development and secondary / tertiary EOR potential
    
    
• Stable Base Production Yields Significant Free Funds Flow Potential
  • Stable base production of approximately 2,962 boe/d, including 460 boe/d at Weyburn
  • Medium-to-light oil weighted production between 27-38° API gravity
  • Free funds flow driven by a shallow base decline (22%, including 4% at Weyburn), high operating netbacks ($37/boe) and compelling capital efficiencies (less than $20,000/boe/d)
  • Opportunity to efficiently optimize production via several low capital outlay workover candidates
    
    
• Strongly Integrated Operations Deliver Low-Cost Structures
  • High working interest and operatorship in key growth properties ensures substantial control over pace of development
  • Readily available area processing capacity and strategic access to markets
  • Low royalties (<13%) and operating costs (<$20/boe)
  • Annualized NOI of $40 million driven off a $37/boe netback
  • Modest asset retirement obligations can be fully serviced with spending $1.2 million per year
    
    
• Excellent ESG Characteristics Underpin Responsible and Sustainable Development
  • Weyburn CCUS EOR project provides significant CO₂ & GHG production offsets
  • Licensee liability ratios of 2.22x (Alberta) and 1.31x (Saskatchewan)
  • Well-planned program to actively manage abandonment obligations on an annual basis
  • Weyburn CO₂ sequestration offsets current GHG emissions by 86%
  • ROK plans to be a carbon negative company by 2023

The Acquisition, the agreement of which was formally executed on Feb 3, 2022, has an effective date of November 1, 2021 and is expected to close on or about late February 2022, subject to certain customary conditions and regulatory and other approvals, including all necessary approvals of the TSXV Exchange.

Acquisition Summary

Acquisition Metrics

Bought Public Offering

In connection with the Acquisition, ROK has entered into an agreement with Echelon (the “Underwriter“) pursuant to which the Underwriter has agreed to purchase 55,555,600 subscription receipts (the “Subscription Receipts“) from the Company at a price of $0.18 per Subscription Receipt (the “Issue Price“) and offer them to the public by way of a short form prospectus for total gross proceeds of approximately $10 million (the “Bought Public Offering“).

Each Subscription Receipt will entitle the holder thereof to receive, upon the satisfaction of certain conditions, including the completion of the Acquisition, and without payment of additional consideration or further action, one unit (a “Unit“), consisting of one Common Share and one Common Share purchase warrant (a “Warrant” and collectively the “Warrants“). Each Warrant will entitle the holder thereof to acquire one additional Common Share at an exercise price of $0.25 for a period of 36 months from the closing date. The Company will apply to list the Common Shares and Warrants underlying the Unit on the TSX Venture Exchange (the “Exchange“).

The Company has granted the Underwriter an option to purchase up to an additional 15% of the Subscription Receipts at the Issue Price (the “Over-Allotment Option“). The Over-Allotment Option may be exercised in whole or in part to purchase Subscription Receipts as determined by the Underwriter upon written notice to the Company at any time up to 30 days following the closing date of the Bought Public Offering.

The Company will use the net proceeds from the Bought Public Offering to fund a portion of the Cash Consideration, in addition to transaction costs and other general corporate purposes.

The Bought Public Offering will be completed (i) by way of a short form prospectus of the Company to be filed in the provinces of British Columbia, Alberta, and Ontario, (ii) on a private placement basis in the United States pursuant to exemptions from the registration requirements of the United States Securities Act of 1933, as amended (the “U.S. Securities Act“) and (iii) 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.

This news release does not constitute an offer to sell or a solicitation of an offer to sell any of securities in the United States. The securities have not been and will not be registered under the U.S. Securities Act or any state securities laws and may not be offered or sold within the United States or to U.S. Persons unless registered under the U.S. Securities Act and applicable state securities laws or an exemption from such registration is available.

The Bought Public Offering is expected to close on or about February 24, 2022, or such other date as the Company and the Underwriter may agree, and is subject to customary closing conditions, including the approval of the securities regulatory authorities and the Exchange.

On completion of the Bought Public Offering and the Acquisition, the Company expects to have approximately 164 million Common Shares outstanding (including full exercise of the Over-Allotment Option).

Senior Loan Facility

In connection with the Acquisition, ROK is pleased to announce that it has entered a commitment letter (the “Commitment Letter“) with respect to a senior secured loan facility with Anvil Channel Energy Solutions (“ACES“) for an aggregate principal amount of $65 million (the “Senior Loan Facility“). The Senior Loan Facility will bear interest at a rate of US prime + 8.00% and will amortize over a four (4) year period (the “Term“). Based on forecast production rates and hedged commodity rates, the Company anticipates repaying the loan in full well in advance of its scheduled amortization payments. The commitment of ACES is 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.

In connection with the Acquisition and the Senior Loan Facility, the Company expects to convert all, or a portion of the $4 million principal amount of its existing senior secured notes (the “Senior Secured Notes“) into Units, that will be exchanged at the Issue Price. Any Senior Secured Notes that are not exchanged for Units will be fully repurchased by the Company, pursuant to the terms of the Senior Secured Notes.

Proforma ROK Highlights  

Upon completing the Acquisition and related Bought Public Offering and Senior Loan Facility, ROK will be strongly positioned to pursue a cost-focused and operationally efficient development plan that is designed to maximize organically generated free funds flow which will be used initially to deleverage the balance sheet, in the medium-term to provide significant flexibility to accelerate growth via development drilling or through completing other accretive acquisitions, and ultimately over the long term ROK believes that these Assets will prove to be the cornerstone to providing attractive yield back to its shareholders.

The highlights of the proforma ROK include the following:

• Organic Free Funds Flow to Support Rapid De-Leveraging and Equity Value Creation
  • Prior to principal repayment but after interest, ROK forecasts 2022 free funds flow of $22 million
  • As at year end 2022, ROK forecasts to carry a total debt to trailing NOI ratio of 1.1x
  • ROK anticipates that while holding production relatively flat it will fully repay all outstanding indebtedness in approximately three years
  • Downside in commodity prices has been largely protected by hedging 75% of its PDP production

Advisors

Echelon Capital Markets is acting as exclusive financial advisor to ROK with respect to the Acquisition and Senior Loan Facility.

McDougall Gauley LPP, Norton Rose Fulbright, and EnerNext Counsel are acting as legal advisor to ROK with respect to the Acquisition and Senior Loan Facility, with EnerNext Counsel also acting as legal advisor to ROK with respect to the Bought Public Offering.

Qualified Person

The technical content of this news release has been reviewed and approved by Bryden Wright, P. Eng., a qualified person for the purpose of National Instrument 41-101.

About ROK

ROK is primarily engaged in exploring for petroleum and natural gas development activities in Saskatchewan. Its head office is located in Regina, Saskatchewan, Canada and ROK’s common shares are traded on the Exchange under the trading symbol “ROK”.

Boe Disclosure

The term barrels of oil equivalent (“boe“) may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet per barrel (6 Mcf/bbl) of natural gas to barrels of oil equivalence is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. All boe conversions in the report are derived from converting gas to oil in the ratio mix of six thousand cubic feet of gas to one barrel of oil.

Reserve Disclosure

All reserves information in this press release was prepared by an independent reserve evaluator, effective October 31, 2021, using the reserve evaluators November 1, 2021 forecast prices and costs in accordance with National Instrument 51-101 – Standards of Disclosure of Oil and Gas Activities (“NI 51-101“) and the Canadian Oil and Gas Evaluation Handbook (the “COGE Handbook“). All reserve references in this press release are “Company gross reserves”. Company gross reserves are the Company’s total working interest reserves before the deduction of any royalties payable by the Company and before the consideration of the Company’s royalty interests. It should not be assumed that the present worth of estimated future cash flow of net revenue presented herein represents the fair market value of the reserves. There is no assurance that the forecast prices and costs assumptions will be attained, and variances could be material. The recovery and reserve estimates of the Assets and ROK’s crude oil, NGLs and natural gas reserves provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. Actual crude oil, natural gas and NGLs reserves may be greater than or less than the estimates provided herein. The estimates of reserves and future net revenue for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties, due to the effects of aggregation.

Estimated proforma reserves have been disclosed to present a post-deal snapshot of ROK, understanding that Estimated ROK Standalone and Estimated ROK Post-Deal employ different price forecasts. The differences in the evaluations, however, are not material and offer a fair representation of the total reserves of the Company after closing of the Acquisition.

Drilling Locations

This press release discloses drilling locations with respect to the Assets in two categories: (i) proved locations; and (ii) un-booked locations. Proved locations are derived from the Company’s internal reserves evaluation as prepared by a member of management who is a qualified reserves evaluator in accordance with NI 51-101 and the COGEH effective October 31, 2021, and account for drilling locations that have associated proved and/or probable reserves, as applicable. Un-booked locations are internal estimates based on the Company’s assumptions as to the number of wells that can be drilled per section based on industry practice and internal review. Un-booked locations do not have attributed reserves or resources. Of the total 100 drilling locations identified herein, 40 are proved plus probable locations and 60 are un-booked locations. Un-booked locations have been identified by management as an estimation of Company’s multi-year drilling activities based on evaluation of applicable geologic, seismic, engineering, production, and reserves information assuming completion of the Acquisition. Assuming completion of the Acquisition, there is no certainty that the Company will drill all un-booked drilling locations and if drilled there is no certainty that such locations will result in additional oil and gas reserves, resources, or production. The drilling locations considered for future development will ultimately depend upon the availability of capital, regulatory approvals, seasonal restrictions, oil and natural gas prices, costs, actual drilling results, additional reservoir information that is obtained and other factors. While certain of the un-booked drilling locations have been de-risked by the drilling of existing wells by the vendor in relative close proximity to such un-booked drilling locations, other un-booked drilling locations are farther away from existing wells where management has less information about the characteristics of the reservoir and therefore there is more uncertainty whether wells will be drilled in such locations and if drilled there is more uncertainty that such wells will result in additional oil and gas reserves, resources or production.

Non-IFRS Measures

Certain measures commonly used in the oil and natural gas industry referred to herein, including, “Operating Netback”, “Net Debt”, “Net Operating Income”, “Free Fund Flow”, “Free Fund Flow Yield”, “Debt-Adjusted Free Fund Flow”, “Debt-Adjusted Free Fund Flow Yield”, and “Enterprise Value” do not have a standardized meaning prescribed by IFRS and therefore may not be comparable with the calculation of similar measures by other companies. These non-IFRS measures are further described and defined below. Such non-IFRS measures are not intended to represent operating profits, nor should they be viewed as an alternative to cash flow provided by operating activities, net earnings or other measures of financial performance calculated in accordance with IFRS.

“Operating Netback” equals petroleum sales (before realized hedging gains or losses on derivative instruments) less royalties and operating costs calculated on a boe basis. The Company uses certain industry benchmarks, such as Operating field netback, to analyze financial and operating performance. This metric can also be calculated on a per boe basis. The Company considers Operating Field Netback an important measure to evaluate operational performance, as it demonstrates field level profitability relative to current commodity prices.

“Net Debt” equals as outstanding long-term debt and net working capital. The Company uses this metric to analyze the level of debt in the Company including the impact of working capital.

“Net Operating Income” is calculated as petroleum and natural gas revenue less royalties, net operating expenses and transportation expenses. Net operating income multiple is calculated as purchase price of the acquisition divided by the annual net operating income related to the acquisition. The Company uses this metric as an indication of the cost of the acquisition in relation to the net operating income from the acquired business.

“Operating Free Funds Flow” is calculated by taking net operating income and deducting capital expenditures, excluding acquisitions and dispositions. The Company uses Operating Free Fund Flow to determine the amount of funds delivered off the asset for future capital allocation decisions.

“Operating Free Fund Flow Yield” is calculated as Operating Free Funds Flow divided by the Transaction Value. The Company uses this measure as an indication of the Operating Free Funds Flow return to all stakeholders of the asset.

“Free Funds Flow” is calculated by taking net operating income and deducting cash G&A and interest expenses, and capital expenditures, excluding acquisitions and dispositions. The Company uses Free Fund Flow to determine the amount of funds available to the Company for future capital allocation decisions.

“Debt–Adjusted Free Fund Flow” is calculated by taking Free Funds Flow and adding back financing costs.

“Enterprise Value” is calculated using (i) the product of * the number of issued and outstanding Common Shares of the Company multiplied by (y) the per share closing price of the Common Shares or the Issue Price, plus (ii) the amount of the Company’s debt, less (iii) the amount of cash and cash equivalents of the Company.

“Debt Adjusted Free Fund Flow Yield” is calculated as Debt-Adjusted Free Funds Flow divided by the Company’s Enterprise Value at the date indicated herein. The Company uses this measure as an indication of the Free Funds Flow return to all stakeholders based on current share prices.

“Reserve Life Index” is calculated by dividing the TPP reserves by the product of the estimated current production and 365 days in a year.

Cautionary Statement Regarding Forward-Looking Information

This news release includes certain “forward-looking statements” under applicable Canadian securities legislation that are not historical facts. Forward-looking statements involve risks, uncertainties, and other factors that could cause actual results, performance, prospects, and opportunities to differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements in this news release include, but are not limited to, statements with respect to the Company’s objectives, goals, or future plans with respect to pursuing the objectives and the expectations regarding the expected results thereof. Forward-looking statements are necessarily based on several estimates and assumptions that, while considered reasonable, are subject to known and unknown risks, uncertainties and other factors which may cause actual results and future events to differ materially from those expressed or implied by such forward-looking statements. Such factors include but are not limited to general business, economic and social uncertainties; litigation, legislative, environmental, and other judicial, regulatory, political and competitive developments; delay or failure to receive board, shareholder or regulatory approvals; those additional risks set out in ROK’s public documents filed on SEDAR at www.sedar.com; and other matters discussed in this news release. Although the Company believes that the assumptions and factors used in preparing the forward-looking statements are reasonable, undue reliance should not be placed on these statements, which only apply as of the date of this news release, and no assurance can be given that such events will occur in the disclosed time frames or at all. Except where required by law, the Company disclaims any intention or obligation to update or revise any forward-looking statement, whether because of new information, future events, or otherwise.

Cautionary Statement Regarding Future Oriented Financial Information

This news release contains future oriented financial information (“FOFI“) within the meaning of applicable securities laws. The FOFI has been prepared by our management to provide an outlook of our activities and results and may not be appropriate for other purposes. The FOFI has been prepared based on a number of assumptions including the assumptions discussed and described as forward-looking statements and assumptions with respect to expected annualized net operating income. The actual results of our operations and the resulting financial results may vary from the forecast set forth herein, and such variation may be material. Our management believes that the FOFI has been prepared on a reasonable basis, reflecting management’s best estimates and judgments.  Readers are cautioned that the foregoing list of important factors is not exhaustive. The forward-looking statements and the FOFI contained in this news release are made as of the date of this news release or the dates specifically referenced herein. All forward-looking statements and the FOFI contained in this news release are expressly qualified by this disclaimer and cautionary statement.  Other than as required by applicable securities laws, the Company assumes no obligation to update forward-looking statements or the FOFI should circumstances or the Company’s estimates or opinions change.

Neither the Exchange nor its Regulation Services Provider (as that term is defined in the policies of the Exchange) accepts responsibility of the adequacy or accuracy of this release.

SOURCE ROK Resources Inc.

For further information: Cameron Taylor, Chairman and CEO, Jared Lukomski, Senior Vice President, Land & Business Development, Phone: (306) 522-0011, Email: info@rokresources.ca