CALGARY, May 16, 2019 /CNW/ – Highwood Oil Company Ltd., (“HOCL“, “Highwood” or the “Company“) (TSXV: HOCL) is pleased to announce that it has entered into an agreement with a publicly traded oil and gas exploration and production company (the “Vendor“) to purchase high quality oil assets in the Peace River Oil region of Northern Alberta for a total transaction value of $93.8 million, comprised of cash considerations of $88.8 million and equity consideration of $5.0 million prior to customary closing adjustments (the “Acquisition“). The Acquisition includes a 55% operated working interest (“WI“) in the Peace River Oil Partnership (the “PROP“) (8,000 boe/d gross production, 4,400 boe/d net production to HOCL, 89% oil and liquids). The PROP asset (the “Assets“) is a world-class resource with a large drilling inventory in the conventional Bluesky and emerging Clearwater oil plays where significant low risk development opportunities exist. The Assets also include access to a large 2D / 3D seismic database license, and extensive egress and infrastructure in place to facilitate self-sustaining operations.
The Acquisition will be funded with $61.5 million of cash, $19.0 million in deferred payment / vendor take-back consideration, $3.0 million of oil price escalator provisions, $5.3 million of assumed working capital deficit and $5.0 million of HOCL equity. Closing of the Acquisition is expected to occur prior to July 31, 2019, subject to the satisfaction of customary closing conditions, and the Acquisition will be deemed effective February 1, 2019.
STRATEGIC RATIONALE
The Acquisition is a continuation of the Company’s strategy to position itself as an area consolidator within oil-weighted resource plays where its management team has the experience and technical expertise to drive significant operating synergies. The Acquisition adds size and scale that will transition HOCL to become a strong intermediate oil weighted growth company. The Acquisition, which is being purchased at an attractive 2.9x multiple of operating funds flow and 3.8x multiple of free operating funds flow, is >160% accretive to HOCL’s estimated funds flow per share, while adding lower decline production with high netbacks and compelling new-drill capital efficiencies.
The base Bluesky production requires minimal capital investment to maintain production volumes allowing HOCL to generate highly sustainable free funds flow that will provide non-dilutive funding for its existing exploration portfolio and/or complementary strategic acquisitions. Furthermore, the Acquisition adds >50 sections of prospective Clearwater inventory to HOCL’s existing >225 sections of undeveloped Clearwater lands. The Acquisition, in combination with the Company’s other core assets, provides HOCL with diversified exposure to high quality upstream and midstream assets that deliver strong economic returns at lower commodity price levels and significant self-funded growth potential at current strip prices.
Based on annualized second half 2019 internal estimates, pro forma the Acquisition, HOCL is set to deliver 6,100 boe/d (93% oil and liquids) with operating funds flow of $55 million. Highwood’s balance sheet remains strong with a projected debt to funds flow ratio of approximately 2.3x assuming the Acquisition is financed with debt.
ASSET OVERVIEW
The PROP was formed in 2010 when the non-operating partner purchased a 45% WI in the Assets to develop what was mutually heralded as a “world-class oil resource” in the Peace River area. The Peace River area has a large drilling inventory, considerable secondary recovery potential, a moderate base decline, strong operating netbacks and capital efficiencies; collectively, providing a stable base for HOCL to grow from for decades to come. Operationally, over the past year, the PROP partners and industry have drilled 19 multi-lateral Bluesky horizontal wells (with 8-16 legs); the IP30 rates from those wells range from 180 bbl/d to >800 bbl/d.
PROP is anticipated to provide a multi-year source of free operating funds flow to fund sustainable growth and carries meaningful near and long-term development opportunities:
- PROP has an extensive land position of >420 sections (incl. >50 with Clearwater potential) and an internally identified drilling inventory of >360 locations (incl. >215 in the Clearwater)
- Recent industry results validate improved Bluesky economics at PROP using open-hole multi-lateral exploitation like HOCL’s technique for its existing Clearwater play
- Further potential Bluesky upside exists in re-drilling existing producers as 8-legs (from single-leg) & 38m (from 200m) inter-well spacing
- Industry has recently drilled two significant Clearwater step-outs (a six-leg producer and a vertical well) just 5-15 miles north and northeast of PROPs existing Nampa lands
- Extensive secondary EOR potential: polymer / thermal application validated by two pilots
- Strong Bluesky / Clearwater pad well economics deliver an IRR of ~157% / ~86% with payout achieved in 0.9 years / 1.3 years, respectively
- Valuable infrastructure: a stake in the Harmon valley plant (non-op, PROP 50% WI). Total estimated gross replacement cost of $500-600 MM
- Seismic: access to 985 km of 2D and 359 km2 of 3D data
- The Acquisition carries an attractive Liability Management Rating of 6.6x
In summary, based on internal estimates of H2 2019E projections, the key benefits to Highwood’s shareholders pro forma the Acquisition are as follows:
- Accretion per share: 163% on funds flow, 185% on production, 166% and 123% on proved developed producing and total proved plus probable reserves, 31% on net asset value
- Improved sustainability ratio / free funds flow yield: 53% (from 96%) / 14% (from 1%)
- Improved LMR Rating: 4.7x (from 1.3x)
SUMMARY OF THE TRANSACTION
The Acquisition has the following key characteristics:
Transaction value |
$93.8 million |
Current production |
4,400 boe/d (89% liquids) |
Base production decline |
24% |
Proved developed producing reserves(1) |
6,191 Mboe |
Proved developed producing NPV10(1)(2) |
$80 million |
Proved plus probable reserves(1) |
12,245 Mboe |
Proved plus probable NPV10(1)(2) |
$137 million |
Operating netback(3) |
$20/boe |
Notes: |
|
(1) |
Gross reserves are the total working interest reserves before the deduction of any royalties and including any royalty interests receivable. Estimated total proved and proved plus probable reserves attributable to the PROP assets as evaluated by Sproule Associates Limited (“Sproule”) in a report with an effective date of December 31, 2018, in accordance with the COGE Handbook and National Instrument 51-101 – Standards for Disclosure for Oil and Gas Activities of the Canadian Securities Administrators, using the Sproule December 31, 2018 price forecast. |
(2) |
Before tax net present value based on a 10 percent discount rate and Sproule’s December 31, 2018 forecast prices. Estimated values of future net revenues do not represent the fair market value of the reserves. |
(3) |
Refer to the non-GAAP measures section of this press release for additional disclosures and assumptions. |
Acquisition metrics are as follows:
Production |
$21,000/boe/d |
H2 2019E operating funds flow multiple(1) |
2.9x |
Proved developed producing reserves(2) |
$15/boe |
Proved plus probable reserves(2) |
$8/boe |
Recycle ratio(3) |
2.7x |
Free operating funds flow yield(4) |
26% |
Notes: |
|
(1) |
Calculated as $93.8 million transaction value / (current production of 4,400 boe/d x $20.39/boe x 365 days). |
(2) |
Calculated as transaction value divided by the proved developed producing or proved plus probable reserves. |
(3) |
Calculated as operating netback of $20.39/boe divided by the cost of proved plus probable reserves of $7.66/boe. |
(4) |
Calculated as ($32.7 million of operating funds flow – $7.9 million of sustaining capital expenditures) / $93.8 million transaction value. |
INCREASED H2 2019E ESTIMATES
The following is HOCL’s change in the company’s annualized internal estimates for the second half of 2019, after giving effect to the Acquisition:
Pre-Acquisition(1) |
Post-Acquisition(1) |
% Change |
|
Average production (boe/d) |
2,060 |
6,100 |
196% |
% Liquids |
100% |
93% |
(7)% |
Operating funds flow(2) |
$28 million |
$55 million |
100% |
Operating netback(2) |
$37/boe |
$25/boe |
(33)% |
Funds flow(2) |
$16 million |
$44 million |
173% |
Funds flow netback(2) |
$21/boe |
$20/boe |
(8)% |
Free funds flow yield(2) |
1% |
15% |
14% |
Net debt(2) |
$33 million |
$102 million |
210% |
Net debt / Funds flow(2) |
2.0x |
2.3x |
13% |
Proved developed producing reserves(3)(4) |
3,505 mboe |
9,696 mboe |
177% |
Proved developed producing NPV10%(3)(4) |
$85 million |
$166 million |
95% |
Proved plus probable reserves(3)(4) |
9,318 mboe |
21,563 mboe |
131% |
Proved plus probable NPV10%(3)(4) |
$192 million |
$329 million |
71% |
Notes: |
|
(1) |
Pricing assumptions: WTI US$62/bbl, WCS differential US$19/bbl, Edmonton par differential C$8/bbl, C$/US$ exchange rate $0.75, AECO C$1.35/Mcf; the pricing assumptions do not apply to before tax reserve evaluation of net present value discounted at 10 percent. |
(2) |
Refer to the non-GAAP measures section of this press release for additional disclosures and assumptions. |
(3) |
Gross reserves are the total working interest reserves before the deduction of any royalties and including any royalty interests receivable. Pre-Acquisition estimated total proved and proved plus probable reserves attributable to the Highwood assets are derived from: the reserve report as evaluated by GLJ Petroleum Consultants Ltd., in a report with an effective date of December 31, 2018, in accordance with the COGE Handbook and National Instrument 51-101 – Standards for Disclosure for Oil and Gas Activities of the Canadian Securities Administrators, using the GLJ December 31, 2018 price forecast, and the recent Saskatchewan acquisition reserve report as evaluated by GLJ Petroleum Consultants Ltd., in a report with an effective date of March 31, 2019, in accordance with the COGE Handbook and National Instrument 51-101 – Standards for Disclosure for Oil and Gas Activities of the Canadian Securities Administrators, using the GLJ March 31, 2019 price forecast. Estimated total proved and proved plus probable reserves attributable to the PROP assets as evaluated by Sproule Associates Limited in a report with an effective date of December 31, 2018, in accordance with the COGE Handbook and National Instrument 51-101 – Standards for Disclosure for Oil and Gas Activities of the Canadian Securities Administrators, using the Sproule December 31, 2018 price forecast. |
(4) |
Pro forma before tax net present value based on a 10 percent discount rate and Sproule’s December 31, 2018 forecast prices and GLJ’s December 31, 2018 forecast prices. Estimated values of future net revenues do not represent the fair market value of the reserves. |