Concurrently with the completion of the Acquisitions, in accordance with their terms, each subscription receipt of the Company issued pursuant to the Offering will be exchanged effective August 3, 2023, for one common share of the Company (a “Common Share“) and one-half of one Common Share purchase warrant (each full warrant, a “Warrant“) with each Warrant exercisable into one Common Share (each a “Warrant Share“) at an exercise price of $7.50 per Warrant Share until August 3, 2026. The net proceeds of approximately $32.7 million were released from escrow to fund a portion of the purchase price of the Acquisitions. Holders of subscription receipts are not required to take any action in order to receive the underlying Common Shares and Warrants, and the subscription receipts are expected to be halted and subsequently de-listed from trading on the TSX Venture Exchange on August 3, 2023.
Commenting on the Acquisitions, Joel MacLeod , Executive Chairman of Highwood said “We are grateful for the institutional equity and shareholder support on our financing and encouraged by the approximate $10/bbl improvement in oil price since the announcement of the acquisitions. We remain excited about the opportunity to acquire high quality, low ARO (asset retirement obligation) assets with significant depth of inventory with sub 12-month payouts at a combined 2.2x EV to NTM Field NOI1 purchase multiple. Further, we believe having a clean capital structure with a advantaged cost and structure of debt financing supported by a $100 million credit facility from Canadian financial institutions is a significant advantage for Highwood as we look to grow Highwood to 30,000+ boe/d. With an estimated initial leverage of approximately 1.2x on 2024E Adjusted EBITDA2 and spending approximately 60% of anticipated cash flow to grow production over 20% while de-leveraging to approximately 0.9x by year-end 20242, we feel Highwood will be in a strong position to grow free cash flow per share over the next three to five years. These acquisitions are expected to provide a strong production and cash flow base as a platform for further consolidation of conventional oil and gas assets in the Western Canadian Sedimentary Basin. The assets bring highly economic multi-lateral drilling inventory with anticipated relatively quick payback periods, which are expected to drive near-term growth while generating free cash flow. We look forward to commencing our capital program in approximately 30-60 days and expect to increase production approximately 20% over the next 6-8 months to approximately 5,000 boe/d. We remain committed to de-leveraging to approximately 0.9x by year-end 2024.”
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1 |
NTM field net operating income (NTM Field NOI) is forecasted for the twelve-month period commencing July 1, 2023 at an average production of 4,500 boe/d. Based on Management’s projections (not forecasts set forth in the Acquisition Reserves Reports) and applying the following pricing assumptions: WTI: US$70.00/bbl; WCS Diff: US$14.00/bbl; MSW Diff: US$3.50/bbl; AECO: C$2.75/GJ; 0.74 CAD/USD. See ”Non-GAAP and other Specified Financial Measures”. |
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Based on Management’s projections (not IQRE forecasts) and applying the following pricing assumptions: WTI: US$70.00/bbl; WCS Diff: US$14.00/bbl; MSW Diff: US$3.50/bbl; AECO: C$2.75/GJ; 0.74 CAD/USD. Management projections are used in place of IQRE forecasts as Management believes it provides investors with valuable information concerning the liquidity of the Company. Cash flow figures assume completion of the Acquisitions on July 1, 2023 and illustrative hedges for total of 65% of net after royalty Proved Developed Producing reserves production. See ”Caution Respecting Reserves Information” and ”Non-GAAP and other Specified Financial Measures”. |
Acquisitions
The final consideration for the Shale Acquisition was 1,277,025 Common Shares. The final consideration for the Castlegate Acquisition was comprised of $37.6 million in cash. The final consideration for the Boulder Acquisition was $75.1 million in cash, the issuance of 1,500,000 common shares in the capital of the Company (“Common Shares“) and a $14 million note payable to the Boulder shareholder (the “Boulder Note“). The Boulder Note matures on July 1, 2025 and provides for payments, equal to $3,500,000, commencing October 1, 2024 and thereafter on January 1, 2025, April 1, 2025 and July 1, 2025, with the outstanding principal (if any) due in full on maturity. The Boulder Note will pay interest at 13% per annum payable quarterly on October 1, 2024, January 1, 2025, April 1, 2025 and July 1, 2025; all payments/repayments (of both principal and interest) under the Boulder Note are subject to certain terms and conditions under the New Credit Facilities discussed below. All obligations under the Boulder Note are fully and unconditionally personally guaranteed by Joel MacLeod, the Executive Chairman of the Company, in an amount limited to $3 million, plus costs and expenses of enforcement plus interest (the “Guarantee“).
New Credit Facilities
In connection with the Acquisitions, the Company entered into a new senior secured extendible revolving credit facilities in the aggregate principal amount of up to $100 million (the “New Credit Facilities“). The New Credit Facilities are comprised of extendible revolving credit facilities consisting of a $10 million operating facility and an up to $90 million syndicated loan facility.
The New Credit Facilities have a revolving period of 364 days, extendible annually at the request of the Company, subject to approval of the lenders thereunder. If not extended, the New Credit Facilities are anticipated to automatically convert to a term loan and all outstanding obligations will be repayable one year after the expiry of the revolving period. The borrowing base for the New Credit Facilities is $100 million, and to be subject to semi-annual redeterminations, based upon the Company’s annual report of the Company’s independent qualified reserves evaluator or updates thereto. The New Credit Facilities are secured by a first fixed and floating charge over all the Company’s assets. The New Credit Facilities include operating restrictions on the Company, including (among other things), limitations on acquisitions, distributions, dividends and hedging arrangements.
Board Updates
In connection with the completion of the Acquisitions, the Company has added David Gardner and Garrett Ulmer to the Board of Directors.
Mr. Gardner has over 30 years of experience in the global oil and gas industry, initially as a geologist with Exxon; and after completing an MBA, progressed his commercial career to the corporate executive level with a growing focus on general management, strategy, business development and M&A. He spent nearly 17 years with BP, including in BP’s corporate center and M&A group, and leading Exploration new access globally and Upstream business development across Europe and Africa. From 2014, Mr. Gardner was SVP of Business Development for Husky Energy in Calgary culminating in Husky’s combination with Cenovus Energy in January 2021. Mr. Gardner, also, was a Special Adviser with Kirk Lovegrove & Company Ltd in London in 2021. Since December 2021, Mr Gardner has been the CEO of Shale Petroleum Ltd. Mr. Gardner has a BS degree in Geology from the College of William and Mary in Virginia, an MS degree in Geology from the University of Wisconsin-Madison and an MBA degree from the University of California, Los Angeles.
Mr. Ulmer is currently serving as Chief Executive Officer of private oil and gas company West Lake Energy following approximately 2 years as Chief Operating Officer. Prior thereto, he worked in roles of increasing responsibility at Bellatrix Exploration from 2009 up to the role of Chief Operating Officer from 2017 to 2020. He has over 30 years experience in the upstream oil and gas industry including extensive service with Imperial Oil (Exxon Mobil) and ConocoPhillips in various roles.
The Board now consists of: Joel Macleod (Executive Chairman), Greg Macdonald, Stephen Holyoake, Ryan Mooney, David Gardner and Garrett Ulmer. The officers consist of: Joel Macleod (Executive Chairman), Greg Macdonald (Chief Executive Officer), Chris Allchorne (Chief Financial Officer), Kelly McDonald (Vice President, Exploration) and Trevor Wong-Chor (Corporate Secretary).
Mr. Gardner is the nominee pursuant to a board nomination agreement (“HR Board Nomination Agreement“) between the Company and HR Exploration whereby HR Exploration shall, for so long as it and its affiliates together shall own or control or exercise discretion over, directly or indirectly, not less than 10% of the issued and outstanding Common Shares, be entitled to nominate for election or appointment to the board of directors of the Company (the “Board“), as applicable, the greater of: (i) one nominee and (ii) such number of nominees that, when compared to the authorized number of directors on the Board at such time, is closest to but not less than proportional to the total number of Common Shares which HR Exploration and its affiliates together own or exercise control or direction over, directly or indirectly, relative to the total number of Common Shares then issued and outstanding. The Company shall use commercially reasonable efforts to ensure that the nominee(s) of HR Exploration shall be elected or appointed to the Board. The HR Board Nomination Agreement further provides HR Exploration with participation rights for future offerings to maintain its percentage ownership interest in the issued and outstanding Common Shares up to a maximum of a percentage ownership interest of 17% of the issued and outstanding Common Shares. HR Exploration also has the right to appoint an observer to the Board for so long as it is entitled to designate a Board nominee for election or appointment under the HR Board Nomination Agreement.
Mr. Ulmer is the nominee pursuant to a board nomination agreement between the Company and West Lake (“WL Board Nomination Agreement“) whereby West Lake shall, for so long as it shall own or control, directly or indirectly, not less than 9% of the issued and outstanding Common Shares, be entitled to designate for election or appointment to the Board, as applicable, one nominee. The Company shall use commercially reasonable efforts to ensure that West Lake’s nominee shall be elected to the Board.
Private Placement
In connection with the closing of the Acquisitions, 1080766 has purchased an aggregate amount of $2.8 million in units of the Company (the “Private Placement Units“) comprised of one Common Share and one-half of one Warrant (the “Private Placement“). Each Private Placement Warrant is exercisable into one Warrant Share at an exercise price of $7.50 per Warrant Share until August 3, 2026.
The Private Placement Units purchased pursuant to the Private Placement (including the Common Shares and Warrants comprising such Private Placement Units, and the Warrant Shares issuable upon the exercise of such Warrants) are subject to a statutory hold period until December 4, 2023.
1080766 (and Joel MacLeod) also participated in the Offering for an additional $2.2 million, bringing the aggregate equity commitment from 1080766 (and Joel MacLeod) to $5 million.
Early Warning Requirements
Following completion of the Acquisitions, conversion of Subscription Receipts and the Private Placement, Highwood now has 15,114,323 Common Shares outstanding.
1080766 Alberta Ltd. (“1080766“) (a company controlled by Joel MacLeod, a Director and Executive Chairman of the Company) acquired 309,416 Subscription Receipts pursuant to the Offering. Further, Joel MacLeod directly acquired 57,250 Subscription Receipts pursuant to the Offering. All of these Subscription Receipts will be converted to Common Shares and Warrants effective August 3, 2023 in connection with closing of the Acquisitions. For the purposes of this press release, all securities acquired or to be acquired directly by Joel MacLeod are included in the amount of securities that 1080766 owns and exercises control and direction over.
1080766 completed the Private Placement for $2.8 million and received 466,666 Common Shares and 233,333 Warrants in connection with the Private Placement.
Following completion of the Private Placement and Conversion of the Subscription Receipts, 1080766 and Joel MacLeod will own and exercise control or direction over 4,879,193 Common Shares and 416,666 Warrants, representing approximately 32% of the issued and outstanding Common Shares on a non-diluted basis and approximately 34% of the issued and outstanding Common Shares on a partially-diluted basis (assuming the exercise of all Warrants held by 1080766 and Joel MacLeod). Joel MacLeod is the sole control person of the 1080766. Joel MacLeod and 1080766 participated in the Offering for investment purposes.
HR Exploration acquired 1,666,666 Subscription Receipts pursuant to the Offering at an aggregate purchase price of $10,000,000 ($6.00 per Subscription Receipt). All of these Subscription Receipts will be converted into an aggregate of 1,666,666 Common Shares and 833,333 Warrants effective August 3, 2023 in connection with closing of the Acquisitions. On August 3, 2023, HR Exploration also received 943,741 Common Shares in connection with the closing of the Shale Acquisition. HR Exploration will own and exercise control or direction over 2,610,407 Common Shares and 833,333 Warrants, representing approximately 17% of the issued and outstanding Common Shares on a non-diluted basis and approximately 21% of the issued and outstanding Common Shares on a partially-diluted basis (assuming the exercise of all Warrants held by HR Exploration). HR Exploration may acquire or dispose of additional securities of the Company in the future through the market, privately, or otherwise, as circumstances or market conditions warrant.
The involvement of 1080766 in the Private Placement and Guarantee are “related party transactions” within the meaning of Multilateral Instrument 61-101 — Protection of Minority Security Holders in Special Transactions (“MI 61-101”) and the Company is relying on the exemptions in sections 5.5(a) and 5.7(a) [Fair Market Value Not More Than 25% of Market Capitalization] of MI 61-101 in order to be exempt from the formal valuation and minority shareholder approval requirements therein, as the aggregate fair market value of such transactions does not exceed 25% of the Company’s current market capitalization, as determined in accordance with MI 61-101.
Common Share and Warrant Listing on TSX Venture Exchange
The Warrants underlying the Subscription Receipts are expected to be listed for trading on the TSX Venture Exchange under the symbol “HAM.WT” effective as of the opening of markets on, or about, August 4, 2023. The Common Shares underlying the Subscription Receipts are expected to be listed for trading on the TSX Venture Exchange effective as of the opening of markets on, or about, August 4, 2023.
Financial and Strategic Advisors
RBC Capital Markets acted as financial advisor to Highwood on the Acquisitions and Echelon Capital Markets, Raymond James and ATB Capital Markets acted as strategic advisors to Highwood on the Acquisitions.
About Highwood Asset Management Ltd.
Highwood Asset Management Ltd. (TSXV: HAM) is a growth orientated oil and gas exploration and production company committed to shareholder alignment with high insider ownership while creating long-term value for its shareholders. The Company has an extensive inventory of low-risk, oil development drilling locations focused primarily on horizontal multi-lateral development of its assets. Operating as a responsible corporate citizen is a key focus to ensure we deliver on our environmental, social and governance (ESG) commitments and goals. For more information, please visit the Company’s website at www.highwoodmgmt.com.
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