Surge P.R. Surge acquires 19.8 percent block of Longview Oil Corp. shares
Friday, February 28, 2014
Surge acquires 19.8 percent block of Longview Oil Corp. shares
08:31 EST Friday, February 28, 2014
CALGARY, Feb. 28, 2014 /CNW/ - Pursuant to early warning reporting requirements in Canada, Surge Energy Inc. ("Surge" or the "Company") (TSX: SGY) announces that it has acquired ownership and control of 9,300,000 common shares ("Common Shares") of Longview Oil Corp. ("Longview"), representing 19.8 percent of the outstanding Common Shares, at a purchase price of $4.45 per Common Share (the "Block"). The Common Shares were acquired pursuant to a bought deal secondary offering of Common Shares (the "Secondary Offering"), which were sold by an existing shareholder of Longview on February 28, 2014.
Surge's intent with respect to the acquisition of the Block is to obtain a large, strategic equity position in Longview, at a competitive cost base, and to pursue a mutually beneficial business combination with Longview. Surge, however, has no legal obligation to pursue any such business combination.
BACKGROUND TO THE ACQUISITION OF THE BLOCK
Over the last several months, Surge has completed significant detailed geological, geophysical and engineering technical work in relation to the assets of Longview, from both the public record, and in relation to a number of Longview's properties that overlap with Surge's own core assets. On this basis, Surge also initiated extensive, detailed financial modelling of a possible business combination between Surge and Longview.
The results of Surge's detailed technical and financial work indicate that there is potential for a business combination transaction that will provide significant benefits, to BOTH Longview and Surge shareholders.
Accordingly, when the Company was approached by the underwriters of the Secondary Offering regarding a strategic investment in the Block, Surge management responded favourably.
BENEFITS TO SURGE OWNING THE BLOCK
The distribution of the Common Shares that comprise the Block has been qualified by a prospectus under the Secondary Offering. Accordingly, the Block is freely trading and can be sold by Surge at any time pursuant to applicable securities laws. In the event that Surge continues to own the Block, Surge shareholders will receive a number of ongoing benefits as set forth below.
The Block, acquired at $4.45 per Common Share, provides Surge with a 10.8 percent pre-tax yield. On this basis, Surge will receive $4.5 million in dividend income annually relating to its investment in the Block (i.e. 9,300,000 Longview shares at an annual dividend of $0.48 per share). Further, there is generally no tax payable on dividends between Canadian corporations.
Surge will continue to evaluate its investment in the Block on several criteria — including, the dividend yield of the Block as it relates to Surge's current yield — and the Company may consider divesting some or all of the Block.
Given Surge's excellent balance sheet and low debt levels, pro-forma the investment in the Block, Surge will maintain a peer group low "all-in" payout/sustainability ratio of less than 89 percent, and an excellent balance sheet with a 2014 exit debt to cash flow ratio of less than 1.36 times (based on strip pricing). Pro-forma the investment in the Block, Surge forecasts more than $175 million of credit availability on the Company's bank lines.
The Block provides Surge with a competitive cost base that enhances Surge's ability to negotiate a mutually beneficial business combination with Longview, and offers a strategic ownership position in Longview, that competitors do not possess.
An Early Warning Report detailing this ownership position will be filed on the System for Electronic Document Analysis and Review ("SEDAR") at www.sedar.com within two business days, as required by applicable securities laws.