CALGARY, ALBERTA–(Marketwired – June 12, 2014) – Crocotta Energy Inc. (TSX:CTA) (“Crocotta” or the “Company”) is pleased to announce that it has entered into an arrangement agreement (the “Agreement”) whereby Long Run Exploration Ltd. (“Long Run” or “LRE”) will acquire all of the issued and outstanding common shares of Crocotta in a transaction valued at approximately $357 million (the “Arrangement”) including debt and transaction costs assumed by Long Run. Under the terms of the Arrangement each common share of Crocotta will be exchanged for 0.415 of a common share of Long Run, 1.0 common share of a new Montney-focused exploration and production company (“ExploreCo”) and 0.2 of an ExploreCo common share purchase warrant (“ExploreCo Arrangement Warrants”). Each whole ExploreCo Arrangement Warrant will entitle the holder to acquire one common share of ExploreCo (“ExploreCo Share”) at an exercise price of $1.70 per share at any time on or before 30 days following the closing of the Arrangement. It is also proposed that in conjunction with the Arrangement, certain officers, employees and directors will purchase up to 7.65 million units of ExploreCo (“ExploreCo Units”) at $1.70 per ExploreCo Unit for total proceeds of up to $13 million (the “Management Financing”). Additional details are provided under the heading “Financings” below.
In addition, in conjunction with the Arrangement, Crocotta and ExploreCo have entered into a letter agreement with a syndicate of underwriters lead by National Bank Financial Inc. to raise $30 million through a private placement of subscription receipts of ExploreCo (“Subscription Receipts”) at a price of $1.70 per Subscription Receipt on a “bought-deal” basis (the “Subscription Receipt Offering”). The gross proceeds raised under the Subscription Receipt Offering will be held in escrow pending satisfaction of certain escrow release conditions, including all of the conditions required to complete the Arrangement having being satisfied or waived. Additional details are provided under the heading “Financings” below.
STRATEGIC RATIONALE FOR TRANSACTION
Crocotta has two major assets that are very diverse and believes that separating these two assets will ultimately result in maximizing value for all shareholders of Crocotta. The Edson property is a low operating cost cash flow engine that produces approximately 7,500 BOE/d of light oil and liquids-rich natural gas and has extensive infrastructure and low-risk drilling inventory in the Bluesky and Cardium formations. The Dawson-Sunrise Montney asset is an exciting exploration asset that has significantly less production (2,300 BOE/d) and less established infrastructure, but provides Crocotta shareholders with what Crocotta believes to be a significant potential upside based on recent drilling in the area.
Crocotta believes that the benefits of separating the assets into two companies (Edson as part of a larger established dividend-paying company in Long Run and ExploreCo providing a pure-play Montney company with lands in the heart of the Montney’s liquids-rich gas fairway) are numerous, including:
- allowing shareholders to participate in a larger entity (Long Run) that pays a strong sustainable dividend with a low payout ratio;
- reducing shareholders’ risk and volatility on the Long Run portion given it is a balanced producer (approximately 50/50 Liquid to Gas ratio) with a diversified asset base; and
- exposing shareholders to a new pure play liquids-rich Montney producer (ExploreCo) that will be able to allocate capital and manpower exclusively to accelerate the growth of this asset.
EXPLORECO
ExploreCo is anticipated to be a new junior exploration and production company led by Robert Zakresky as President and CEO and certain members of Crocotta’s current management team. ExploreCo will be a growth-oriented, exploration-focused entity with approximately 2,300 BOE/d of liquids-rich natural gas. The assets will be focused in the highly prolific Montney gas resource trend of northeast British Columbia predominantly in the Dawson-Sunrise area where drilling results have been exceptional. Crocotta recently drilled a Montney well that has been on-stream for over 60 days with an IP30 of 920 BOE/d (32% oil and liquids) and and IP60 of 880 BOE/d (32% oil and liquids). Based on initial results, ExploreCo estimates the rate of return on this well to be over 200% with payback of approximately 7 months and a net present value of greater than $12 million based on certain capital estimates and forward strip pricing.
ExploreCo will hold a large land base in the Dawson-Sunrise area consisting of over 60 net sections (38,400 acres) of land with potential for Montney. Currently, ExploreCo anticipates having greater than 80 Montney locations and will continue with delineation drilling to possibly prove up an additional 200 locations on its current land base.
The Agreement contemplates that ExploreCo will assume approximately $15 million of existing Crocotta debt, however, based on the Management Financing, the Subscription Receipt Offering and exercise of ExploreCo Arrangement Warrants noted above, expects to be fully financed to carry out a significant drilling program and a material expansion of its current gas plant. ExploreCo has estimated that it will achieve a production rate of over 5,000 BOE/d (20-25% oil and liquids) by the end of 2015. ExploreCo estimates it will spend approximately $90 million in 2015 that includes drilling approximately 8 horizontal multi-frac Montney wells and the expansion of its current gas plant from 20 MMcf/d capacity to 60 MMcf/d capacity.
Assuming all private placements are fully subscribed for and all ExploreCo Arrangement Warrants are exercised, ExploreCo will have the following characteristics:
- 2,300 BOE/d (projected 5,000 BOE/d by exit 2015);
- $67 million cash (no debt);
- over 60 net sections (38,400 acres) of land in the highly prolific liquids-rich Montney fairway;
- a development drilling inventory of over 80 locations (IP60 approximately 880 BOE/d) with potential to prove up an additional 200 locations; and
- 155 million ExploreCo Shares outstanding.
SUMMARY
Crocotta’s board of directors and management view the Arrangement as an advantageous transaction for Crocotta shareholders. Through the Long Run transaction, existing Crocotta shareholders will benefit from the diversification of the Long Run asset base and liquidity in its shares as well as access to a monthly dividend stream (current average dividend yield of Long Run is approximately 7.6% per annum). Additionally, Crocotta shareholders will retain ownership in ExploreCo following the completion of the Arrangement, which will own certain assets that Crocotta’s management believe to contain significant upside and growth potential which can be accelerated through focused exploration and development in a well-capitalized entity.
Consideration Received by Crocotta Shareholders:
1.0 ExploreCo Share (ExploreCo financing price) | $ | 1.70/share |
0.415 common share of Long Run | $ | 2.28/share(1) |
Total Value (not including ExploreCo Arrangement Warrants) | $ | 3.98/share |
- Based on June 11, 2014 trading price of Long Run of $5.50
DESCRIPTION OF THE TRANSACTION
Arrangement
The Arrangement is a culmination of over seven years of exploration and development over which the Company grew production from approximately 100 BOE/d to current production of approximately 9,800 BOE/d. Management views the Arrangement as an opportunity for Crocotta shareholders to realize value for a large portion of the Company’s assets while retaining significant upside exposure associated with the Montney focused ExploreCo.
Based on the above expectations for the Arrangement and the consideration offered by Long Run (excluding ExploreCo component) the Arrangement has the following operational characteristics: