Donnycreek to merge with Contact Exploration Inc.

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TSXV: DCK

CALGARY, Oct. 21, 2014 /CNW/ - Donnycreek Energy Inc. ("Donnycreek" or the "Company") (TSX-V: DCK) reports that it has entered into an arm's length definitive arrangement agreement (the "Arrangement Agreement") with Contact Exploration Inc. ("Contact") whereby Contact and Donnycreek will merge (the "Merger") to form a new, amalgamated corporation to be named "Kicking Horse Energy Inc." ("Kicking Horse"). The Merger will consolidate the companies' interests in the Deep Basin including their working interests ("WI") in their Kakwa (East), Alberta property (the "Kakwa Property").

Donnycreek holds a 50% WI in 16.75 gross sections at the Kakwa Property. Contact is the 25% WI operator of the Kakwa Property. Based on current WI production, Kicking Horse will have approximately 3,000 BOE/d of Montney production from the Kakwa Property (52% natural gas, 48% condensate and other natural gas liquids).

The Merger also includes Donnycreek's operated working interest in 380 gross sections of petroleum and natural gas rights at Wapiti (75% WI) and West Kakwa (Chicken) (40% WI) as well as 2 gross sections (24% WI) and 2 gross sections (64% WI) contiguous to the Kakwa Property; and Contact's 100% working interest in 11 additional gross sections at West Kakwa; 27 gross sections at Chime and 23 gross sections at Pinto.

Contact has also announced today that it has entered into a $20 million bought deal equity financing of 54,100,000 common shares of Contact ("Contact Shares") at a price of $0.37 per Contact Share on a private placement basis, to fund ongoing development and exploration at the Kakwa Property (the "Contact Financing"). 

MERGER

The Merger will be undertaken by way of a plan of arrangement under the Business Corporations Act (Alberta) ("ABCA").  Pursuant to the Merger, Contact and Donnycreek will amalgamate to form Kicking Horse on the basis of 0.075 of a common share of Kicking Horse (each, a "Kicking Horse Share") being issued in exchange for each outstanding Contact Share and 0.600 of a Kicking Horse Share being issued in exchange for each outstanding common share of Donnycreek (the "Donnycreek Shares").  The Merger will represent an exchange ratio of 8.0 Contact Shares for each Donnycreek Share, being a value of $2.96 for each Donnycreek Share, based on the issue price of Contact Shares in the Contact Financing, of $0.37 per share.  Immediately following the closing of the Contact Financing and Merger (collectively, the "Transactions"), the former Donnycreek shareholders will hold approximately 58% of the outstanding Kicking Horse Shares and the former Contact shareholders (including subscribers under the Contact Financing) will hold approximately 42% of the outstanding Kicking Horse Shares. 

Upon completion of the Transactions, there will be approximately 60.6 million Kicking Horse Shares outstanding (without giving effect to the possible exercise of the underwriters' option granted in connection with the Contact Financing) and the Kicking Horse Shares will (subject to receipt of the final approval of the TSX Venture Exchange (the "TSXV")) be listed on the TSXV. 

Kicking Horse will be managed by Steve Harding as President and CEO, Raymond Sully as COO, Chad Kalmakoff as VP Finance and CFO, Mark Hadley as VP Exploration and Paul Poohkay as Production Manager.  The Board of Directors of Kicking Horse will initially consist of 7 members, being Ken Bowie, Bob Hodgins, Bruce Allford, Steve Harding and three directors to be determined by Donnycreek and agreed to by Contact.

The Merger is anticipated to close in mid to late December 2014. Closing of the Merger is subject to, among other conditions, the approval by holders of at least 66²/₃% of the shares (and by a majority of holders of the minority of shares, if applicable) voted at each of the parties' respective securityholder meetings, the approval of the Alberta Court of Queen's Bench, the receipt of all necessary regulatory and stock exchange approvals and satisfaction of certain other closing conditions that are customary for a transaction of this nature. Closing of the Merger is not conditional on the closing of the Contact Financing. 

It is anticipated that separate Contact and Donnycreek securityholder meetings will be held in December 2014 following the mailing of a joint information circular regarding the Merger in November 2014 to securityholders of each company.  Each party has agreed to pay a non-completion fee of $10 million in certain circumstances as set forth in the Arrangement Agreement, and upon the termination of the Arrangement Agreement.

The Board of Directors of Donnycreek has unanimously approved the Arrangement Agreement, determined that the Merger is in the best interests of Donnycreek and, based on the fairness opinion provided by RBC Dominion Securities Inc., determined that the consideration to be received by Donnycreek shareholders pursuant to the Merger is fair from a financial point of view and has unanimously resolved to recommend that Donnycreek securityholders vote in favour of the Merger.

The Board of Directors of Contact has unanimously approved the Arrangement Agreement, determined that the Merger is in the best interests of Contact and, based on the fairness opinion provided by Canaccord Genuity Corp., determined that the consideration to be received by Contact securityholders pursuant to the Merger is fair from a financial point of view and has unanimously resolved to recommend that Contact securityholders vote in favour of the Merger.

The directors and officers of Contact and Donnycreek, holding approximately 3% and 11% of the outstanding Contact Shares and Donnycreek Shares, respectively, have entered into support agreements pursuant to which each has agreed to vote their securities in favour of the Merger.

STRATEGIC RATIONALE

The key benefits to Donnycreek shareholders pro forma the Merger are as follows:

• Based on an exchange ratio of 8.0 Contact Shares to each Donnycreek Share and the issue price of Contact Shares issuable pursuant to the Contact Financing of $0.37 per share, the Kicking Horse Shares issuable to the holders of Donnycreek Shares under the Arrangement represents a 56% premium to the closing price of the Donnycreek Shares on October 20, 2014 of $1.90 per share.
• Maintain upside exposure to the current asset base for Donnycreek shareholders through their 58% (assuming closing of the Contact Financing) pro-forma ownership in the consolidated and capitalized entity.
• Creates a growth orientated junior oil and gas company with a strong balance sheet and substantial land holdings in the liquids rich Montney play providing increased scale and trading liquidity to enhance relevance and attractiveness for institutional investors.
• Consolidates ownership in the Deep Basin, including a 75% WI in the high netback Kakwa Property.
• Improves corporate efficiencies and provides additional cash flow that can be used to explore and develop acreage outside of the Kakwa Property, in exploration areas at Wapiti, West Kakwa, Pinto and Chime.
• Exposure to emerging east coast LNG markets through Contact's ownership in New Brunswick assets and Contact's equity ownership in Pieridae Energy Ltd.

Complete details of the terms of the Merger are set out in the Arrangement Agreement, which will be filed by each of the parties and will be available for viewing under each company's respective profile at www.sedar.com.

CONTACT FINANCING AND CREDIT FACILITY

Contact has entered into an agreement with a syndicate of underwriters (the "Underwriters"), pursuant to which the Underwriters have agreed to carry out a private placement, on an underwritten, bought-deal basis, of 54,100,000 Contact Shares at a price of $0.37 per Contact Share (the "Offering Price") for gross proceeds of approximately $20 million. The net proceeds from the sale of the Contact Shares will be used to fund ongoing development and exploration at the Kakwa Property.  Subject to regulatory approval, the Underwriters will also be granted an Underwriters' option (the "Option"), to purchase up to an additional 15% of the Contact Shares (representing 8,115,000 Contact Shares) offered at the Offering Price, which Option will be exercisable in whole or part at the sole discretion of the Underwriters at any time up to 48 hours prior to the closing date of the Contact Financing.

Completion of the Contact Financing is subject to certain conditions including the receipt of all necessary regulatory approvals, including the approval of the TSXV. Closing of the Contact Financing is expected to occur on November 13, 2014.

Based on a proposal received from its current lender, Contact anticipates that Kicking Horse will have approximately $45 million available on a credit facility at closing of the Transactions.

FINANCIAL ADVISORS AND FAIRNESS OPINIONS

RBC Dominion Securities Inc. has provided the Board of Directors of Donnycreek with its verbal opinion that, as of the date hereof and subject to the assumptions, qualifications and limitations on which the opinion is based, that the consideration received under the Merger is fair, from a financial point of view to the holders of Donnycreek Shares.

Canaccord Genuity Corp. is acting as exclusive financial advisor to Contact respecting the Merger and has provided the Board of Directors of Contact with its verbal opinion that, as of the date hereof and subject to the assumptions, qualifications and limitations contained therein and subject to its review of the final form of the documentation effecting the Merger, the consideration to be received by holders of Contact Shares and the holders of options to purchase Contact Shares pursuant to the Merger is fair, from a financial point of view to the holders of Contact Shares and the holders of options to purchase Contact Shares.

Further information relating to Donnycreek is also available on its website at www.donnycreekenergy.com.

ADVISORY ON FORWARD-LOOKING STATEMENTS

This news release contains forward-looking statements and information ("forward-looking statements") within the meaning of applicable securities laws and is based on the expectations, estimates and projections of management of Donnycreek as of the date of this news release, unless otherwise stated. The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "project", "should", "believe", "plans", "intends" and similar expressions are intended to identify forward-looking statements.  More particularly and without limitation, this news release contains forward-looking statements concerning: anticipated benefits of the Merger to the securityholders of Donnycreek, the timing and anticipated receipt of required regulatory, court and securityholder approvals for the Transactions; the ability of Donnycreek to satisfy the other conditions to, and to complete, the Merger; the anticipated timing of the joint information circular regarding the Merger and the holding of the securityholder meetings of each of Contact and Donnycreek, the anticipated closing date of the Contact Financing and the anticipated use of proceeds of the Contact Financing, the anticipated name of the company to be formed following the Merger, the anticipated management team and Board of Directors of Kicking Horse; the anticipated share capital of Kicking Horse, including the percentage of Kicking Horse Shares held by former Contact shareholders and Donnycreek shareholders and the anticipated credit facility of Kicking Horse following completion of the Merger.  Such forward-looking statements are provided for the purpose of providing information about management's current expectations and plans relating to the future. Investors are cautioned that reliance on such information may not be appropriate for other purposes, such as making investment decisions.

In respect of the forward-looking statements concerning the anticipated benefits and completion of the proposed Merger and the anticipated timing for completion of the Merger, Donnycreek has provided such in reliance on certain assumptions that it believes are reasonable at this time, including assumptions as to the time required to prepare and mail securityholder meeting materials, including the required information circular; the ability of each of Contact and Donnycreek to receive, in a timely manner, the necessary regulatory, court, securityholder, stock exchange and other third party approvals, the ability of each of Contact and Donnycreek to satisfy, in a timely manner, the other conditions to the closing of the Merger; and expectations and assumptions concerning, among other things: commodity prices and interest and foreign exchange rates; planned synergies, capital efficiencies and cost-savings; applicable tax laws; future production rates; the sufficiency of budgeted capital expenditures in carrying out planned activities; and the availability and cost of labour and services.

The anticipated dates provided may change for a number of reasons, including unforeseen delays in preparing meeting materials, inability to secure necessary securityholder, regulatory, court or other third party approvals in the time assumed or the need for additional time to satisfy the other conditions to the completion of the Merger.  Accordingly, readers should not place undue reliance on the forward-looking statements contained in this news release.  In respect of the forward-looking statements, Donnycreek has provided such in reliance on certain assumptions that it believes are reasonable at this time, including assumptions in respect of: prevailing commodity prices, margins and exchange rates; that each of Donnycreek's and Contact's future results of operations will be consistent with past performance and management expectations in relation thereto; the continued availability of capital at attractive prices to fund future capital requirements relating to existing assets and projects, including but not limited to future capital expenditures relating to expansion, upgrades and maintenance shutdowns; the success of growth projects; future operating costs; that counterparties to material agreements will continue to perform in a timely manner; that there are no unforeseen events preventing the performance of contracts; and that there are no unforeseen material construction or other costs related to current growth projects or current operations.

Since forward-looking statements addresses future events and conditions, such information by its very nature involves inherent risks and uncertainties.  Actual results could differ materially from those currently anticipated due to a number of factors and risks.  These include, but are not limited to the risks associated with the industries in which each of Contact and Donnycreek operates in general such as: operational risks; delays or changes in plans with respect to growth projects or capital expenditures; costs and expenses; health, safety and environmental risks; commodity price, interest rate and exchange rate fluctuations; environmental risks; competition; failure to realize the anticipated benefits of the Merger and to successfully integrate each of Contact and Donnycreek; ability to access sufficient capital from internal and external sources; and changes in legislation, including but not limited to tax laws and environmental regulations.  Risks and uncertainties inherent in the nature of the Merger include the failure of each of Contact and Donnycreek to obtain necessary securityholder, regulatory, court and other third party approvals, or to otherwise satisfy the conditions to the Merger, in a timely manner, or at all.  Failure to so obtain such approvals, or the failure of each of Contact and Donnycreek to otherwise satisfy the conditions to the Merger, may result in the Merger not being completed on the proposed terms, or at all.

Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information regarding some of these risks, expectations or assumptions and other factors may be found in the Company's Annual Information Form for the year ended July 31, 2013 and the Company's Management's Discussion and Analysis prepared for the year ended July 31, 2013.  The reader is cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements contained in this news release are made as of the date hereof and Donnycreek undertakes no obligations to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.

BOEs are presented on the basis of one BOE for six Mcf of natural gas.  Disclosure provided herein in respect of BOEs may be misleading, particularly if used in isolation.  A BOE conversion ratio of 6 Mcf:1 Bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.  Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion ratio on a 6:1 basis may be misleading as an indication of value.

NEITHER TSX VENTURE EXCHANGE NOR ITS REGULATION SERVICES PROVIDER (AS THAT TERM IS DEFINED IN THE POLICIES OF THE TSX VENTURE EXCHANGE) ACCEPTS RESPONSIBILITY FOR THE ADEQUACY OR ACCURACY OF THIS NEWS RELEASE.

This news release does not constitute an offer to sell or the solicitation of an offer to buy any securities within the United States. The securities to be offered have not been and will not be registered under the U.S. Securities Act of 1933, as amended, or any state securities laws, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of such Act or other laws.

SOURCE Donnycreek Energy Inc.