Daylight Resources Trust
TSX : DAY.UN
TSX : DAY.DB.B
TSX : DAY.DB.C
TSX : DAY.DB.D

Daylight Resources Trust
West Energy Ltd.
TSX : WTL

West Energy Ltd.

March 05, 2010 09:29 ET

Daylight Resources Trust Announces Agreement to Acquire West Energy Ltd.

- INCREASES OIL LEVERAGE TO 45%

- SUBSTANTIAL IMPACT ON INVENTORY OF CARDIUM LIGHT OIL PROSPECTS

- CONSOLIDATES EXISTING PEMBINA OPERATIONS

CALGARY, ALBERTA--(Marketwire - March 5, 2010) - Daylight Resources Trust ("Daylight" or the "Trust") (TSX:DAY.UN) and West Energy Ltd. (TSX:WTL) are pleased to announce that they have entered into an arrangement agreement (the "Arrangement Agreement") pursuant to which, subject to the approval of the West shareholders, Daylight shall acquire all of the outstanding common shares of West by way of a plan of arrangement (the "Arrangement"). The transaction is valued at approximately $570 million, including currently estimated net debt and transaction costs of $135 million. Consideration for the transaction is comprised of $115 million of cash, with the remainder to be paid in Daylight trust unit equivalents. Based on the expected fully diluted shares outstanding of West at the closing of the Arrangement, each West shareholder will receive, at their election: (a) $5.50 in cash, or (b) 0.465 of a Daylight trust unit equivalent, or (c) a combination thereof for each West share held. The final consideration received by each West shareholder is subject to proration such that $115 million in cash will be paid to West shareholders in aggregate. Based on the 10-day weighted average price of Daylight trust units ending March 4, 2010, and cash to be paid, West shareholders will receive an aggregate $5.30 per share, a premium of 25% to West's 10-day weighted average price of $4.24 per share ending March 4, 2010. The Arrangement is expected to close in mid-to-late May 2010, after Daylight's proposed conversion to a corporation.

TRANSACTION RATIONALE

Daylight's acquisition of West continues its strategy of pursuing transactions where near-term cash flow strength is supported by long-term development potential to provide growth opportunities for our equity holders. The acquired assets are highly complementary to Daylight's existing Pembina operations and expand our position in the Pembina region of central Alberta.

The highlight of the transaction is the addition of West's Cardium opportunity to Daylight's existing large Cardium position in the Pembina fairway. Over 90% of West's assets are located in the Pembina region of central Alberta where West has accumulated over 40 net sections of highly prospective Cardium oil rights.

  • Pro Forma Cardium rights in the Pembina area increase to over 140 net sections.
  • West's lands are concentrated on the east side of the major Pembina Cardium pool, in close proximity to the initial successful Cardium horizontal drilling in the Pembina area.
  • Daylight estimates an unrisked drilling inventory of 80 to 160 horizontal Cardium light oil locations on West's lands at Pembina.
  • West has drilled 13 (10.1 net) horizontal Cardium light oil wells to date with the first 7 (5.1 net) wells delivering an average 30-day initial production rate of 200 barrels of oil equivalent ("boe") per day.
  • Daylight plans to continue with an aggressive drilling program in Pembina for horizontal Cardium development to take full advantage of the current Alberta royalty incentives and currently has 4 rigs operating in Pembina executing our horizontal Cardium drilling program.

West has substantial light oil assets in addition to its Cardium horizontal opportunities, in particular two light oil pools at Pembina, which have large original oil in place ("OOIP") with the potential to improve recovery factors.

  • The Belly River oil pool (in which West has an approximate 80% working interest) has a low decline rate, over 400 million barrels of OOIP and a recovery to date of ~18%. Several operators to the east have been experimenting with the same horizontal multi-frac technology used in the Cardium to develop similar Belly River oil pools. Daylight has been investigating the applicability of these technologies as well as enhanced recovery to increase production and reserves from this asset.
  • The second pool is the Pembina Keystone Cardium Unit #3, where West has a 59% working interest in this large OOIP asset with a low recovery factor.

There are also significant synergies in combining the two company's existing Nisku light oil facilities and gathering systems. By combining the operating infrastructure of the two companies, Daylight sees potential to substantially reduce operating costs.

The transaction further supports Daylight's goal of maintaining a balanced portfolio between oil and natural gas, increasing the Trust's leverage to oil to approximately 45%. This also enhances the strategic balance between oil and gas in our resource play drilling inventory.

The combination of Daylight and West's assets and operations is expected to offer a number of benefits to West's shareholders through their participation in the pro forma Daylight.

  • West's shareholders will be able to participate in Daylight's extensive inventory of low geological risk and repeatable resource play drilling opportunities. These include multi-zone natural gas in the Deep Basin, high liquids natural gas in West Central Alberta and additional Cardium light oil in Pembina.
  • Daylight will have one of the largest Cardium positions in the Pembina fairway with over 140 net sections of prospective lands with 300 to 600 horizontal locations.
  • Daylight also has Cardium potential opportunity outside of the Pembina fairway at Pine Creek.
  • Daylight's solid balance sheet and portfolio diversity also provides the flexibility to expand drilling programs in key plays depending on relative commodity price strength and project economics. 
  • West's shareholders will also receive monthly dividends expected to be paid by Daylight upon closing of the transaction.

Anthony Lambert, President and CEO of Daylight stated, "With the addition of West's high quality assets, this transaction solidifies Daylight's position as one of the leading players in the Pembina Cardium horizontal oil development."

Ken McCagherty, President and CEO of West stated, "Our combination with Daylight enables West's shareholders to take advantage of substantial synergies in the combined Pembina area and to benefit from Daylight's extensive inventory of high quality oil and gas resource play opportunities in other areas of the Western Canadian Sedimentary Basin."

SIGNIFICANT TRANSACTION HIGHLIGHTS

Transaction Metrics

  • Utilizing current production and attributing an estimated value for land of approximately $110 million, the production acquisition cost is approximately $79,300/boe per day, which compares favorably to other oil weighted transactions executed through 2009 and year-to-date 2010.
  • The Proved plus Probable ("2P") reserve acquisition cost is $23.84/boe (based on West's reported reserves at 2009 year-end) offering an acquisition recycle ratio of 1.6 times on West's current corporate operating netbacks.

Operational Impact

  • The transaction supports Daylight's goal of maintaining a balanced portfolio between oil and natural gas, increasing Daylight's leverage to oil and NGL production from 40% to 45%.
  • Current production from West's assets is approximately 5,800 boe/d (81% oil & NGLs), an increase from their February 2010 published production due to the successful tie-in of several Pembina wells.
  • Reserve additions of 19.3 mmboe of "2P" reserves (84% oil and NGLs), based on West's independent third party reserve evaluation dated December 31, 2009. These reserves represent an increase of 16% over Daylight's reported 2009 year-end reserves. Only 19% of the 2P reserves are associated with the Nisku light oil properties. Daylight and West use the same independent third party engineering firm.
  • West currently holds over 100,000 net acres of undeveloped land, including 40 net sections of Cardium rights in the Pembina fairway and significant 2D and 3D seismic data.
  • Daylight's equity holders and West's shareholders benefit from the combination of the Trust's significant inventory of low geological risk repeatable resource play type assets and West's complementary high netback light oil and extensive Cardium drilling inventory. Including the lands acquired from West, Daylight now estimates an unrisked drilling inventory of 300 – 600 horizontal Cardium light oil locations within the Pembina fairway.
  • The acquired production volumes offer attractive operating netbacks at $38.26/boe using our commodity price estimates of US$80.00/bbl WTI oil and $5.25/mcf AECO natural gas, delivering a 7% pro forma increase to the Trust's netback.
  • Daylight will provide additional guidance with respect to the Trust's production and capital spending plans upon successful completion of the transaction.

Corporate Conversion

  • Daylight is proceeding with plans to propose a conversion to a dividend paying corporation in May 2010 with the Trust's extensive inventory expected to continue to provide investors with capital growth while also offering a monthly income component for an attractive total return.
  • The combination of Daylight's and West's year-end 2009 tax pools are approximately $1.7 billion. These tax pools create high value for our equity holders as they have the potential to defer taxation well into the future following Daylight's conversion to a corporation.

West Transaction Details

The completion of the Arrangement is subject to customary TSX, court and regulatory approvals, as well as the approval of at least 66 2/3 percent of the votes cast by the West shareholders present, in person or by proxy, at the West shareholders' meeting. It is expected that the West shareholders' meeting to vote on the Arrangement and closing will occur in mid-to-late May 2010. An information circular is expected to be mailed to shareholders of West in early April 2010. The Arrangement is scheduled to close after Daylight's planned conversion to a corporation expected to occur in early May 2010.

Board Approval

The Board of Directors of Daylight and West have unanimously approved the execution of the Arrangement Agreement. West's Board of Directors has determined that the proposed Arrangement is fair to West shareholders, is in the best interests of West shareholders and has unanimously recommended that West shareholders vote in favor of the Arrangement. The West Board of Directors, Officers and senior management, who own approximately 7.1 percent of the outstanding West shares, have agreed to vote their West shares in favor of the proposed Arrangement.

West has agreed that it will not solicit or initiate any discussions concerning any other business combination. West has agreed to pay a non-completion fee of $25 million to Daylight in certain circumstances. In addition, Daylight has the right to match any competing proposal for West in the event such a proposal is made.

Advisors

GMP Securities L.P. ("GMP") is acting as exclusive financial advisor to Daylight with respect to this transaction.

CIBC World Markets Inc. ("CIBC") is acting as exclusive financial advisor to West with respect to this transaction. CIBC has advised the Board of Directors of West that, subject to the review of definitive legal agreements, it is of the opinion, as of the date hereof, that the consideration to be received by West shareholders pursuant to the proposed Arrangement is fair from a financial point of view to West shareholders.

Advisory Regarding Forward-Looking Information and Statements

This press release contains forward-looking statements and forward-looking information within the meaning of applicable securities laws. 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 or information. More particularly and without limitation, this press release contains forward looking statements and information concerning: the combined entities' petroleum and natural gas production, reserves and resources (including original oil in place), undeveloped land holdings, drilling inventory, reserve life index, business strategy, future development and growth opportunities, prospects and asset base; the anticipated benefits from the transaction including improved operating efficiencies, field optimizations and cost reductions; enhanced liquidity and increased investor attention and future cash flows, distributions; value and debt levels; capital programs; future tax pools and positions; treatment under tax laws; and oil and natural gas prices. 

The forward-looking statements and information in this press release are based on certain key expectations and assumptions made by West and Daylight, including expectations and assumptions concerning: prevailing commodity prices and exchange rates; applicable royalty rates and tax laws; future well production rates; reserve and resource volumes; the performance of existing wells; the success obtained in drilling new wells; the inventory of new drilling locations, the sufficiency of budgeted capital expenditures in carrying out planned activities; the availability and cost of labour and services; and the receipt, in a timely manner, of regulatory, securityholder and third party approvals. Although West and Daylight believe that the expectations and assumptions on which such forward-looking statements and information are based are reasonable, undue reliance should not be placed on the forward-looking statements and information because West and Daylight can give no assurance that they will prove to be correct. There is no certainty that West or Daylight will achieve commercially viable production from miscible floods or otherwise.

Since forward-looking statements and information address future events and conditions, by their very nature they involve 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 oil and gas industry in general such as: operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to reserves, production, costs and expenses; health, safety and environmental risks; commodity price and exchange rate fluctuations; marketing and transportation or petroleum and natural gas and loss of markets; environmental risks; competition; incorrect assessment of the value of acquisitions; failure to realize the anticipated benefits of acquisitions; ability to access sufficient capital from internal and external sources; failure to obtain required regulatory, securityholder and other third party approvals; and changes in legislation, including but not limited to tax laws, royalty rates and environmental regulations. There are risks also inherent in the nature of the proposed transaction, including: failure to realize anticipated synergies or cost savings; risks regarding the integration of the two entities; incorrect assessments of the values of the other entity; and failure to obtain the required securityholder, court, regulatory and other third party approvals (or to do so in a timely manner). This press release also contains forward-looking statements and information concerning the anticipated completion of the proposed transaction and the anticipated timing for completion of the transaction. West and Daylight have provided these anticipated times in reliance on certain assumptions that they believe are reasonable at this time, including assumptions as to the time required to prepare and mail West securityholder meeting materials; the timing of receipt of the necessary regulatory, court and other third party approvals; and the time necessary to satisfy the conditions to the closing of the transaction. These dates may change for a number of reasons, including unforeseen delays in preparing meeting materials, inability to secure necessary regulatory, court or other third party approvals in the time assumed or the need for additional time to satisfy the conditions to the completion of the transaction. Accordingly, readers should not place undue reliance on the forward-looking statements and information contained in this press release concerning these times. 

Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information on these and other factors that could affect the operations or financial results of M, Daylight or the combined entity are included in reports on file with applicable securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com).

The forward-looking statements and information contained in this press release are made as of the date hereof and West and Daylight undertake no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.

Barrels of Oil Equivalent

"Boe" means barrel of oil equivalent on the basis of 1 boe to 6,000 cubic feet of natural gas. Boe's may be misleading, particularly if used in isolation. A boe conversion ratio of 1 boe for 6,000 cubic feet of natural gas is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

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