Total Energy Services Inc.
TSX : TOT

Total Energy Services Inc.

December 08, 2009 09:02 ET

Total Energy Services Inc. Signs Agreement to Acquire Oilfield Services, Rental and Transportation Business of DC Energy Services Inc.

CALGARY, ALBERTA--(Marketwire - Dec. 8, 2009) - Total Energy Services Inc. ("Total") (TSX:TOT) is pleased to announce that it has entered into a letter agreement (the "Letter Agreement") with DC Energy Services Inc. ("DC Energy") and various related parties, which provides for the indirect purchase by Total (or one or more affiliates) (the "Purchaser") of the oilfield services, rental and transportation business currently conducted by DC Energy for $44.5 million, subject to certain adjustments (the "Acquisition").

Certain statements in this News Release constitute forward-looking statements, including statements respecting the nature and structure of the Acquisition, the attributes of the debentures proposed to be issued in partial payment of the purchase price for the Acquisition, expectations concerning the timing of finalization of additional bank borrowing capacity by Total, the timing of closing of the Acquisition and the perceived benefits of the Acquisition to Total, including the estimated increase in Total's EBITDA attributable to marketing and operational synergies arising from the Acquisition. Readers should refer to the cautionary statement concerning forward-looking statements that appears at the end of this News Release.

DC Energy is a private Alberta corporation that has been in business since 1979. DC Energy conducts business throughout western and northern Canada and Alaska through seven primary locations and several satellite locations and currently employs approximately 135 people. The assets to be indirectly acquired by Total are complementary to Total's existing equipment fleet and include approximately 3,600 pieces of rental equipment, 20 heavy trucks and 59 trailers, together with all inventories and other assets (excluding only land and buildings) used in connection with DC Energy's business. Total will indirectly assume certain leases in respect of real estate, and certain vehicles and trailers utilized by DC Energy in the ordinary course of business and offers of employment will be made to substantially all of DC Energy's employees.

Through its operating subsidiary, Total currently owns and operates approximately 4,500 pieces of rental equipment, 74 heavy trucks and 131 trailers. As such, the Acquisition represents an approximate 80% increase to Total's rental equipment fleet and a 27% increase to its heavy truck fleet.

Of the purchase price, $32 million is to be paid in cash at closing, with $12.5 million to be paid through the issuance of convertible unsecured debentures of Total (the "Debentures") to the vendors, bearing interest at 5% per annum, payable semiannually. The maturity date of the Debentures will be June 30, 2012, provided that the holders of the Debentures will be entitled to require payment in full of the principal amount of the Debentures, and outstanding interest, in the event of a change of control of Total. At the option of the holders, the Debentures will be convertible into common shares of Total, at a conversion price of $7.00 per share (subject to customary anti-dilution adjustments). As well, Total will have the right to cause the conversion of the outstanding principal amount of the Debentures into common shares if the 20 day weighted average trading price of its common shares exceeds $7.50 per share (subject to customary anti-dilution adjustments) at any time prior to the maturity date of the Debentures. Total will have the right to prepay all or any portion of the principal amount of the Debentures, together with accrued and unpaid interest, at any time without payment of any premium or penalty on 10 days prior written notice (the "Notice Period"). The Debenture holders will be entitled to convert their Debentures into common shares during any Notice Period.

Total intends to fund the cash portion of the purchase price utilizing bank debt. Total has $65 million of existing credit facilities with a single Canadian chartered bank, of which approximately $22.1 million is currently not utilized. Total has received proposals for up to an additional $35 million of borrowing capacity and expects to finalize its banking arrangements shortly.

Completion of the Acquisition is subject to satisfaction of a number of conditions in favor of Total, including approval of the board of directors of Total, receipt of all necessary third-party consents and approvals, completion of satisfactory due diligence, execution and delivery of a formal agreement of purchase and sale, conduct of DC Energy's oilfield services and rental business in the ordinary course until closing of the Acquisition and the execution and delivery of non-competition agreements by DC Energy and various related parties. The Letter Agreement also provides for various conditions in favor of the vendors, including receipt of all necessary third-party consents and approvals and the execution and delivery of a formal agreement of purchase and sale. The Letter Agreement provides that the parties will use reasonable efforts to complete the Acquisition on January 15, 2010 and that the effective date of the Acquisition will be January 1, 2010.

When completed, the Acquisition is expected to significantly increase Total's presence in the drilling, completions and production rentals market in Western Canada. The Acquisition will add two new branch locations (Drayton Valley and Red Deer), increasing the number of branches to 19. The Acquisition will also provide Total with experienced personnel and a quality asset base that has a significant presence in the completions market. The Acquisition is also expected to provide Total with a platform to expand its operations outside of western Canada, notably Alaska.

The following information has been obtained from the audited financial statements of DC Energy as at and for the year ended April 30, 2009, the unaudited interim financial statements of DC Energy as at and for the five months ended September 30, 2009 and certain other materials, which have been provided to Total for due diligence purposes and for purposes of the Letter Agreement. The information in the audited annual financial statements and unaudited interim financial statements of DC Energy and in other materials provided to Total by or on behalf of DC Energy has not been verified by or on behalf of Total and Total assumes no responsibility for the accuracy of such information.

For the 12 months ended April 30, 2009, DC Energy's revenue from operations intended to be continued by Total ("continuing operations") was approximately $65.7 million, and DC Energy's earnings from continuing operations before interest, taxes, depreciation and amortization ("EBITDA") was approximately $15.7 million. For the five months ended September 30, 2009, revenue from continuing operations was approximately $16.0 million, and EBITDA from continuing operations was approximately $1.5 million.

The combination of DC Energy's business with the existing rental and transportation business of Total is also expected to result in significant marketing and operational synergies. Management of Total has estimated that such synergies will provide a minimum of $2 million of incremental EBITDA for the 2010 financial year.

Total plans to file a Material Change Report (the "Report") respecting the Letter Agreement with certain securities regulatory authorities in Canada, which Report is expected to set out additional information relating to the Acquisition. When filed, the Report will be available under Total's profile on SEDAR at www.SEDAR.com.

Total is a growth oriented energy services corporation involved in contract drilling services, drilling and production rentals and natural gas compression equipment fabrication, sales, rental and service. The common shares of Total are listed and trade on the TSX under the symbol "TOT".

Cautionary Statement Respecting Non-GAAP Financial Measures

DC Energy's revenue and EBITDA from continuing operations are financial measures that have been included in this news release to enable readers to assess, at a high-level, the pro forma financial effect of the Acquisition on certain key financial accounts of Total. Revenue from continuing operations means the revenue generated by DC Energy for the applicable periods, less revenue associated with the portions of the DC Energy business that Total does not intend to continue to operate following completion of the Acquisition. EBITDA means earnings before interest, taxes, depreciation and amortization and is equal to earnings before income taxes plus interest on long-term debt plus other interest plus depreciation and has been calculated a manner consistent with the manner in which Total calculates EBITDA. However, DC Energy's EBITDA has been calculated after deducting earnings associated with the portions of the DC Energy business that Total does not intend to continue to operate following completion of the Acquisition and after excluding certain expenses that are not expected to be incurred in future operations. Revenue and EBITDA from continuing operations are not recognized measures under Canadian generally accepted accounting principles ("GAAP"). Management of Total has presented revenue and EBITDA from continuing operations in this news release (as opposed to DC Energy's topline revenue and EBITDA in isolation), so as not to overstate the pro forma effect of the Acquisition on Total.

Management of Total regularly provides information concerning Total's EBITDA for various periods, as Management believes that EBITDA is a useful supplemental measure, which provides an indication of the results generated by Total's primary business activities prior to consideration of how those activities are financed, amortized or how the results are taxed in various jurisdictions. Investors are cautioned, however, that revenue and EBITDA from continuing operations should not be construed as an alternative to net earnings determined in accordance with GAAP as an indicator of DC Energy's financial performance. Total's method of calculating DC Energy's revenue and EBITDA from continuing operations may differ from other organizations and, accordingly, the calculations of DC Energy's revenue and EBITDA from continuing operations contained in this news release may not be comparable to measures used by other organizations.

Cautionary Statement Respecting Forward-Looking Information

Certain information set out in this News Release constitutes forward-looking information. Forward-looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "intend", "could", "might", "should", "believe" and similar expressions. Forward-looking statements are based upon the opinions and expectations of management of the Company, as at the effective date of such statements and, in certain cases, information provided or disseminated by third parties (including DC Energy). Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, and that information obtained from third party sources is reliable, it can give no assurance that those expectations will prove to have been correct. Forward-looking statements are subject to certain risks and uncertainties (known and unknown) that could cause actual outcomes to differ materially from those anticipated or implied by such forward-looking statements. These factors include, but are not limited to such things as closing risk (including the risk that the Acquisition will not close due to non-fulfillment of conditions, for example), the risk that Total may not be able to successfully integrate the business, assets and employees of DC Energy into Total following closing of the Acquisition, the risk that the future performance of the assets associated with the business of DC Energy is not consistent with the past performance of the business conducted by DC Energy, the risk that anticipated synergies of the Acquisition may not materialize and the risk that additional bank financing will not be available to Total on terms acceptable to it, or at all. Accordingly, readers should not place undue reliance upon the forward-looking statements contained in this News Release and such forward-looking statements should not be interpreted or regarded as guarantees of future outcomes.

Forward-looking information respecting the nature and structure of the Acquisition is based upon the terms of the Letter Agreement and advice from representatives of DC Energy with respect to certain reorganization transactions proposed to be completed by DC Energy (and certain related parties) prior to closing of the Acquisition. Forward-looking information respecting the attributes of the Debentures proposed to be issued in partial payment of the purchase price for the Acquisition is based upon the terms of the Letter Agreement. Forward-looking information respecting the anticipated timing of finalization of additional bank borrowing capacity by Total is based upon financing proposals received by Total from its existing bank and other Canadian chartered banks. Forward-looking information concerning the anticipated timing of closing of the Acquisition is based upon the terms of the Letter Agreement, the current status of the Company's efforts to obtain the additional bank borrowing capacity described above and the current status of the Company's efforts to conclude various documents and arrangements incidental to closing of the Acquisition. Forward-looking information concerning the effect of the Acquisition on Total and the perceived benefits of the Acquisition is based upon the financial and operating attributes of both Total and DC Energy as at the date hereof, the views of management of Total respecting the synergies associated with the Acquisition, current and anticipated market conditions, that the future performance of the DC Energy assets to be acquired by Total will be consistent with historical performance and that Total will be successful in retaining a significant proportion of the current employees of DC Energy. Forward-looking information respecting management's estimate of the anticipated increase in Total's EBITDA attributable to marketing and operational synergies arising from the Acquisition is based upon EBITDA generated by each of Total and DC Energy during recently completed financial periods and an analysis by management of Total of the expected reduction in overhead and third-party rental and transportation expenses arising from the Acquisition.

Various risks to which the Company is exposed in the conduct of its business are set out in the Management's Discussion and Analysis respecting the Company's third-quarter financial statements, which was filed on SEDAR on November 5, 2009 and is available under the Company's profile at www.SEDAR.com. Subject to applicable securities laws, the Company does not undertake any obligation to publicly revise the forward-looking statements included in this News Release to reflect subsequent events or circumstances.

The Toronto Stock Exchange has neither approved nor disapproved of the information contained herein.

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