Arcan Resources Ltd.
TSX VENTURE : ARN

Arcan Resources Ltd.

December 19, 2014 22:22 ET

Arcan Announces Proposed Transaction to Recapitalize Its Convertible Debentures

CALGARY, ALBERTA--(Marketwired - Dec. 19, 2014) -

NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES.

Arcan Resources Ltd. (TSX VENTURE:ARN) ("Arcan" or the "Company") announced today a proposed transaction to recapitalize its convertible debentures into equity (the "Exchange") with the following key elements:

  • Exchange of Arcan's $86.25 million 6.25% convertible unsecured subordinated debentures due February 28, 2016 (the "2016 Debentures") and $85.0 million 6.50% convertible unsecured subordinated debentures due October 31, 2018 (the "2018 Debentures", and together with the 2016 Debentures, the "Debentures") into equity at an exchange price of $0.15 per share, representing approximately 87.5% of the post-Exchange common shares in the capital of Arcan

  • Reduction of Arcan's total pro forma debt, as at September 30, 2014, from $324.6 million, including the Debentures at face value, to $150.6 million

  • Reduction of Arcan's annual cash interest and financing expenses by approximately $10.9 million

  • Current holders of Arcan's issued and outstanding common shares ("Current Shareholders") will retain an approximate 7.5% interest in the Company upon completion of the Exchange

  • Employees, trade creditors and customers will not be affected by the Exchange

  • The Exchange is expected to be completed early in the first quarter of 2015

"The recapitalization transaction provides the best available solution to reduce our debt levels and normalize our capital structure to be on a level playing field with other oil and natural gas producers," said Terry McCoy, Arcan's Chief Executive Officer.

Management and the Board of Directors of Arcan (the "Board") believe that the Exchange is in the best interest of all stakeholders, and provides a number of benefits to the Company including the following:

  • Normalizes Arcan's capital structure to be competitive with industry peers in the challenging oil price and equity market environment

    • Reduces Arcan's pro forma ratio of net debt and working capital to quarterly annualized funds from operations, as at September 30, 2014, from 9.0 times to 3.2 times

    • Simplifies Arcan's capital structure to include only common shares and bank debt

    • Encourages investor interest in the Company

  • Substantially improves financial strength and reduces financial risk

    • Retires the approximately $171.25 million of net debt currently existing pursuant to the Debentures

    • Improves Arcan's financial liquidity and sustainability

    • Improves Arcan's liquidity position under its credit facilities due to the impact on future interest charges

    • Provides increased certainty to the capital markets and Arcan's banking syndicate with respect to Arcan's capital structure

  • Positions the Company to invest in its asset base

    • Decreases annual cash interest and financing expenses by approximately $10.9 million, which can be reallocated to asset development

    • Provides the opportunity for accretive growth using only internally generated cash flow over a multi-year horizon

The Exchange will be implemented upon the approval of the holders of Debentures (the "Debentureholders"), by way of extraordinary resolution, pursuant to and in accordance with the terms of the indenture (as supplemented) governing the Debentures. Arcan will continue to operate as usual and will carry on satisfying its obligations to trade creditors, customers and employees in the ordinary course of business.

Arcan has thoroughly investigated and exhausted a variety of financial and strategic alternatives, all of which have failed to generate acceptable proposals. The significant decline in oil prices has further exacerbated Arcan's position with respect to asset distribution opportunities and other strategic alternatives.

Arcan's Board has determined that the Exchange is in the best interests of the Company and its stakeholders given, among other considerations, that it will reduce Arcan's net debt by approximately $171.25 million, simplify Arcan's capital structure and provide considerable improvement in Arcan's financial liquidity. The determination to approve the Exchange was made based on a range of factors, including an opinion received from Scotia Waterous Inc., Arcan's financial advisor with respect to the Exchange, addressed to the Board of the Company, that the consideration to be received by the Debentureholders pursuant to the Exchange, if implemented, is fair, from a financial point of view, to the Debentureholders and Current Shareholders of the Company.

The Board believes that the Exchange transaction is a significant and positive development for Arcan and its stakeholders. It is a solution that is considered fair to the Debentureholders and to the Current Shareholders, and it delivers on the Company's key commitment to explore and pursue strategic options to improve its capital structure and liquidity. The Board and Management believe that the Exchange will create a financially stronger company and better allow for the pursuit of Arcan's business and operational goals.

Terry McCoy continued: "After a thorough review of options, we are convinced that it is in all stakeholders' best interests to implement the recapitalization transaction at this time. We believe that our capital structure, without the Exchange, would continue to negatively impact market valuation and the ability for Arcan to operate effectively. Management expects that the Exchange will rectify the issues impacting the Company's financial position, resulting in a stronger entity that can actively invest in its asset base and realize asset value. Arcan has shown its ability to be an efficient operator through its improvements in drilling and operations. Arcan's asset base provides growth potential through a focused land position, extensive existing infrastructure and ongoing positive impact from horizontal multi-stage fracture technology.

"The completion of the recapitalization transaction will normalize Arcan's capital structure to be competitive with other oil and natural gas producers and significantly improve liquidity," said Doug Penner, President. "We will now be able to truly focus on the development of our asset base and path forward without the implications of high debt levels overshadowing our operational successes."

Management and the Board believe that the Exchange is an important step to stabilizing the Company and moving forward. Arcan's credit facilities have been successively reduced by its banking syndicate over the last two years from $200 million and are now comprised of a $160 million syndicated revolving term credit facility and a $10 million non-syndicated revolving operating term credit facility (together, the "Credit Facilities"). These Credit Facilities are in term out and will mature on May 28, 2015. Management is currently in discussions with the syndicate regarding the impact of reduced oil prices and production and the Exchange on the Credit Facilities and the potential refinancing of the Credit Facilities.

In connection with the Exchange, Debentureholders holding approximately 40% of the Debentures have executed a support agreement whereby they have agreed, subject to certain terms and conditions (including due diligence and the extension or refinancing of the Credit Facilities on terms acceptable to them), to vote in favour of and support the Exchange (the "Support Agreement"). Under the terms of the Support Agreement, such Debentureholders will receive additional common shares representing approximately 5% of the new common shares in the capital of Arcan upon completion of the Exchange (the "Transaction Structure Shares"). Additional details regarding the Exchange are contained in the Support Agreement, a copy of which will be filed under Arcan's profile on SEDAR at www.sedar.com.
The Exchange remains subject to approval in its entirety by the TSX Venture Exchange.

Blake, Cassels & Graydon LLP is legal advisor to the Company. Goodmans LLP is legal advisor to the Ad Hoc Committee of Debentureholders.

Pro Forma Net Debt and Working Capital to Quarterly Annualized Funds From Operations, and Common Share Interests

Management uses net debt and working capital to quarterly annualized funds from operations as a key measure of Arcan's liquidity, as shown in Note 5 of Arcan's audited consolidated financial statements for the year ended December 31, 2013. The following table sets forth Arcan's pro forma net debt and working capital to quarterly annualized funds from operations as at September 30, 2014, assuming the completion of the Exchange:

Three months ended September 30, 2014 Pro Forma September 30, 2014
(000's) (unaudited)
Net debt and working capital(1) (5)
(including convertible debentures at face value) $ (324,637 ) $ (150,608)(6)
Cash flow from operating activities 6,981 9,732(7)
Change in non-cash operating working capital and Restricted Share Units 995 939(8)
Exchange costs 1,051 1,051
Funds from operations(2)(5) 9,027 11,722
Annualizing factor x4 x4
Quarterly annualized funds from operations(3)(5) $ 36,108 $ 46,888
Ratio(4)(5) 9.0 to 1 3.2 to 1

Notes:

  1. Net debt and working capital (deficiency) is calculated by subtracting the current liabilities (excluding bank debt), bank debt, and convertible debentures (at face value) from current assets.
  2. Funds from operations is determined as cash flow from operating activities before changes in non-cash working capital and Restricted Share Units and adding back non-operational, nonrecurring transactional costs.
  3. Quarterly annualized funds from operations is determined as quarterly funds from operations multiplied by a factor of four to represent an estimated full year of funds from operations based on that particular quarter's funds from operations.
  4. Net debt to annualized funds from operations is calculated as a ratio of net debt over annualized funds from operations.
  5. Net debt and working capital, funds from operations, annualized funds from operations and working capital are non-GAAP financial measures. See "Non-GAAP Measures" below.
  6. September 30, 2014 net debt and working capital has been reduced by the face value of the Debentures of $171,250 and the total balance of accrued interest on the Debentures of $2,779 in accounts payable, to calculate the pro forma September 30, 2014 balance.
  7. The three months ended September 30, 2014 cash flow has been increased by $2,751 of accrued interest on the Debentures over the period to calculate the pro forma three months ended September 30, 2014 cash flow from operating activities.
  8. The three months ended September 30, 2014 change in non-cash operating working capital and Restricted Share Units is adjusted by $56 for the change in accrued interest on the Debentures on accounts payable over the period to calculate the pro forma amount.

The following table sets forth the pro forma common share interests, assuming the completion of the Exchange:

Number of Shares Percentage
Common shares outstanding at September 30, 2014 97,860,013 7.5 %
Debentureholder exchange shares issued 1,141,666,667 87.5 %
Transaction Structure Shares issued 65,238,246 5.0 %
Shares outstanding after completion of Exchange 1,304,764,926 100.0 %

Key Steps in the Exchange

Arcan expects to hold a meeting of Debentureholders to consider the Exchange before the end of the first quarter of 2015 in Calgary, Alberta. The extraordinary resolution approving the exchange of the Debentures into equity must be passed by 66 2/3% of the Debentures present in person or by proxy and voting on the resolution.

The Exchange will not require any action by shareholders and is not subject to any shareholder vote.

Further information about the Exchange and the meeting of Debentureholders will be provided in an information circular expected to be distributed to Debentureholders in the coming weeks, as well as in other Arcan continuous disclosure filings available on SEDAR (www.sedar.com) and the Company's website (www.arcanres.com).

Arcan Resources Ltd. is an Alberta, Canada corporation that is principally engaged in the exploration, development and acquisition of petroleum and natural gas located in the Western Canada Sedimentary Basin. Additional information about the Company, including the Company's annual information form for the year ended December 31, 2013, is available under Arcan's profile on SEDAR at www.sedar.com.

Non-GAAP Measures

This news release contains disclosure respecting non-GAAP performance measures including, without limitation, funds from operations, net debt and working capital and net debt to quarterly annualized funds from operations. These measures are included to enhance the overall understanding of Arcan's current financial situation, to provide an alternative method for assessing Arcan's financial situation should the Exchange be completed and to provide a more consistent basis for comparison. These measures are not calculated in accordance with, or an alternative to, GAAP and do not have standardized meanings. Therefore, they may not be comparable to similar measures provided by other entities. Reconciliations from net debt and working capital and funds flow from operations, as applicable, to the most directly comparable measure calculated in accordance with GAAP as at September 30, 2014 have been provided in Arcan's third quarter management's discussion and analysis dated November 27, 2014, copies of which are available under Arcan's profile on SEDAR at www.sedar.com. The financial information accompanying this news release was prepared in accordance with International Financial Reporting Standards unless otherwise noted.

Forward-Looking Information and Statements

This press release contains certain forward-looking information and statements within the meaning of applicable securities laws. The use of any of the words ''expect'', ''anticipate'', ''continue'', ''estimate'', ''guidance'', ''objective'', ''ongoing'', ''may'', ''will'', ''project'', ''should'', ''believe'', ''plans'', ''intends'', "possible" and similar expressions are intended to identify forward-looking information or statements. In particular, but without limiting the foregoing, this press release contains forward-looking information and statements pertaining to, among other things, the following: Arcan's assessment of future plans, operations and the financial viability of Arcan; the benefits of the Exchange and the impact of the Exchange on Arcan and its capital structure, financial position and liquidity and outlook, including that the Exchange will create a financially stronger company and better allow for the pursuit of Arcan's business and operational goals; opportunities for accretive growth and the growth potential of Arcan's asset base; Arcan's pro forma net debt and working capital to annualized funds from operations; Arcan's common share interests assuming the completion of the Exchange; Arcan's ability to be competitive with industry peers upon the normalization of its capital structure; Arcan's ability to implement its plans relating to the Exchange; the potential re-financing of Arcan's Credit Facilities; and anticipated dates and information relating to the Debentureholder meeting.

Arcan believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable at this time but no assurance can be given that these factors, expectations and assumptions will prove to be correct. With respect to forward-looking statements contained in this press release, Arcan made assumptions regarding, among other things: the expected costs of potential projects; future crude oil and natural gas prices; Arcan's ability to obtain qualified staff and equipment in a timely and cost-efficient manner to meet demands; the regulatory framework with respect to royalties, taxes, environmental matters, resource recovery and securities matters in which Arcan conducts its business; timing and progress of work relating to Arcan's assets; future production levels; future capital expenditures; future sources of funding for Arcan's capital program; future debt levels; Arcan's geological and engineering estimates; costs associated with Arcan's operations; the geography of the areas in which Arcan is exploring; the impact of increasing competition; the sufficiency of budgeted capital expenditures in carrying out planned activities; the receipt, in a timely manner, of regulatory, Debentureholder and third party approvals in respect of the Exchange; the plans of counterparties, including the Debentureholders and Arcan's banking syndicate; and the expected costs, fees and expenses of the Exchange.

The forward-looking information and statements included in this press release are not guarantees of future performance and should not be unduly relied upon. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements including, without limitation: general economic conditions; the general continuance of current or, where applicable, assumed industry conditions; for reasons currently unanticipated, Arcan may not be able to maintain or increase its production rates in the manner currently expected; Arcan's capital spending and operations plans for 2014 and 2015 may not be completed in the timelines anticipated, in the manner anticipated or at all and the execution of such plans may not have the results currently anticipated by Arcan; uncertainties in the estimates of reserves and in projection of future rates of production and timing of development expenditures; changes in commodity prices and other cost assumptions; exchange rate fluctuations; interest rate fluctuations; the continuance of existing and, in certain circumstances, proposed tax and royalty regimes; unanticipated operating results or production declines; that Arcan will continue to conduct its operations in a manner consistent with past operations; debt levels or debt service requirements; limited, unfavourable or no access to debt or equity capital markets; Arcan's objectives; Arcan's budget and the expected cash flows resulting therefrom; the ability of Arcan's common shares to remain listed on the TSXV; the Exchange is subject in its entirety to the approval of the TSXV and such approval may not be granted on the terms currently contemplated by Arcan or at all; the availability of services and supplies; Arcan's ability to maintain relationships with suppliers, customers, employees, stockholders and other third parties in light of its current liquidity situation; reviews of Arcan's Credit Facilities and/or budget may not occur on the timelines anticipated or at all; an amendment, renewal or extension may not be considered by Arcan's lenders on terms acceptable to Arcan or at all; and certain other risks detailed from time to time in Arcan's public disclosure documents including, without limitation, those risks identified in this press release, and in Arcan's annual information form, copies of which are available under Arcan's profile on SEDAR at www.sedar.com.

The forward-looking information and statements contained in this press release speak only as of the date of this press release, and Arcan does not assume any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.

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 release.

This press release shall not constitute an offer to sell or the solicitation of an offer to buy any securities of Arcan Resources Ltd. in any jurisdiction. The common shares will not be and have not been registered under the United States Securities Act of 1933, as amended, or any state securities laws and may not be offered or sold in the United States, absent registration under the United States Securities Act of 1933, as amended, and any applicable state securities laws, or the availability of an exemption therefrom.

Contact Information

  • Arcan Resources Ltd.
    Terry McCoy
    Chief Executive Officer
    tmccoy@arcanres.com

    Arcan Resources Ltd.
    Douglas Penner
    President
    dpenner@arcanres.com

    Arcan Resources Ltd.
    Suite 2200, 500 - 4th Avenue S.W.
    Calgary, AB T2P 0H7
    (403) 262-0321