Arcan Resources Ltd.
TSX VENTURE : ARN

Arcan Resources Ltd.

June 23, 2014 16:22 ET

Arcan Resources Ltd. Announces Strategic Transaction With Aspenleaf Energy Limited and Creation of A New Swan Hills Company

CALGARY, ALBERTA--(Marketwired - June 23, 2014) -

NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES OF AMERICA

Arcan Resources Ltd. (TSX VENTURE:ARN) ("Arcan" or the "Corporation") is pleased to announce that it has entered into an arrangement agreement (the "Arrangement Agreement") with Aspenleaf Energy Limited ("Aspenleaf") pursuant to which Aspenleaf and Arcan will complete a plan of arrangement under the Business Corporations Act (Alberta) (the "Arrangement") which will, subject to receipt of all necessary approvals, result in the following transactions occurring:

  • Arcan will form a new junior oil and gas exploration and production company ("Spinco") which will hold 12.5% of Arcan's interest in the Swan Hills oil and gas assets and be spun out to Arcan's shareholders. Each common share of Arcan will be exchanged for one common share of Spinco ("Spinco Share") and 0.1 of a Spinco common share purchase warrant ("Spinco Warrant"). Each whole Spinco Warrant will entitle the holder to acquire one Spinco Share at an exercise price of $0.43 per share at any time on or before the date that is nine months following the closing of the Arrangement.

  • Aspenleaf will fund Arcan's redemption and cancellation of all of its outstanding 6.25% Convertible Unsecured Subordinated Debentures due February 28, 2016 (the "2016 Debentures") and 6.50% Convertible Unsecured Subordinated Debentures due October 31, 2018 (the "2018 Debentures, and together with the 2016 Debentures, the "Debentures"), pursuant to which debentureholders will receive aggregate consideration of $141,281,250 plus accrued but unpaid interest as of the closing date, representing approximately $825 per $1,000 principal amount of Debentures, and holders of Debentures will receive 100 Spinco Warrants per $1,000 principal amount of Debentures.

  • Following the transaction, Aspenleaf will retain all amounts owing under Arcan's $180 million credit facility which was drawn at $150.8 million as at March 31, 2014, other than $10 million which will be repaid by Spinco at closing pursuant to a new credit facility to be entered into by Spinco.

  • Aspenleaf will subscribe for $3 million of Spinco Shares at a purchase price of $0.43 per Spinco Share, representing approximately 6.7% of the issued and outstanding Spinco Shares upon completion of the Arrangement, and will receive 0.1 Spinco Warrants per Spinco Share subscribed for.

  • Upon completion of the arrangement, reorganization of Arcan's share capital and the recapitalization of Arcan's outstanding debt, Aspenleaf, either directly or through a subsidiary, will hold all of the shares of Arcan, which will retain 87.5% of Arcan's interest in the Swan Hills oil and gas assets.

Terry McCoy, CEO of Arcan, stated "Aspenleaf shares the same vision as we do in terms of the potential of the Swan Hills assets, and are not only committed to their development, but have the financial backing to realize that potential. Through Spinco and the warrants, all securityholders will benefit from Aspenleaf's continued development."

"After an extensive and thorough review of alternatives," continued Doug Penner, President of Arcan, "we are very pleased to move forward with this transaction as it provides an opportunity for shareholders to continue to participate in the growth of Arcan through Spinco and for debentureholders to monetize their investment at a significant premium to both historic and recent trading levels."

TRANSACTION RATIONALE

Arcan's board of directors and management believes the Arrangement is advantageous for Arcan's stakeholders after examining a variety of financial and strategic alternatives. In determining to proceed with the Arrangement, Arcan's board considered the following factors:

  • Arcan has succeeded in optimizing drilling, operating and G&A costs but remains severely constrained and undervalued compared to its peers due to its current capital structure and limited credit capacity.

  • Arcan believes that it is difficult to realize full value from its inventory of Swan Hills opportunities due to the significant curtailment of capital spending. As a result of interest payment obligations, it is difficult to grow the company's production base and reserve base from internally generated cash flow.

  • Arcan has examined a variety of financial and strategic alternatives which have failed to generate acceptable proposals.

  • Based upon current financial projections and expectations, there is some uncertainty as to Arcan having adequate cash on hand to repay the Debentures at maturity from internally generated cash flow, and the prospects for obtaining external financing to repay the Debentures at maturity are limited.

  • The cash payable to holders of Debentures under the Arrangement provides for a premium of approximately 25% over the closing price of the 2016 Debentures, and approximately 33% over the closing price of the 2018 Debentures, in each case on the trading date prior to the announcement of the Arrangement.

  • The Arrangement will provide an opportunity for Arcan's securityholders to continue to participate in the future upside in Arcan's Swan Hills play through ownership in Spinco pursuant to the Spinco Shares and Spinco Warrants issued in connection with the transaction. Aspenleaf has advised Arcan that it intends to exploit the significant drilling and waterflood opportunities on the overall land base. Through its financial partners, Aspenleaf has significant access to capital to accelerate development of the Swan Hills play.

ABOUT SPINCO

Spinco will be a new junior oil and gas exploration and production company led by certain members of Arcan's current management team, including Arcan's President Doug Penner, Executive Vice President Andy Fisher and Chief Financial Officer Graeme Ryder. Arcan expects that some members of its existing Board of Directors will join the board of Spinco.

Spinco will be a growth-oriented company with initial assets that comprise an interest in 12.5% of Arcan's Swan Hills assets. The Arrangement Agreement provides that Spinco will enter into a joint development agreement ("JVA") with Aspenleaf at closing of the Arrangement which will govern the joint development of the Swan Hills assets. Terms of the JVA will include customary industry operating standards for the operation of the assets in the area including an area of mutual interest in the Swan Hills, whereby Spinco will have the opportunity to participate in any future acquisitions or developments made by Aspenleaf, on a 12.5% interest basis.

The Arrangement Agreement provides that Spinco will pay $10 million to Arcan at closing of the Arrangement, with such funds to be drawn on a new credit facility to be entered into by Spinco (the "Spinco Facility"), the proceeds of which will be used to repay a portion of the existing Arcan bank debt. Aspenleaf has agreed that, concurrent with closing, it will subscribe for 6,976,744 Spinco Shares at a price of $0.43 per Spinco Share for total consideration of $3.0 million and receive 0.1 Spinco Warrants for each Spinco Share subscribed for. If all holders of Spinco Warrants exercise their Spinco Warrants in full, Spinco will have net cash on hand of approximately $4.9 million.

To provide increased certainty of future cash flows, Spinco will be assigned 12.5% of Arcan's outstanding commodity hedging contracts.

At closing of the Arrangement, Spinco will have the following characteristics:

  • 12.5% of Arcan's interest in the Swan Hills assets.

  • Production of approximately 450 barrels of oil equivalent ("BOE") per day (95% light oil).

  • Proved reserves of 3.1 million BOE ("MMboe") and proved plus probable reserves of 4.9 MMboe, as evaluated by GLJ Petroleum Consultants Ltd. in its report dated March 26, 2014, effective as at December 31, 2013 (the "GLJ Report").

  • Proved reserve net present value of $50.2 million and proved plus probable reserve net present value of $72.9 million as at December 31, 2013 (based upon a 10% discount rate, before tax), per the GLJ Report.

  • $7 million of net debt, before considering exercise of the Spinco Warrants; $4.9 million of cash assuming full exercise of the Spinco Warrants.

  • 104.8 million common shares outstanding (132.4 million assuming full exercise of the Spinco Warrants)

  • The net asset value ("NAV") per common share of Spinco is estimated to be $0.63 per share based on an independent engineering evaluation whereby the net present value of proved plus probable reserves are discounted at 10% before tax.

Proved Reserves Proved + Probable Reserves
Reserves - NPV 10% ($ million)(1) $ 50.2 $ 72.9
Assumed Debt ($ million) $ (10.0 ) $ (10.0 )
Equity issued to Aspenleaf $ 3.0 $ 3.0
NAV(2) ($ million) $ 43.2 $ 65.9
Spinco Shares (million shares) 104.8 104.8
Net Asset Value per Share ($/share) $ 0.41 $ 0.63

Notes:

(1) Net present value is calculated using a discount rate of 10% before taxes, per the GLJ Report.

(2) Net asset value is derived from the net present value of reserves, calculated using a discount rate of 10% before taxes, per the GLJ Report.

INFORMATION REGARDING THE ARRANGEMENT

Following an extensive review and analysis of the proposed transaction and consideration of other available alternatives, the Board of Directors of Arcan has unanimously determined that the Arrangement is in the best interests of Arcan and is fair to Arcan's securityholders. The Board of Directors of Arcan has unanimously approved the transaction and determined to recommend that Arcan's shareholders and holders of Debentures vote in favour of the Arrangement. All of the directors and senior executive officers of Arcan have entered into lock-up agreements with Aspenleaf supporting the transaction, pursuant to which they have agreed to vote their common shares (representing approximately 2.8% of the outstanding Arcan common shares) and convertible debentures held in favour of the approval of the Arrangement.

Scotiabank is acting as the lead financial advisor to Arcan and has provided the Board of Directors of Arcan with a fairness opinion regarding the proposed transaction. RBC Capital Markets is also acting as a financial advisor to Arcan. A copy of Scotiabank's fairness opinion will be included in the information circular to be sent to Arcan securityholders for the special meeting to be called to consider the arrangement. Blake, Cassels and Graydon LLP is acting as legal counsel to Arcan.

TD Securities Inc. is acting as exclusive financial advisor to Aspenleaf. Osler, Hoskin & Harcourt LLP is acting as legal counsel to Aspenleaf.

The Arrangement Agreement provides for, among other things, a non-solicitation covenant on the part of Arcan, subject to customary "fiduciary out" provisions that entitle Arcan to consider and accept a superior proposal and a right in favour of Aspenleaf to match any superior proposal. The Arrangement Agreement provides for a $6.0 million termination fee payable by Arcan in certain circumstances if the transaction is not completed.

Completion of the transaction is subject to receipt of court approval, approval by Arcan's shareholders and debentureholders, and receipt of all necessary regulatory approvals, including the approval of the TSXV, as well as other customary closing conditions. Arcan's securityholders will be asked to vote on the transaction at a special securityholders' meeting and the completion of the transaction will require the approval of two-thirds of the votes cast in person or by proxy at the meeting by shareholders and holders of each series of debentures.

An information circular regarding the Arrangement is expected to be mailed to securityholders in July for a special meeting of the holders of common shares and Debentures to take place in August, with closing expected to occur as soon as reasonably practicable following the securityholder vote and regulatory approval.

A copy of the arrangement agreement and the information circular and related documents will be filed with Canadian securities regulators and will be available on Arcan's profile at www.sedar.com.

About Arcan Resources Ltd.

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 Canada's Western Sedimentary Basin.

About Aspenleaf Energy Limited

Aspenleaf Energy Limited is a private oil and gas company that is focused on the acquisition and exploitation of light oil and liquids-rich gas assets in Western Canada. Aspenleaf is run by a highly experienced team, with combined industry experience of well over 100 years and headed by President & CEO, Bryan Gould. The company is backed by ARC Financial Corp, a Canadian energy-focused private equity manager, and Ontario Teachers' Pension Plan, one of Canada's most active pension investors.

Legal Advisories

BOEs may be misleading, particularly if used in isolation. The calculation of BOEs is based on a conversion ratio of six Mcf of natural gas to one bbl of oil based on an energy equivalency conversion primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In addition, given that the value ratio based on the current price of oil as compared to natural gas is significantly different from the energy equivalent of six to one, utilizing a BOE conversion ratio of 6 Mcf: 1 bbl would be misleading as an indication of value.

Additional information about the Corporation, including the Corporation's financial statements, management discussion and analysis, and annual information form for the year ended December 31, 2013, is available under Arcan's profile on SEDAR at www.sedar.com.

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 "will", "continue", "expect" 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: the terms of the Arrangement and the JVA, the anticipated closing date of the Arrangement, the anticipated mailing date of the information circular and proxy materials in connection with the Arrangement, Spinco's ability to obtain the Spinco Facility, Arcan's ability to repay the Debentures at maturity, the future upside of the Swan Hills play, that Aspenleaf will have significant access to capital to accelerate development of the Swan Hills Play, that Spinco will be able to participate in future acquisitions and developments by Aspenleaf, future production of the Swan Hills assets, the future exercise of the Spinco Warrants .

The forward-looking information and statements contained in this press release reflect several material factors and expectations and assumptions of Arcan including, without limitation, expectations and assumptions relating to the Corporation and Spinco being able to receive all required regulatory approvals to consummate the Arrangement, the ability of the Corporation to obtain the required levels of securityholder approval for the Arrangement, Aspenleaf's, the Corporation's and Spinco's future access to capital; and certain commodity price and other cost assumptions.

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. 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: failure to realize the anticipated benefits of the transaction, failure to obtain the necessary approvals, or to otherwise satisfy the conditions of the transaction, in a timely manner, 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 on Arcan's SEDAR profile 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.

Any questions and requests for assistance may be directed to Arcan's information agent:
CST Phoenix Advisors
North American Toll Free Phone:
(800) 239-6513
Banks, Brokers and collect calls: 201-806-2222
Toll Free Facsimile: 1-888-509-5907
Email: inquiries@phoenixadvisorscst.com

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