BlackWatch Energy Services Trust
TSX : BWT.UN

BlackWatch Energy Services Trust

March 24, 2008 18:20 ET

BlackWatch Energy Services Trust (TSX:BWT.UN) ("BlackWatch" or the "Trust") Announces Take-or-Pay Agreement, Acquisition of Assets and Extension of Financing Commitment

CALGARY, ALBERTA--(Marketwire - March 24, 2008) - Blackwatch Energy Services Trust (TSX:BWT.UN)

Take-or-Pay Agreement

BlackWatch has entered into a take-or-pay agreement with an intermediate oil and gas producer for the use of a telescopic double drilling rig that is currently under construction. The agreement provides for a commitment of 200 days per year for two years and a separate cash payment to BlackWatch, half of which payment has been received with the remainder due on delivery of the completed rig, anticipated to be in the third quarter. The costs to complete this rig will be financed partly with the aforementioned cash payment, with the remainder from BlackWatch's senior credit facility.

Acquisition of Assets

BlackWatch is also pleased to announce the acquisition of the well flowback tank systems and related equipment of Loadrunner Oilfield Hauling Inc. ("Loadrunner") of Drumheller, Alberta effective March 7, 2008, for cash consideration of $750,000.

Loadrunner is a private company and has been in the business of providing well flow-back and testing services and general oilfield hauling in Southern Alberta for 15 years. The addition of the Loadrunner assets to BlackWatch's existing service lines completes its offering of fluid support services used for the completion, stimulation and production of oil and gas wells. This integrated range of fluid products, rental equipment and specialised transport services will be marketed as the "BlackWatch Frac Pack". The "BlackWatch Frac Pack" will provide BlackWatch's customers with a seamless, cost effective approach to fluid support services.

"The addition of these assets fits with our strategy of offering a complete service package to our clients and is expected to immediately enhance the cash flow of BlackWatch" said President and Chief Executive Officer Travis Robertson.

Extension of Financing Commitment

BlackWatch wishes to provide an update on the status of the subordinated loan facility (the "Facility") entered into by it with a related party entity (the "Lender") in the third quarter of 2007. BlackWatch is continuing to feel the impact of broad market weakness, compounded by reduced demand for services in some of its specific markets. Consequently, it is unable, at this time, to retire this subordinated indebtedness. The Lender has offered to extend the term and increase the size of the Facility, which Facility is subordinated to the Trust's senior indebtedness. The original term of the Facility expired on December 31, 2007.

Two of BlackWatch's directors, M. Bruce Chernoff and David Rain, are indirect securityholders of the Lender with Mr. Chernoff owning the substantial majority of the securities of the Lender, and Mr. Rain serving as the President of the Lender. The Trust and the Lender originally entered into the Facility pursuant to a credit facility agreement dated October 4, 2007 and the Facility was approved by the holders of trust units (the "Trust Units") of the Trust and the holders of exchangeable units of BlackWatch Energy Services Limited Partnership (the "Exchangeable Units") at the annual and special meeting of the Trust held on July 6, 2007. Due to the involvement of Mr. Chernoff and Mr. Rain in the Lender, the Board of Directors of BlackWatch Energy Services Operating Corp., the administrator of BlackWatch, has appointed a Special Committee to review the proposal to extend the term and increase the size of the Facility. The Special Committee consists of the remaining members of the Board of Directors, John A. Brussa and Howard J. Crone. The Special Committee explored and considered alternatives available for raising additional capital and has determined that the proposal to extend and increase the size of the Facility is the best alternative available at this time and is necessary for the Trust to continue to carry out its operations and strategic plan.

BlackWatch has entered into an agreement in principle with the Lender whereby the Lender has agreed to extend the term of the Facility, to increase the amount available under the Facility by $5.0 million and make certain other related amendments to the Facility. The following is a brief description of the amended terms of the Facility:

- the new maturity date will be September 1, 2008;

- the Facility will be increased by $5.0 million to an available facility of $27.5 million, with $22.5 million currently outstanding and the remaining $5.0 million available to be drawn as needed by the Trust for capital expenditures and strategic acquisitions and as agreed to by the Lender;

- interest on the Facility will be payable quarterly at a rate of 12% per annum but: (i) if the ratio of the Trust's "Cash Flow" to "Net Debt" in the Trust's quarterly financial statements for the three months ended March 31, 2008 does not exceed 46%; or (ii) if the ratio of the Trust's "Cash Flow" to "Net Debt" in the Trust's quarterly financial statements for the three months ended June 30, 2008 does not exceed negative 17%; or (iii) if the ratio of the Trust's "Cash Flow" to "Net Debt" in the Trust's quarterly financial statements for the six months ended June 30, 2008 does not exceed 23%, the interest rate will become 15% in the subsequent quarter;

- interest will be payable in cash (subject to approval of BlackWatch's secured lenders) or through the issuance of Trust Units at the Lender's option to be issued at a 10% discount to the 10 day weighted average trading price of the Trust Units on the Toronto Stock Exchange (the "TSX") (as calculated for the ten trading days immediately prior to the interest payment date);

- as consideration for extending the term and increasing the size of the Facility, the Lender will be paid a fee equal to 2.75% of the Facility commitment (being 2.75% of up to $27.5 million, or $756,250) (the "Extension Fee"), payable at closing through the issuance of Trust Units issuable at a price equal to the 10% discount to the 10 day weighted average trading price on the TSX (as calculated for the ten trading days immediately prior to closing); and

- the Lender will have the right to convert up to 15% of the outstanding loan balance to Trust Units at a conversion price of $0.80 per Trust Unit from time to time until the Facility is repaid in full.

BlackWatch has made an application to the TSX for approval of the listing of any Trust Units issuable pursuant to the terms of the Facility, as revised. Completion of the extension and amendment to the Facility is subject to a number of conditions including the final approval of the TSX. The TSX requires an agreement between the Lender and BlackWatch as to the maximum number of Trust Units which may be issuable pursuant to the terms of the Facility. The Lender has agreed with BlackWatch that the lowest market price to be used in determining the number of Trust Units which may be issued in settlement of interest during the extended term of the Facility and in payment of the Extension Fee will be $0.60. The actual market price of the Trust Units will be used if it is higher. Therefore, if the Facility is extended to the full $27.5 million on April 1, 2008, if the Trust is required to pay interest in the form of Trust Units, and if the interest rate increases to 15% effective April 1, 2008 due to a breach of the financial covenant, and the Lender decides not to convert 15% of the loan to Trust Units at $0.80 during the term of the Facility, the maximum number of Trust Units BlackWatch would issue during the term of this loan is 5,833,359 Units. If the market price of the Trust Units is $0.80 or higher, the maximum number of Trust Units which might be issued based on the assumptions described above, and also assuming the issuance of an additional 5,156,250 Trust Units pursuant to the Lender's right to convert 15% of the outstanding balance under the Facility to Trust Units at a conversion price of $0.80 per Trust Unit, is 9,531,269 Units. Management notes that the larger of these two amounts of Trust Units is the maximum number of Trust Units that might be issued pursuant to the terms of the Facility as proposed to be amended. Management and the Special Committee of the Board of Directors of the Administrator of the Trust believe the extension of the Facility on these terms is in the best interests of BlackWatch at this time.

Pursuant to applicable securities laws and the policies of the TSX, the Trust would generally be required to obtain minority securityholder approval and a formal valuation for the Facility given it is a related party transaction and involves the potential issuance of Trust Units at a discount to the market price to insiders of the Trust in excess of 25% of the outstanding Trust Units; however, an exemption is available from such requirements for entities in financial difficulty given that the transaction is designed to improve the financial position of the Trust. The Trust has chosen not to avail itself of the financial hardship exemption under the policies of the TSX and instead has sought minority securityholder approval for the transaction on the basis described below. Pursuant to the policies of the TSX, the Trust received TSX conditional approval to proceed with the transaction without obtaining securityholder approval at a duly called meeting of securityholders on the condition that the Trust provide written evidence to the TSX that holders of more than 50% of the Trust Units and the Exchangeable Units, other than the Trust Units and Exchangeable Units held by securityholders and their associates and affiliates who have an interest in the Lender or the Facility, approve of the transaction including the issuance of Trust Units pursuant to the Facility. The Trust has received such written approval of its securityholders to the transaction. On or about March 31, 2008 the Trust expects to enter into the definitive agreement for the extension and amendment to the Facility based on receiving such approval.

Mr. Chernoff currently beneficially owns, directly or indirectly, 4,772,829 Trust Units, 1,274,638 Exchangeable Units and 1,666,667 warrants to purchase Trust Units, each of such Warrants allowing the holder to purchase one Trust Unit at a price of $1.68 per Trust Unit. Each Exchangeable Unit is convertible into a Trust Unit on a one-for-one basis. Such Trust Units and Exchangeable Units represent, in aggregate, 18.8% of the total outstanding Trust Units and Exchangeable Units. As a result of the extension and amendment to the Facility, Mr. Chernoff's percentage interest in the outstanding Trust Units and Exchangeable Units will be increased with the payment of the Extension Fee and in the event the interest payments due under the Facility continue to be paid in Trust Units or if the Lender chooses to convert 15% of the outstanding balance under the Facility to Trust Units.

ABOUT BLACKWATCH ENERGY SERVICES TRUST

BlackWatch Energy Services Trust is a diversified income trust that provides a range of services to its customers operating in the Western Canadian Sedimentary Basin including drilling, wireline services, rig transportation and hauling, coil tubing well servicing, production services, and oilfield equipment rentals and leasing. The units of BlackWatch trade on the Toronto Stock Exchange under the symbol "BWT.UN".

Certain information regarding the Trust contained herein may constitute forward-looking statements within the meaning of applicable securities laws. Forward-looking statements may include estimates, plans, expectations, opinions, forecasts, projections, guidance or other similar statements that are not statements of fact. Although the Trust believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. These statements are subject to certain risks and uncertainties, and may be based on assumptions that could cause actual results to differ materially from those anticipated or implied in the forward-looking statements. The Trust 's forward-looking statements are expressly qualified in their entirety by this cautionary statement.

The TSX has not reviewed and does not accept responsibility for the adequacy or accuracy of this news release.

Contact Information

  • Blackwatch Energy Services Trust
    Travis Robertsom
    President and Chief Executive Officer
    (403) 225-3879
    (403) 366-2067 (FAX)
    or
    Blackwatch Energy Services Trust
    Wiley Auch
    Vice President, Finance and CFO
    (403) 225-3879
    (403) 366-2067 (FAX)
    or
    Blackwatch Energy Services Trust
    #300, 855 8th Avenue SW
    Calgary, AB T2P 3P1
    Website: www.blackwatchenergy.ca