BlackWatch Energy Services Trust

BlackWatch Energy Services Trust

June 08, 2007 09:15 ET

BlackWatch Energy Services Trust (TSX:BWT.UN) ("BlackWatch" or the "Trust") Provides an Information Update and Announces Financing Commitment

CALGARY, ALBERTA--(Marketwire - June 8, 2007) - BlackWatch (TSX:BWT.UN) wishes to provide an update on its financial condition, and various strategic and financing initiatives. In BlackWatch's financial and operations update for the first quarter, we disclosed that the Trust was continuing to feel the impact of a broad market weakness, compounded by reduced demand for services in some of its specific markets. In addition, as a result of weak financial results in the fourth quarter of 2006 and the first quarter of 2007, BlackWatch is in breach of several of the financial covenants contained within its senior credit facility agreement. Pursuant to the terms of the credit facility agreement, such a breach provides the senior lenders the right to take certain actions including termination of the credit facility and steps to recover the amount owed. As noted below, management has had constructive discussions with its lenders regarding a re-capitalization which we believe will allow BlackWatch to continue to carry out its business plan.

As noted in our first quarter MD&A, BlackWatch's financial results were negatively impacted by higher costs than expected. These costs included unusual repair and maintenance expenditures, subcontracting costs for equipment and personnel needed to carry out certain operations during a busy February and high fixed personnel costs during a much slower than anticipated March. This year's Spring Breakup, which typically limits the level of drilling and other oilfield service activities, commenced earlier and finished later this year than is normal. Work slowed in early March and due to heavy rains in parts of Alberta, activity levels remained low until June. Although the second calendar quarter is typically the weakest quarter of the year due to the impact of Spring Breakup, BlackWatch anticipates a weaker than normal second quarter.

Following the release of its first quarter results, BlackWatch has been in discussions with its senior lenders concerning amendments to the credit facility agreement. Although BlackWatch has a solid asset base which secures the credit facility, the lenders indicated a strong desire to reduce the amount drawn under the facility. As a result, Caribou Capital Corp. ("Caribou") offered to provide up to $25 million of capital to BlackWatch, in the form of debt which would be subordinate to the senior lenders. The Board of Directors (the "Board") of BlackWatch Energy Services Operating Corp., the Administrator of BlackWatch, appointed a Special Committee to review this proposal as two of BlackWatch's directors, M. Bruce Chernoff and David Rain, are also directors and officers of Caribou and Mr. Chernoff is the sole shareholder of Caribou. The Special Committee consisted of the remaining directors of the Board, Kevin A. Bennett, John A. Brussa and Howard J. Crone. The Special Committee explored and considered alternatives available for raising additional capital, including issuing equity and subordinated debt, and the desire of the senior lenders to see a reduction in BlackWatch's senior debt until such time as earnings improve and the original covenants under the credit facility agreement are capable of being achieved. The members of the Special Committee believe that the Caribou proposal, in combination with the rights offering (the "Rights Offering") announced on June 1, 2007, is the best alternative available at this time and is necessary to re-capitalize BlackWatch's balance sheet, to facilitate discussions with its senior lenders concerning terms of the credit facility going forward and to create some borrowing capacity for the Trust to continue to carry out its operations.

BlackWatch has signed a commitment letter with Caribou whereby Caribou has agreed to provide BlackWatch with a loan in an amount not to exceed $25,000,000 (the "Caribou Loan") to enable BlackWatch to recapitalize its balance sheet and carry out its strategic plan. The Caribou Loan will be strictly subordinate to the senior credit facility. Interest on the Caribou Loan will be payable quarterly at a rate of 9.5% per annum for the first three months the Caribou Loan is outstanding and 12% thereafter, until the date of maturity being December 31, 2007. Interest will be payable in cash (subject to approval of BlackWatch's secured lenders) or through the issuance of trust units of BlackWatch ("Trust Units") at Caribou's option. As consideration for committing to the Caribou Loan, BlackWatch will grant Caribou 3,000,000 warrants to purchase Trust Units for a period of 18 months from the date of grant at an exercise price of $1.68 per Trust Unit. This is equivalent to the price at which BlackWatch has offered to sell Trust Units to its unitholders pursuant to the Rights Offering. Caribou will also be paid a fee equal to 5% of the Caribou Loan commitment, payable in cash (subject to approval of BlackWatch's secured lenders) or through the issuance of Trust Units at Caribou's option.

BlackWatch has made an application to the Toronto Stock Exchange (the "TSX") for approval of the listing of any Trust Units issued as consideration for payment of the fee to Caribou and as settlement of the interest payable, as well as any Trust Units issued upon conversion of warrants issued. Completion of the Caribou Loan is subject to a number of conditions including negotiation of a revised credit agreement between BlackWatch and its senior lenders and the final approval of the TSX.

Pursuant to the rules of the Ontario Securities Commission and the TSX, the Trust would generally be required to obtain minority unitholder approval and a formal valuation for the Caribou Loan given it is a related party transaction, due to the involvement of M. Bruce Chernoff and David Rain in Caribou; however, an exemption is available from the requirements for such approval for entities in financial difficulty, and the related financing is designed to improve the financial position of the Trust. The Trust has chosen not to avail itself of the exemption from minority unitholder approval as it would prefer to give the opportunity to the Unitholders to approve the Caribou Loan. Since the Trust has chosen to not avail itself of the financial hardship exemption under the policies of the TSX, the TSX requires the Trust obtain disinterested Unitholder approval of the securities to be issued pursuant to the Caribou Loan because the number of securities to be issued exceeds 10% of the outstanding Units and because the warrants are priced at a discount. Therefore, at the annual and special meeting to be held on July 6, 2007, Unitholders will be asked to ratify and approve the Caribou Loan and the issuance of the securities to be issued pursuant to the Caribou Loan.

Coincident with the decision to enter into the Caribou Loan, the Board has initiated the Rights Offering to its existing holders of Trust Units and Exchangeable Partnership Units as a means of further reducing senior bank debt and increasing borrowing capacity of the Trust. Certain directors of the Trust have indicated their desire to acquire up to $5.5 million of the Trust Units available for purchase under the Rights Offering, subject to their ability to exercise the Additional Subscription Privilege available under the Rights Offering. If all rights are exercised under the Rights Offering, the Trust would issue 4,765,656 Trust Units for gross proceeds of approximately $8.0 million.

The members of the Board are supportive of BlackWatch continuing to pursue its business plan of growth through consolidation of smaller competitors operating in western Canada. Management has taken steps to address the impact of soft market demand by reviewing and altering its cost structure. Management has also taken decisions which rationalize BlackWatch's asset base and operating locations and are pursuing new business. As disclosed on May 11, 2007, BlackWatch was pleased to announce the appointment of Travis Robertson as its new President and Chief Executive Officer. Although the current operating environment for service companies in western Canada is likely to remain challenging in the short-term, we are optimistic that we can improve operating results and be in a position to take significant advantage of a return to normal sector activity levels.


BlackWatch Energy Services Trust is a diversified energy services 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, pipeline and facility construction and oilfield equipment rental services 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 Robertson
    President and Chief Executive Officer
    (403) 225-3879
    BlackWatch Energy Services Trust
    Paul Partlo
    Vice President and Chief Financial Officer
    (403) 225-3879
    (403) 366-2066 (FAX)
    BlackWatch Energy Services Trust
    #300, 855 - 8 Avenue SW
    Calgary, Alberta T2P 3P1
    (403) 225-3879