CanElson Drilling Inc.
TSX VENTURE : CDI

CanElson Drilling Inc.

January 14, 2011 07:30 ET

CanElson Drilling Inc. to Acquire Eagle Drilling Services Ltd.

CALGARY, ALBERTA--(Marketwire - Jan. 14, 2011) - CanElson Drilling Inc. ("CanElson") (TSX VENTURE:CDI) announces that it has entered into an agreement to acquire all of the issued and outstanding shares of Eagle Drilling Services Ltd. ("Eagle"), a private corporation which owns 8 telescopic double drilling rigs in the Bakken area of southeast Saskatchewan (the "Acquisition").

Under the terms of a pre-acquisition agreement with Eagle (the "Pre-Acquisition Agreement"), CanElson has agreed to make an offer (the "Offer") to acquire all of Eagle's outstanding common shares ("Eagle Shares") for total consideration of approximately $61.0 million (plus the assumption of debt of approximately $17.1 million), consisting of cash and the issuance of common shares of CanElson (the "CanElson Shares") for a total purchase price of approximately $78.0 million. The Pre-Acquisition Agreement provides for a break fee of $2.5 million payable by Eagle to CanElson under certain circumstances.

Pursuant to the Offer, holders of Eagle Shares (the "Eagle Shareholders") will receive $20.0 million of cash consideration and approximately $41.0 million of CanElson Shares at a deemed price of $4.15 per share. Five percent of the CanElson Shares received by Eagle Shareholders will be free trading upon issuance, 33.33% are subject to a resale restriction of 4 months, 33.33% are subject to an 8 month resale restriction and the remainder are subject to a one year resale restriction.

Pursuant to the Acquisition, CanElson will acquire 8 fully crewed, modern, heavy duty, telescopic double rigs (ratings of 3500 metres vertically, 4300 metres horizontally); positive working capital estimated at $6.0 million; land and buildings with an estimated value of $3.5 million; and rental and ancillary equipment with an estimated value of $3.5 million, which equates to a purchase price per rig of approximately $8.1 million. It is expected that key employees and management of Eagle will be retained and continue with CanElson.

By the end of Q1 2011, and including the closing of the Acquisition, CanElson will operate a combined rig fleet of 27 (net 23) rigs which includes 18 drilling rigs in western Canada, 5 (net 4) drilling rigs in the Permian Basin west Texas, 2 (net 1) sub-contracted drilling rigs in Mexico and 2 (net 1) service rigs in Mexico. 100% of CanElson's owned drilling rig fleet is deep, small footprint telescopic double drilling rigs rated greater than 3500 meters with an average age of less than 3 years designed for horizontal and resource play drilling.

The Offer is subject to certain conditions including the acquisition by CanElson of not less than 50.1% of the outstanding Eagle Shares and the receipt of all regulatory approvals, including the approval of the TSXV. The board of directors of Eagle has unanimously recommended that the Eagle Shareholders accept the Offer. Certain Eagle Shareholders holding approximately 55% of the currently outstanding Eagle Shares have executed lock-up agreements agreeing to deposit their Eagle Shares in acceptance of the Offer. Pursuant to Eagle's Unanimous Shareholders Agreement and the terms of their executed Lock-up Agreements, these shareholders will deliver a drag along notice to the other shareholders of Eagle which will result in CanElson acquiring 100% of the outstanding shares of Eagle.

Randy Hawkings, CanElson's President and CEO, stated "Eagle is one of the most respected contract drilling providers operating in southeast Saskatchewan and southwest Manitoba that has consistently realized higher than industry utilization levels and also has a reputation as an efficient and safe drilling contractor. The acquisition adds an additional 8 heavy duty telescopic double rigs to CanElson's existing rig fleet of 10, for a total of 18 drilling rigs operating in western Canada, which will strengthen CanElson's presence and capitalize on increased market exploration and production opportunities in Saskatchewan as well as Manitoba. With CanElson operating a total of 27 rigs by the end of Q1 2011, CanElson will continue to review opportunities for further growth and expansion in western Canada as well as in the other areas where CanElson operates."

Eagle has agreed not to solicit further offers or initiate discussions or negotiations with any third party concerning the sale of Eagle, subject to fiduciary obligations. The Offer is expected to be mailed to all Eagle Shareholders as soon as practical. It is anticipated that the Acquisition will close on or about January 28, 2011.

Upon completion of the Acquisition, CanElson will have approximately 60,160,352 shares outstanding and approximately 2,531,266 options outstanding with a weighted average exercise price of $2.56 per share.

Peters & Co. Limited acted as financial advisor to CanElson on the Acquisition. Ernst & Young Corporate Finance (Canada) Inc. acted as financial advisor to Eagle on the Acquisition.

Overview of Eagle

Founded in 2005 by Robert G. MacCuish and Derrick Big Eagle, Eagle currently has 8 fully crewed, modern, heavy duty telescopic double rigs (depth ratings of 3500 metres vertically, 4300 metres horizontally), purpose built for horizontal and resource play drilling, which align with CanElson's existing drilling rig fleet. Eagle's drilling rig fleet has been focused on drilling in southeast Saskatchewan, which currently has the highest rates of drilling activity in western Canada. During the year ended December 31, 2010, Eagle operated at 71% utilization compared to the average industry utilization of 40%.

The following table presents selected annual financial information based on the audited financial statements of Eagle for the years ended May 31, 2010 and 2009.

As at and for the years ended May 31, 2010 and 2009 ('000s of Canadian dollars, except average number of rigs)   2010   2009
           
Revenue     $30,704   $28,786
EBITDA (i)   $9,908   $9,791
Net income     $3,777   $4,951
Funds flow (ii)   $8,445   $8,337
Current assets   $5,785   $3,298
Total assets     $35,181   $35,247
Current liabilities (excluding current portion of bank debt and capital leases)   $1,253   $2,143
Bank debt and capital leases   $4,110   $6,400
Average number of rigs available for operations   6   5

This press release contains references to EBITDA and funds flow from operations. These financial measures are not measures that have any standardized meaning prescribed by Generally Accepted Accounting Principles ("GAAP") and are therefore referred to as non-GAAP measures. The non-GAAP measures used by the Corporation may not be comparable to similar measures used by other companies.

  1. EBITDA is defined as "income before interest expense (income), income taxes, depreciation, stock based compensation expense, non-inventory gains and losses on capital assets and foreign exchange." Management believes that in addition to net and comprehensive income (loss), EBITDA is a useful supplemental measure as it provides an indication of the results generated by the Corporation's principal business activities prior to consideration of how these activities are financed, how the results are taxed in various jurisdictions, and how the results are affected by the accounting standards associated with the Corporation's stock based compensation plan.
  2. Funds flow from operations is defined as "cash provided by operating activities before the change in non-cash working capital". Funds flow from operations is a measure that provides shareholders and potential investors additional information regarding the Corporation's liquidity and its ability to generate funds to finance its operations. Management utilizes this measurement to assess the Corporation's ability to finance operating activities and capital expenditures.

Operations Update

CanElson's Texas operations achieved high activity levels during the fourth quarter, with CanElson achieving utilization of 94%. A fourth rig was added upon the commencement of the Texas based joint venture operations on December 30, 2010. In addition to strong US activity levels, Canadian operating results also showed strong results with fourth quarter utilization of approximately 70%, compared to industry utilization of approximately 46%.

Since October 1, 2010, CanElson has incurred, expects to incur or has committed to net capital expenditures of approximately $20.8 million which compares to CanElson's third quarter 2010 MD&A reported capital net commitments of $14.3 million. The $14.3 million of net capital commitments reported in the third quarter 2010 primarily related to the completion of 3 (net 2) drilling rigs and other various rig equipment. Rig 16 commenced operations in Saskatchewan in mid-November, Rig 6 commenced operations in west Texas on December 30, 2010 and Rig 8 is expected to commence operation in Q1 2011. The incremental $6.5 million of additional net capital expenditures primarily relates to maintenance capital and provision for spare equipment, including capital related to Eagle's operations.

CanElson is an Alberta, Canada corporation that is currently engaged in the manufacture, acquisition and operation of drilling rigs for the oil and gas industry. The Corporation currently operates in the western Canadian Sedimentary Basin, the Permian Basin of west Texas and the Ebano-Panuco-Cacalilao fields of Mexico.

FORWARD-LOOKING INFORMATION

This press release contains certain statements or disclosures relating to CanElson that are based on the expectations of CanElson as well as assumptions made by and information currently available to CanElson which may constitute forward-looking information under applicable securities laws. All such statements and disclosures, other than those of historical fact, which address activities, events, outcomes, results or developments that CanElson anticipates or expects may, or will occur in the future (in whole or in part) should be considered forward-looking information. In some cases, forward-looking information can be identified by terms such as "forecast", "future", "may", "will", "expect", "anticipate", "believe", "potential", "enable", "plan", "continue", "contemplate", "pro-forma", or other comparable terminology.

In particular, this press release makes reference to the completion of the Acquisition, the retention of key Eagle employees and management, the number of drilling rigs CanElson will operate at the end of Q1 2011, and expected capital expenditures all of which statements are forward looking information. Readers are cautioned that certain conditions must be met before the foregoing transaction can proceed. Such conditions include the receipt of all necessary regulatory approvals, including the approval of the TSXV. There is no assurance that the Acquisition will be completed in the time frame anticipated or at all.

Many factors could cause the performance or achievement by CanElson to be materially different from any future results, performance or achievements that may be expressed or implied by such forward- looking statements. These factors include the failure to obtain the required approvals and failure to acquire not less than 50.1% of the Eagle Shares pursuant to the Offer.

Neither the TSXV nor its Regulation Services Provider (as that term is defined in the policies of the TSXV) accepts responsibility for the adequacy or accuracy of this release.

Contact Information

  • CanElson Drilling Inc.
    Randy Hawkings
    President and CEO
    (403) 266-3922
    or
    CanElson Drilling Inc.
    Robert Skilnick
    Chief Financial Officer
    (403) 266-3922
    or
    CanElson Drilling Inc.
    515, 808 - 4th Avenue SW
    Calgary, Alberta T2P 3E8