Open Range Energy Corp.
TSX : ONR

Open Range Energy Corp.

September 06, 2011 07:00 ET

Open Range Energy Corp. Announces Creation of High-Growth, Dividend-Paying Energy Service and Supply Company

CALGARY, ALBERTA--(Marketwire - Sept. 6, 2011) -

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Open Range Energy Corp. (TSX:ONR) ("Open Range" or the "Company") is pleased to announce a proposed strategic realignment in the interests of shareholders aimed at recognizing the value in the Company's current businesses through the creation of a dividend-paying, publicly-traded energy service company. Open Range is also pleased to include initial 2012 guidance for the new energy service and supply company.

Under the proposed Arrangement Agreement (the "Arrangement"), Open Range's wholly-owned subsidiary, Poseidon Concepts, will become an independent, sustainable, pure-play, dividend-paying company ("Poseidon") while Open Range, formed as a new legal entity for the purposes of the Arrangement, will continue to grow its high-quality Deep Basin exploration and production (E&P) assets in a separate publicly-traded company with a target to exit 2011 at 6,200 boe per day.

Under the Arrangement, Open Range shareholders will receive, for each common share of Open Range:

  • 0.882 of a Poseidon common share. Poseidon Concepts will be an independent, publicly-traded corporation paying a monthly dividend to shareholders that is anticipated to be $0.09 per share ($1.08 per share annually) commencing December 2011. Holders of Poseidon common shares as of November 30, 2011 will be entitled to the dividend payable on December 15, 2011; and
  • One common share of the E&P company ("NewCo").

The reorganization is aimed at unlocking the value of Open Range's two current business units. The Board of Directors of Open Range (the "Board") believes that the reorganization is in the best interests of Open Range and its shareholders for the following reasons:

  • It creates a stand-alone, sustainable, dividend-paying energy service and supply company, allowing the market to more accurately compare, evaluate and value the business against industry peers and benchmarks, based on its projected growth profile;
  • It enables Poseidon's senior management team to focus on the go-forward company's core business, with support from an experienced board of directors; and
  • The continued operation of Open Range's E&P assets under NewCo will provide the opportunity for investors to participate in the assets' future growth, based on the strong track record of the Company's horizontal development of Deep Basin horizons at its core Ansell/Sundance property, which has a multi-year inventory of repeatable drilling opportunities.

Strategic Rationale

The reorganization facilitated by the Arrangement is driven by the success of Poseidon over the past 15 months. Its growing stream of sustainable revenue has created a unique opportunity for Open Range shareholders by rebranding Poseidon as a pure-play energy service and supply company, which will also strengthen its ability to pursue a continued growth strategy and pay a sustainable dividend.

The Board and management team of Open Range are of the view that the Company, as it is currently structured, is not receiving fair recognition in the market for its assets, their respective strengths, future growth profiles and the combined stream of growing cash flow.

Since June 2010, Poseidon has progressed from its first commercial fracturing fluid tank rental job to an operational fleet of 170 tanks and forecast 2011 EBITDA of $55 million. Operating margins have been averaging close to or above 80 percent in each of the past four quarters and to date in the third quarter of 2011. Solid margins and low operating costs are expected to allow Poseidon, as a stand-alone company, to remain a growth vehicle with a clean balance sheet while paying an attractive dividend on a sustainable basis.

Given the Company's strong track record of vertical and horizontal drilling at Ansell/Sundance, the de-risking of the horizontal Wilrich play, its top-decile operating and cash costs and the opportunity for horizontal development of multiple additional Deep Basin horizons, NewCo will be a well-funded, opportunity-rich E&P company.

The Plan of Arrangement

Under the Arrangement, for each Open Range common share held, Open Range shareholders will receive:

  • 0.882 of a common share of Poseidon, which will initially pay a monthly dividend of $0.09 per share and will have 74.7 million common shares outstanding; and
  • One common share of NewCo, which will also have 74.7 million common shares outstanding.

The Arrangement requires the approval of Open Range's shareholders as well as approvals from the Court and the TSX, as are typical for transactions of this nature. A management information circular and proxy statement outlining the details of the Arrangement is expected to be mailed to Open Range shareholders in September 2011, in connection with the special meeting of Open Range shareholders to be called to consider and vote on the proposed Arrangement, which is expected to occur prior to the end of October 2011. To be implemented, the Arrangement must be approved by not less than 66 2/3 percent of the votes cast by Open Range shareholders voting at the meeting as well as a majority of the votes of disinterested shareholders. Closing of the Arrangement is anticipated on or about October 31, 2011.

Go-Forward Business Plans

Poseidon

The success of Poseidon to date has resulted in a large rental tank fleet that is active across western Canada as well as in ten states, with business development continuing to expand its presence in growing unconventional oil and liquids-rich natural gas resource plays. Poseidon's continued growth and low operating costs will contribute to the sustainability of its' future cash flow.

These attributes will allow Poseidon to pay a dividend without limiting its ability to grow or requiring it to take on substantial incremental debt, while providing a cushion for unpredictable market factors. The Arrangement contemplates Poseidon commencing operations with approximately $25 million in net debt on bank lines anticipated to be set at $75 million based on Poseidon's EBITDA record and growth profile. Bank facilities will be finalized and executed in the weeks ahead. Combined dividends are estimated at $80 million for 2012, the first full year of independent operations, resulting in an estimated sustainability ratio (calculated as dividends plus capital expenditures divided by cash flow) of 95 percent.

Poseidon is having a successful third quarter to date as it recently became active in three additional states and is finding strong industry acceptance of its largest, 41,000-barrel-capacity Atlantis tank model. As the number of horizontal wells drilled across North America increases, Poseidon expects to see continued strong demand for innovative and high-capacity fluid handling systems that meet the operational and environmental needs of producers and the requirements of regulators. There are approximately 35,000 horizontal wells drilled in North America annually. Poseidon currently provides its fluid handling systems to less than five percent of the horizontal well completions market.

Recent business development has added a number of long-term minimum commitments from customers. These long-term commitments now represent combined revenues of $87 million through September 2012, covering approximately 50 percent of the current tank fleet of 170. Poseidon currently anticipates increasing its fleet to a total of 210 tanks across North America by year-end 2011.

Open Range is pleased to provide the following initial 2012 guidance for Poseidon:

2012 Estimate
EBITDA (millions) $130
Capital expenditures (millions) $25
Exit net debt (millions) $25
Debt-to-EBITDA ratio <0.2x
Tank rental fleet at January 1, 2012 210
Tank rental fleet at June 30, 2012 240
Dividend per share $1.08
Payout ratio 73%
Sustainability ratio(1) 95%
(1)Sustainability ratio calculated as dividends plus capital expenditures
divided by cash flow.

Poseidon's go-forward business plan will be to continue to use its first-mover advantage to increase market penetration across North America. This will involve continued expansion of the tank rental business, including adding field operating bases in Alberta, North Dakota and the southern U.S. In addition, the business plan will include evaluating accretive opportunities for diversification into complementary businesses, potentially facilitating an evolution into a full-cycle fracturing fluid solutions company.

The management team and Board of Directors of Poseidon will be as follows:

Management Team
Chief Executive Officer Lyle Michaluk
President & Chief Operating Officer Cliff Wiebe
Vice President, Global Development Brad Wanchulak
Vice President, U.S. Division Joe Kostelecky
Board of Directors
Scott Dawson, Chairman
Harley Winger
Lyle Michaluk
Cliff Wiebe
Dean Jensen

Certain other Poseidon management personnel are expected to be announced in the coming weeks.

E&P Operations – NewCo

Open Range, as NewCo, will continue to pursue its medium-term objective to grow to 10,000 boe per day by year-end 2012 under the direction of an experienced management team. Repeated horizontal successes in the Wilrich play during the first half of 2011 have been followed up with an aggressive second-half 2011 program that includes a planned eight gross wells.

To date in the second half two 60 percent working interest horizontal wells targeting the Wilrich have been successfully drilled to their planned target depth and have been cased with packers set. Open Range anticipates conducting hydraulic fracturing operations on both wells in the coming two weeks. The third well (100 percent working interest), also targeting the Wilrich, is currently drilling. Test results and initial on-stream rates will be released in due course. The new wells will be tied into the Open Range-operated Ansell/Sundance gas plant, currently undergoing expansion to capacity of 60 mmcf per day, in the coming days.

NewCo will commence operations with anticipated net debt of approximately $15 million on E&P bank lines anticipated to be unchanged at $70 million based on the Company's established base of producing assets. Guidance remains unchanged from previous 2011 guidance for Open Range of $25 million in funds from E&P operations and an exit production rate of 6,200 boe per day.

The management team and Board of Directors of NewCo will continue to include:

Management Team
President & CEO Scott Dawson
Executive Vice President Gerald Costigan
Vice President, Engineering & COO John Mueller
Vice President, Exploration James Bland
Vice President & Chief Geophysicist David Griffith
Vice President, Land James Beninger
Board of Directors
Harley Winger, Chairman
Scott Dawson
Kenneth Faircloth
Dean Jensen
W.C. (Mike) Seth

Financial Advisor

National Bank Financial Inc. ("National Bank") acted as exclusive financial advisor to Open Range with respect to the proposed transaction. National Bank has advised the Board of Directors of Open Range that it is of the opinion, subject to its review of the final form of the documents effecting the Arrangement, that the consideration to be received by the Open Range shareholders as a result of the completion of the Arrangement is fair from a financial point of view to the Open Range shareholders.

Reader Advisory

This news release contains certain forward-looking statements, which include assumptions with respect to (i) the transactions contemplated herein, including the date of the special meeting of Open Range's shareholders; (ii) results from drilling and completion operations; (iii) production; (iv) future capital expenditures and operating activities and how they will be financed; (v) funds from operations; (vi) cash flow from operations and EBITDA; (vii) demand for Poseidon Concepts' tank systems; (viii) timing and amount of dividend payments; and (ix) general oil and gas industry activity. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. Such risks and uncertainties include, without limitation, risks associated with the ability of Open Range to obtain the approvals required to consummate the Arrangement, oil and natural gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, dependence on manufacturers of the Poseidon Concepts tank systems; operating risk liability; demand for Poseidon Concepts' tank systems; levels of competition in the fracturing fluid storage industry; the ability of Poseidon Concepts to attract and retain clientele; the ability of Poseidon Concepts to fund its ongoing capital requirements; Poseidon Concepts' limited operating history; delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources, the impact of general economic conditions in Canada and the United States, industry conditions, changes in laws and regulations (including the adoption of new environmental laws and regulations) and changes in how they are interpreted and enforced, increased competition, the lack of availability of qualified personnel or management, fluctuations in foreign exchange or interest rates, stock market volatility and market valuations of companies with respect to announced transactions and the final valuations thereof, and obtaining required approvals of regulatory authorities.

Open Range's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what benefits, including the amount of proceeds, Open Range will derive therefrom. Readers are cautioned that the foregoing list of factors is not exhaustive. All subsequent forward-looking statements, whether written or oral, attributable to Open Range or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Additional information on the foregoing risks and other factors that could affect Open Range's operations and financial results are included in the Company's annual information form and other reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com). Furthermore, the forward-looking statements contained in this news release are made as at the date of this news release and Open Range does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

Disclosure provided herein in respect of barrel(s) of oil equivalent (boe) may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 barrel is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

THE TORONTO STOCK EXCHANGE HAS NEITHER APPROVED NOR DISAPPROVED OF THE INFORMATION CONTAINED HEREIN.

Contact Information

  • Open Range Energy Corp.
    A. Scott Dawson, P.Eng.
    President and Chief Executive Officer
    403-205-3704

    Open Range Energy Corp.
    Lyle D. Michaluk, CA
    Vice President, Finance and Chief Financial Officer
    403-262-9280
    www.openrangeenergy.com