Pengrowth Energy Trust

Pengrowth Energy Trust
Monterey Exploration Ltd.

Monterey Exploration Ltd.

July 12, 2010 03:54 ET

Pengrowth Energy Trust Announces Strategic Acquisition of Monterey Exploration Ltd.

CALGARY, ALBERTA--(Marketwire - July 12, 2010) - Pengrowth Corporation ("Pengrowth Corp."), administrator of Pengrowth Energy Trust ("Pengrowth"), (TSX:PGF.UN)(NYSE:PGH) and Monterey Exploration Ltd. ("Monterey") (TSX:MXL) are pleased to announce that they have entered into an arrangement agreement pursuant to which Pengrowth Corp. will acquire all of the issued and outstanding common shares of Monterey not presently owned by Pengrowth. The transaction is expected to close in mid-September 2010 subject to regulatory, shareholder and court approvals pursuant to a plan of arrangement (the "Arrangement").

Pengrowth has been a shareholder of Monterey since 2006 and currently owns 8,990,642 common shares of Monterey, which represents approximately 18 percent of the fully diluted outstanding common shares. Monterey has been a successful developer of gas reserves from the Montney formation in the Groundbirch area of northeast British Columbia where it holds 19.0 net sections of prospective lands. 

Under the terms of the Arrangement, each Monterey shareholder may elect to receive either: (i) 0.8298 of a Pengrowth trust unit; or (ii) 0.8298 of an exchangeable share of Pengrowth Corp., with each exchangeable share being exchangeable for one Pengrowth trust unit. The purchase price is equivalent to approximately $8.30 per common share of Monterey based on the 10-day volume weighted average price of $10.00 per Pengrowth unit.

The total consideration for the 82 percent of Monterey not currently owned by Pengrowth is approximately $366 million net of transaction costs and option proceeds, and including approximately $30 million of Monterey net debt as at June 30, 2010. Including Pengrowth's existing 18 percent equity interest in Monterey, which Pengrowth acquired at a total cost of $9 million or an average cost of $0.96 per Monterey common share, the total transaction value is approximately $375 million.

Derek Evans, Pengrowth's President & CEO, said "The acquisition of Monterey represents a significant step forward in our value creation strategy announced last year. Monterey's concentrated, Montney resource focused asset base in the Groundbirch area of northeast British Columbia will provide Pengrowth with a new core area with a deep inventory of operated, low risk drilling opportunities that provide excellent full cycle economics. Pengrowth has been carefully monitoring Monterey's development as a company since our original investment in 2006 and Chris Webster, Pengrowth's Chief Financial Officer has served on Monterey's Board of Directors since 2006. We believe now is the opportune time to take control of the Groundbirch development and apply Pengrowth's significant financial and technical resources to it."

"We are excited to be combining our company with Pengrowth. The Arrangement will provide Monterey securityholders with exposure to a well run, highly liquid, commodity balanced entity with an excellent portfolio of low risk, high quality assets. Monterey defined and derisked a world class Montney asset at Groundbirch; however, Monterey does not have the critical mass or cash flow to properly capitalize this asset as it moves into the development stage. Pengrowth's financial and technical resources will ensure the long term development of the Groundbirch asset in a timely and efficient manner" commented Patrick Manuel, Monterey's President & CEO.


The acquisition of Monterey is an important step in Pengrowth's strategy of pursuing assets with highly scalable positions with multi-year drilling inventories and excellent full cycle economics. The highlight of the Monterey asset base is its focused, operated 21 (19.0 net) sections at Groundbirch in northeast British Columbia, a highly prospective Montney focused resource asset located in one of the thickest and most prospective areas of the Montney fairway. A number of analysts rank the Montney formation as one of the lowest cost sources of unconventional gas in North America. Current net tested production volumes of 20 mmcf/d at Groundbirch is awaiting tie-in to a 28 mmcf/d natural gas processing facility currently being constructed which is expected to be on stream in December 2010.

Key attributes of Monterey include:

  • Provides Pengrowth with significant and meaningful exposure to the Montney, one of the most economic unconventional gas plays in the Western Canadian Sedimentary Basin;
  • A 90 percent operated working interest in 21 sections of concentrated acreage in the heart of some of the thickest and most prospective area of the Montney resource fairway in northeast British Columbia;
  • Expected 2010 and 2011 exit production of 6,000 boe/d (95 percent natural gas) and 10,000 boe/d, respectively, driven by development of the Montney lands;
  • 11.2 mmboe of proved reserves and 23.8 mmboe of proved plus probable reserves, based on a GLJ Petroleum Consultants Ltd. ("GLJ") evaluation effective April 1, 2010. Over 71 percent or 16.9 mmboe of the proved plus probable GLJ evaluated reserves are associated with the Groundbirch asset;
  • Current Montney reserve bookings of 101 Bcf (proven plus probable), that Pengrowth estimates represent a recovery factor of less than 5 percent;
  • Proved plus probable reserve life index of 10.8 years based on expected 2010 exit production of 6,000 boe/d;
  • GLJ prepared an independent resource assessment effective April 21, 2010 with a best estimate of Discovered Petroleum Initially-in-Place (DPIIP) on the Groundbirch asset of 2.46 Tcf (Monterey interest share) (see "Information Regarding Discovered Petroleum Initially in Place"). GLJ's resource assessment applies only to the Upper Montney zone and does not include any incremental assessment of the Lower Montney, Lower Doig or Doig phosphate zones also in place on the Groundbirch asset;
  • Drilling inventory of 105 (95 net) locations into the Upper Montney alone on Monterey lands at Groundbirch, of which only 15 net locations (approximately 15 percent) have been included in Monterey's current reserve bookings leaving a significant amount of reserves conversion from "resource" to "reserves" to occur over time;
  • Significantly expands Pengrowth's drilling inventory with the addition of approximately $650 million of low risk drilling in the Upper Montney;
  • Monterey has drilled three horizontal test wells and two vertical stratigraphic wells into its Groundbirch development with the first three horizontal wells averaging initial test rates in excess of 7.3 mmcf/d out of the Upper Montney;
  • Access to key infrastructure in the area including a new 28 mmcf/d natural gas plant expected to be completed on or before December 31, 2010, with a second 28 mmcf/d plant expected on-line prior to December 31, 2011;
  • Pengrowth has identified significant incremental potential in the Doig Phosphate and Lower Doig formations.

Reserve estimates prepared using reserve definitions consistent with NI 51-101 by GLJ effective April 1, 2010 indicate a total of 23.8 mmboe of proven plus probable company interest reserves are being acquired. The Groundbirch property represents approximately 71 percent of the total proved plus probable reserves. A summary of the total reserves being acquired is provided below:

  Crude Oil & NGLs (mbbl) Natural Gas (mmcf) Barrels of Oil Equivalent (mboe) Natural Gas Equivalent (mmcfe)
  Proved Proved Plus Probable Proved Proved Plus Probable Proved Proved Plus Probable Proved Proved Plus Probable
Groundbirch 95 211 45,322 100,145 7,649 16,902 45,894 101,412
Others 360 626 19,226 37,594 3,565 6,892 21,390 41,352
Total 455 837 64,548 137,739 11,214 23,794 67,284 142,764

Note: Reserves are presented on a company gross basis which refers to working interest reserves of Monterey before royalty burdens payable and without including any royalty interests.


  • Upper Montney zone 400 to 500 feet thick with four to seven percent porosity;
  • GLJ evaluated Upper Montney DPIIP of 2.46 Tcf (Monterey interest share);
  • Gas-in-place per section equates to +/- 130 Bcf making it one of the thickest, most prospective areas of the Montney fairway
  • Pengrowth has at present identified in the Upper Montney 105 (95 net) horizontal multi-stage frac drilling locations at 5 wells per section, with an associated development capital program for drilling and infrastructure of approximately $650 million over the period of development;
  • At five wells per section, Pengrowth estimates significant Upper Montney resources can be developed at attractive F&D costs and $ per flowing barrel metrics;
  • Pengrowth estimates that increasing the well density from five to eight wells per section could result in the recovery of incremental Upper Montney resources with favourable economics;
  • Pengrowth's internal evaluation indicates significant unrecognized upside in the Lower Doig and Doig Phosphates in the Groundbirch area; and
  • Future drilling inventory sufficient to fill two 28 mmcf/d plants to capacity for a period of 8 years.


Based on total transaction value of $296 million, which includes Pengrowth's existing 18 percent equity interest and after adjusting for the estimated value of undeveloped land value of $79 million, the expected acquisition metrics are shown below. The $79 million in land value is based on a December 31st, 2009 independent land evaluation of Monterey and the amount paid by Monterey at the April 2010 Crown land sale for six additional sections of nearby Montney acreage.:

Production: $49,333 per producing boe based on expected 2010 exit production of 6,000 boe/d.

Reserves: $26.40 per proven and $12.44 per proven plus probable boe of reserves as evaluated as at April 1, 2010 by GLJ.

The Arrangement is accretive to Pengrowth on a production, reserves and cash flow per unit basis by 2012, based on Pengrowth's internal long term view of the reserves, cash flow and production profile of the Monterey assets. Pengrowth believes that over the next two to three years the accretion on a reserves and production per unit basis of the Arrangement will improve significantly with an update to the engineering report and additional development drilling on the undeveloped lands.


The Arrangement is expected to close by mid-September, and accordingly Pengrowth plans to increase its capital expenditure budget by approximately $65 million in 2010 with the majority of that increase being directed to drilling activity in the Groundbirch area. Pengrowth currently intends to drill six (6) 100 percent working interest wells on Monterey Groundbirch lands with the remainder of the capital assigned to the new facility and tie-in activity. The following table provides updated guidance for 2010 to take into account the impact on the assumption that the Arrangement closes in mid-September with Pengrowth benefiting from four months of production from the Monterey assets.

  Pengrowth (Current) Pengrowth (Pro Forma)
2010 Average Production    
  Crude Oil & NGLs (bbls/d) 37,200 37,326
  Natural Gas (mmcf/d) 226.8 229.6
  Total (boe/d) 75,000 75,600
2010 Exit Production    
  Crude Oil & NGLs (bbls/d) 37,949 37,949
  Natural Gas (mcf/d) 219.4 257.7
  Total (boe/d) 74,510 81,235
2010 Capital Expenditures ($mm) $285 $350
Operating Costs ($/boe) $14.40 $14.33


It is expected that a meeting of Monterey securityholders will occur in mid-September 2010 to vote on the Arrangement with closing of the Arrangement to occur shortly thereafter. An information circular is expected to be mailed to securityholders of Monterey in mid-August 2010. Provided that the closing date occurs on or before September 30, 2010, Monterey securityholders who elect to receive Pengrowth trust units and who continue to hold such Pengrowth trust units after closing will be entitled to receive the cash distribution payable by Pengrowth on October 15, 2010 to its unitholders of record on September 30, 2010.

To be implemented, the Arrangement must be approved by not less than 66â…” percent of the votes cast by Monterey securityholders, present in person or by proxy, at the securityholders meeting called to approve the transaction. In addition, the Arrangement will require the approval of a majority of the votes cast by Monterey securityholders, excluding votes cast which may not be included in determining minority approval pursuant to Multilateral Instrument 61-101 Protection of Minority Securityholders in Special Transactions ("MI 61-101"). Completion of the transaction will also be subject to the receipt of customary stock exchange, regulatory and court approvals, the absence of any material adverse change in Pengrowth or Monterey and a number of other matters customary in transactions of this nature.

The arrangement agreement provides that Monterey will pay Pengrowth a non-completion fee of $15 million in certain circumstances. There is no non-completion fee payable by Pengrowth. The arrangement agreement also provides for customary non-solicitation covenants, including that Monterey has the right to respond to superior proposals and that Pengrowth has the right to match any such proposal.

Registered holders of Monterey securities entitled to vote at the meeting of Monterey securityholders may exercise rights of dissent with respect to their Monterey securities. Completion of the transaction is subject to the condition in favour of Pengrowth that holders of Monterey securities representing not more than five percent of the Monterey securities then outstanding shall have validly exercised, and not withdrawn, their dissent rights.


The Boards of Directors of Pengrowth and Monterey have approved the Arrangement and the execution of the Arrangement Agreement. The Board of Directors of Monterey has determined that the Arrangement is in the best interests of Monterey and the Monterey securityholders, and has, based upon, among other things, the opinion of Monterey's financial advisor, determined that the Arrangement is fair, from a financial point of view to Monterey securityholders and has resolved to recommend that Monterey securityholders vote in favour of the Arrangement. Certain Monterey securityholders, including all officers, directors and key employees, who collectively beneficially own or exercise control and direction over approximately 17 percent of Monterey's fully diluted common shares, have agreed to vote in favour of the Arrangement.


BMO Capital Markets acted as financial advisor to Pengrowth with respect to the transaction and has delivered a fairness opinion to the Pengrowth Board of Directors in connection with the transaction.

Cormark Securities Inc. acted as exclusive financial advisor to Monterey with respect to this transaction and has provided the Monterey Board of Directors with its verbal opinion that, as of the date hereof and subject to review of final documentation, the consideration to be received by Monterey securityholders pursuant to the proposed Arrangement is fair, from an financial point of view, to Monterey securityholders.

Wellington West Capital Markets Inc. has been engaged by Monterey to provide a formal valuation of the Monterey common shares in accordance with MI 61-101.

Copies of the Cormark Securities Inc. fairness opinion and the Wellington West Capital Markets Inc. formal valuation will be included in the information circular to be mailed to Monterey shareholders in connection with the meeting to approve the Arrangement.


A conference call will be held for investors, financial analysts, media and other interested persons on July 12, 2010 at 9:00 AM EDT to discuss the Arrangement. To call in, please call the following numbers:

Participant dial-in number: 1-866-696-5910

Participant pass code: 4426400

A replay of the conference call will be available until July 26, 2010 and may be accessed by the following numbers:

Replay dial-in number: 1-800-408-3053

Pass code: 2646724

A presentation containing corporate maps and transaction highlights is available on Pengrowth's website at

For further information about Pengrowth, please visit our website


Pengrowth Energy Trust is an oil and gas operating company, structured as a trust, with a focus on creating value with the drill bit by drilling operated, low cost, low risk, repeatable opportunities in the Western Canadian Sedimentary Basin ("WCSB"). Pengrowth's operation's includes production from a number of conventional and unconventional assets and is evenly balanced between liquids and natural gas. Future growth opportunities include the development of conventional oil and natural gas production, heavy oil, shale gas and coalbed methane as well as the addition of production through acquisition. Pengrowth's trust units trade on the Toronto Stock Exchange under the symbol PGF.UN and on the New York Stock Exchange under the symbol PGH.


This news release contains forward-looking statements as to Pengrowth and Monterey's internal projections, expectations or beliefs relating to future events or future performance, including for Pengrowth, the estimated timing of closing, reserves, reserve life index, discovered petroleum
initially in place, drilling inventory, gas plant completion, recovery factors, capital expenditures,
operating costs and guidance for operating results for 2010, after giving effect to the Arrangement and the transactions and expenditures set forth herein and Pengrowth's expectations for synergies and other advantages arising from the completion of the Plan of Arrangement. In some cases, forward-looking statements can be identified by terminology such as "may", "will", "should", "expects", "projects", "plans", "anticipates" and similar expressions. These statements represent the expectations or beliefs of management of each of Pengrowth and Monterey concerning, among other things, future capital expenditures and future operating results and various components thereof or the economic performance of Pengrowth and Monterey. The projections, estimates and beliefs contained in such forward-looking statements are based on management's assumptions relating to the production performance of Pengrowth's oil and gas assets, including the assets to be acquired through Monterey, the closing of the acquisition and on anticipated terms, the cost and competition for services throughout the oil and gas industry in 2010 and 2011, the results of exploration and development activities during 2010 and 2011, the market price for oil and gas, expectations regarding the availability of capital, estimates as to the size of reserves and resources, and the continuation of the current regulatory and tax regime in Canada, and necessarily involve known and unknown risks and uncertainties inherent in exploration and development activities, geological, technical, drilling and processing problems and other risks and uncertainties, including the business risks discussed in management's discussion and analysis and the annual information forms of both Pengrowth and Monterey, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. Accordingly, readers are cautioned that events or circumstances could cause results to differ materially from those predicted. Pengrowth and Monterey do not individually or jointly undertake to update any forward looking information in this document whether as to new information, future events or otherwise except as required by securities rules and regulations. 


This news release contains references to the abbreviations boe and Mcfe, which means barrels of oil equivalent and thousand cubic feet of gas equivalent, respectively. Boes and Mcfes may be be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet to one barrel and a Mcfe conversion ratio of one barrel to six thousand cubic feet is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.


This news release contains references to estimates of gas classified as discovered petroleum initially in place in the area of Groundbirch in British Columbia which are not, and should not be confused with, oil and gas reserves. "Discovered Petroleum Initially in Place" ("DPIIP") is defined in the Canadian Oil and Gas Evaluation Handbook (the "COGE Handbook") as the quantity of hydrocarbons that are estimated to be in place with a known accumulation. DPIIP is divided into recoverable and unrecoverable portions, with the estimated future recoverable portion classified as reserves and contingent resources and the remainder as at the evaluation date is by definition unrecoverable. There is no certainty that it will be economically viable or technically feasible to produce any portion of this DPIIP except to the extent identified as proved or probable reserves. Resources do not constitute, and should not be confused with, reserves.

Monterey has not categorized the resources disclosed as DPIIP into all of the sub-categories of discovered resources (other than those identified as proved or probable reserves) as projects have not been defined to develop such resources as at the evaluation date. Such projects, in the case of the Montney resource described, have historically been developed sequentially over a number of drilling seasons and are subject to annual budget constraints, the timing of the growth of third party infrastructure, the short and long term view of commodity prices, the results of exploration and development activities and possible infrastructure capacity constraints.

Contact Information

  • Pengrowth
    Derek Evans
    President & Chief Executive Officer
    (403) 233-0224
    Monterey Exploration Ltd.
    Patrick D. Manuel
    President & Chief Executive Officer
    (403) 691-7725
    Investor Relations
    (403) 233-0224 or Toll Free: 1-888-744-1111
    (403) 693-8889 (FAX)
    Media Inquiries
    (403) 213-8684
    (403) 781-9757 (FAX)