Skope Energy Inc.
TSX : SKL

Skope Energy Inc.

December 02, 2011 13:33 ET

Skope Energy Inc. Announces Filing of Preliminary Prospectus in Connection With a Convertible Debenture Issue, Operational Update and Updated Guidance

CALGARY, ALBERTA--(Marketwire - Dec. 2, 2011) -

NOT FOR DISSEMINATION IN THE U.S.

Skope Energy Inc. ("Skope" or the "Company") (TSX:SKL) today announced that it has filed a preliminary short form prospectus in all provinces of Canada (excluding Québec), and obtained a receipt therefor, with respect to a public offering of 5 Year 8.00% Convertible Unsecured Subordinated Debentures due December 31, 2016 (the "Debentures") in the minimum aggregate principal amount of approximately $15,000,000 (the "Offering"). The syndicate of agents is co-led by National Bank Financial Inc. and CIBC World Markets Inc. and also includes GMP Securities L.P. and HSBC Securities (Canada) Inc. (collectively, the "Agents"). The Company has also granted the Agents an over-allotment option to purchase up to 15% of the principal amount of Debentures on the same terms and conditions of the Offering, exercisable in whole or in part at any time, and from time to time, from the closing of the Offering and for a period of 30 days thereafter for the purposes of covering the Agents' over-allocation position, if any, and market stabilization purposes.

The Debentures will be convertible at the holder's option into common shares of the Company at a conversion price expected to be equal to a 30% premium to the closing price of the common shares of the Company on the date the Offering is priced. The Debentures will not be redeemable prior to December 31, 2014. On or after December 31, 2014 and prior to December 31, 2015, the Debentures may be redeemed in whole or in part at the option of the Company on not more than 60 days and not less than 30 days prior notice at a price equal to their principal amount plus accrued and unpaid interest, provided that the volume weighted average trading price of the common shares of the Company on the Toronto Stock Exchange ("TSX") for the 20 consecutive trading days preceding the date on which the notice of redemption is given is not less than 125% of the Conversion Price. On or after December 31, 2015 and prior to the Maturity Date, the Debentures may be redeemed in whole or in part at the option of the Company on not more than 60 days and not less than 30 days prior notice at a price equal to their principal amount plus accrued and unpaid interest.

Approximately $12 million of the net proceeds of the Offering will be used to reduce outstanding amounts under the Company's credit facility from $60 million to $48 million and the current credit facility limit will be permanently reduced from $65 million to $48 million. The balance of the net proceeds will be applied to further reduce outstanding amounts under the credit facility thereby strengthening the Company's balance sheet and freeing up borrowing capacity to fund a portion of the Company's exploration and development program and for potential acquisitions and general corporate purposes.

The Offering is expected to close the week of December 19, 2011 and is subject to regulatory approval. The Company has applied to the TSX to list the Debentures and the common shares underlying the Debentures. Listing will be subject to the Company satisfying all requirements of the TSX.

The securities being offered have not been, nor will be, registered under the United States Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or applicable exemption from the registration requirement of such Act. This release does not constitute an offer for sale of the Debentures.

Operational Update

Since completing the acquisition of certain oil, petroleum and natural gas properties and related assets in southeast Alberta and southwest Saskatchewan, Skope has initiated a recompletion and workover program, focusing in the Pendor area of southern Alberta.

In May 2011, Skope drilled two shallow gas horizontal wells at Pendor targeting the Second White Specks and Medicine Hat formations. These wells have been completed and are on production. A third horizontal shallow gas well at Pendor targeting the Bow Island formation was drilled in the second fiscal quarter ended September 30, 2011, which is in the process of being completed. Subsequent to the end of the second fiscal quarter, Skope drilled two additional horizontal gas wells at Pendor in the Mannville and Second White Specks formations which are expected be completed in December 2011.

Skope has identified over 20 potential follow-up horizontal drilling locations and a significant number of workover and recompletion candidates in Pendor and its other areas to offset production declines in the coming years.

Risk Management

Since inception, Skope has actively used hedging products to minimize risk and maximize financial leverage with the primary objectives of protecting cash flow to fund debt service, capital expenditures and dividends, to manage the borrowing base of the credit facility, and to retain price leverage and upside. In November 2011, the Company entered into the following additional natural gas financial commodity contracts for commodity price risk management.

Instrument Basis Volume Price Term
Swap AECO 2,500 Gj/d Cdn$3.90 April 2012 to March 2013
Short Call Option NYMEX 2,500 MMbtu/d US$5.65 November 2015 to October 2016
Swap AECO 2,500 Gj/d Cdn$3.90 April 2012 to March 2013
Short Call Option NYMEX 2,500 MMbtu/d US$5.57 November 2015 to October 2016

Skope has also entered into a series interest rate and commodity hedges with terms of 6 months to 5 years. The Company currently has an average of 13,459 Gj/d (12,762 Mcf/d), approximately 54% of anticipated net production for calendar 2012, of financial put and swap contracts at an average price of $3.99 Gj/d ($4.21 Mcf/d) to protect the natural gas price downside for the next 12 months.

Credit Facility

The Company has received consent in principle from its lender to the Offering provided that the proceeds of the Offering are applied to permanently reduce the indebtedness of the Company under the credit facility to $48 million. In addition, the Company expects to amend the credit facility concurrently with completion of the Offering to set the next borrowing base re-determination under the credit facility for March 31, 2012 and to extend the revolving period to April 30, 2012.

Updated Guidance

The following table outlines the Company's expected cash flow available for distribution for the calendar year ended December 2012 before and after giving effect to the Offering and without giving effect to the exercise of the Agents' over-allotment option:

Calendar Year 2012 Prior to giving effect to the Offering After giving effect to the Offering
(millions of dollars)
Funds from Operations (1) (2) 14.0 13.3
Capital Expenditures (3) (5.7 ) (5.7 )
Cash Flow Available for Distribution (1) 8.3 7.6

Notes:

  1. See "Financial Information".
  2. Based on estimated average production of 26 Mmcf/d and a $3.48/mcf AECO price for the calendar year 2012.
  3. Represents the Company's current capital expenditure budget.

About Skope Energy Inc.

Skope is in the business of oil and natural gas exploration, development and production in Western Canada with a focus on shallow natural gas. Skope was formed to acquire an 80% working interest in a package of high quality, long-term, low decline producing shallow gas assets, located in southeast Alberta and southwest Saskatchewan.

Forward-Looking Statements

This news release contains forward looking statements. These statements relate to future events or the Company's future performance. All information and statements contained herein that are not clearly historical in nature constitute forward looking statements, and the words "may", "will", "should", "could", "expect", "plan", "intend", "anticipate", "believe", "estimate", "propose", "predict", "potential", "continue", or the negative of these terms or other comparable terminology are generally intended to identify forward looking statements. These statements involve known or unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward looking statements. Undue reliance should not be placed on these forward looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur.

Specifically, this news release contains forward looking statements relating to the Company's internal projections, estimates or beliefs concerning, the timing and amount of future production, future commodity prices, funds from operations, drilling, development and completion plans, including recompletions and workovers, the timing thereof and the results therefrom, the amount of and allocation of the Company's capital expenditures and the results therefrom, future capital and operating costs, economics and efficiencies, the Company's business focus, strategy, goals, plans and management focus, the Company's anticipated production decline profile and plans to maintain production, the existence, strategy and impact of the Company's risk management program, the Company's acquisition and growth strategy and opportunities, the Company's expectations regarding commodity prices, the anticipated closing of the Offering, the anticipated use of the net proceeds of the Offering and expectations regarding amendments to the Company's credit facility following completion of the Offering. The closing of the Offering could be delayed if the Company is not able to obtain the required subscriptions to complete the Offering and the necessary regulatory approvals required for completion of the Offering and on the timeframes contemplated. The Offering will not be completed at all if the required subscriptions to complete the Offering are not obtained or these approvals are not obtained or, unless waived, some other condition to closing is not satisfied. Accordingly there is a risk that the Offering will not be completed within the anticipated time or at all.

Forward-looking statements contained in this press release are based on certain assumptions and are subject to a number of risks. Investors are cautioned that such information, although considered reasonable by the Company, may prove to be incorrect. Actual results achieved will vary from the information provided in this news release as a result of numerous known and unknown risks and uncertainties and other factors described in the Company's annual information form and other disclosure documents. Some of the additional risks and other factors which could cause actual results to differ materially from those expressed herein include, but are not limited to: failure to complete the Offering, failure to amend the credit facility on the terms contemplated, operating and capital costs, general economic, market and business conditions, volatility in market prices for crude oil and natural gas and hedging activities related thereto, risks related to the exploration, development and production of oil and natural reserves, risks related to the timing of completion of the Company's projects, reliance on industry partners, operational hazards, risks inherent in the exploration, development and production of oil and natural gas, the availability of capital on acceptable terms or at all, hedging strategies, the potential for management estimates and assumptions to be inaccurate, additional indebtedness and debt service requirements, geological, technical, drilling and processing problems, including the availability of equipment and access to properties, current global financial conditions, including fluctuations in interest rates, foreign exchange rates and stock market volatility and limited, unfavourable, or a lack of access to capital markets.

Readers are cautioned that the foregoing lists of factors are not exhaustive. The forward-looking statement disclosure contained in this press release, and the documents incorporated by reference herein, are expressly qualified by this cautionary statement.

These forward-looking statements are made as of the date of this press release, or in the case of documents incorporated by reference herein, as of the dates of such documents, and the Company disclaims any intent or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or results or otherwise, other than as required by applicable securities laws.

Financial Information

In this news release, Skope refers to certain financial measures (such as funds from operations, cash flow available for distribution and free cash flow) which do not have any standardized meaning prescribed by Canadian generally accepted accounting principle ("Canadian GAAP"). Skope defines funds from operations as cash provided by operating activities adjusted for changes in non-cash working capital. Cash flow available for distribution is defined as funds from operations less capital expenditures and free cash flow is defined as funds from operations less capital expenditures and dividends. Management believes that these measures assist in providing a more complete understanding of certain aspects of Skope's results of operations and financial performance, including its ability to generate the cash flow necessary to fund future dividends to shareholders and capital expenditures. However, funds from operations, cash flow available for distribution and free cash flow should not be construed as an alternative to traditional performance measures determined in accordance with Canadian GAAP, such as cash provided by operating activities and net income (loss). Reference should be made to Skope's annual and interim management's discussion and analysis for a reconciliation of funds from operations to cash flow from operating activities.

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