Whitecap Resources Inc.
TSX : WCP

Whitecap Resources Inc.

March 08, 2011 07:57 ET

Whitecap Resources Inc. and Spry Energy Ltd. Announce Significant Light Oil Combination, $136 Million Bought Deal Financing and Increased 2011 Guidance

CALGARY, ALBERTA--(Marketwire - March 8, 2011) -

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This News Release shall not constitute an offer to sell or the solicitation of an offer to buy any securities nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful. The securities have not been and will not be registered under the United States Securities Act of 1933 and may not be offered or sold in the United States except in transactions exempt from such registration.

Whitecap Resources Inc. ("Whitecap" or the "Company") (TSX:WCP) and Spry Energy Ltd. ("Spry"), are pleased to announce that they have entered into an arrangement agreement (the "Arrangement Agreement") with respect to a combination of the two entities. Spry is an oil weighted private company with its primary operations located in the Pembina area of west central Alberta with the majority of its production and reserves focused in the Cardium formation. The Arrangement Agreement provides for total consideration of $223.0 million payable by Whitecap including the assumption by Whitecap of Spry's net debt (the "Transaction"). The Transaction will be funded in part through a $136 million bought deal financing (the "Offering") of subscription receipts in the capital of Whitecap at $6.80 per subscription receipt.

SUMMARY OF THE TRANSACTION

Through the Transaction, Whitecap is acquiring operated, high working interest light oil assets located predominantly in the Pembina area of west central Alberta focused in the Cardium formation, and very complementary to Whitecap's existing operations in Pembina including an extensive development inventory of 52 gross locations. The Transaction also adds attractive light oil assets in southeast Saskatchewan and a high working interest, operated heavy oil asset at Lloydminster, Alberta. Spry's current production is approximately 2,600 boe/d (71% oil and NGLs), of which 1,700 boe/d (86% oil and NGLs) is from the Pembina Cardium lands.

Under the terms of the Transaction, Spry shareholders will receive, for each Spry share held: i) 1.17647 Whitecap common shares; or ii) $8.00 in cash, subject to an aggregate cash maximum of $130.9 million and a maximum distribution of 8.2 million Whitecap common shares. Whitecap will also assume the debt and working capital of Spry, estimated at $36.0 million as at March 1, 2011.

The Transaction has the following characteristics:
 
Total Transaction price (including net debt) $223.0 million
Current production 2,600 boe/d (71% light oil and NGLs)
Proved reserves(1) 5,832 mboe (71% light oil and NGLs)
Proved plus probable reserves(1) 9,930 mboe (70% light oil and NGLs)
Proved plus probable RLI(2) 10.5 years
Annualized cash flow(3) $50 million
Operating netback(3) $48/boe
   
Net of undeveloped land value of $11.5 million (internally estimated), the associated transaction metrics are as follows:
   
Current production $81,300/boe/d
Proved reserves $36.26/boe
Proved plus probable reserves $21.29/boe
Proved plus probable reserves recycle ratio 2.3x

The Transaction is forecast to be accretive on a fully diluted basis to Whitecap in 2011 including cash flow per share, production per share, proved plus probable reserves per share and net asset value per share.

STRATEGIC RATIONALE

The Transaction represents a continuation of Whitecap's strategy of becoming a premier oil weighted intermediate producer through a combination of organic growth and accretive transactions that are oil focused, with high netbacks and provide significant Company operated drilling upside. The Transaction is complementary to Whitecap's existing asset base and significantly increases Whitecap's footprint into the early stage Cardium oil resource play in Pembina.

The Acquired Pembina Cardium Assets

Spry's Pembina Cardium assets are very focused with the entire production base of 1,700 boe/d immediately offsetting Whitecap's Pembina Cardium production and lands. The Spry assets add 31 producing Cardium horizontal oil wells to Whitecap's existing base of 12 producing Cardium horizontal wells. The remainder of the 2011 drilling program is forecasted to bring this total to 75 producing Cardium horizontal wells by year end. Spry's Cardium assets have provided top quartile results to date with development upside remaining. Using current horizontal multi-fracturing technology in combination with increasing well densities from 4 to 6-8 wells per section Whitecap expects to increase recoverable reserves from the current reserve assignment.

Furthermore, the Pembina assets have waterflood potential which could further increase ultimate recoveries.

INCREASED 2011 GUIDANCE

Following the Transaction, Whitecap will continue and expand on its projected 2011 capital program, which is directed 100% towards oil opportunities. The Company's increased guidance for 2011, after giving effect to the Transaction and the Offering, is as follows:

Average production(4) 5,600 - 5,800 boe/d (68% light oil and NGLs)
Exit production 7,800 - 8,000 boe/d (72% light oil and NGLs)
2011 cash flow(3)(4) $83 - $87 million
  Per share – basic $1.28 - $1.35
2011 Q4 annualized cash flow(3) $126 - $130 million
  Per share – basic $1.75 - $1.80
Operating netback(3) $48/boe
2011 capital expenditures (excluding acquisitions) $112 - 117 million
Wells drilled (gross) 62 – 64

PLAN OF ARRANGEMENT

Whitecap and Spry have entered into an Arrangement Agreement pursuant to which Whitecap and Spry have agreed that the Transaction will be conducted by means of a plan of arrangement under the Business Corporations Act (Alberta). Whitecap will pay up to $130.9 million in cash (subject to adjustment in certain circumstances) and issue up to 8.2 million Whitecap common shares to the shareholders of Spry, in exchange for all of the outstanding common shares of Spry and subject to the terms and conditions of the Arrangement Agreement.

Holders of over 49 percent of the voting shares of Spry on a fully diluted basis have entered into agreements with Whitecap pursuant to which they have agreed to vote their shares in favour of the Transaction and the Board of Directors of Spry has unanimously approved the Transaction and recommended that the shareholders of Spry vote in favour of the Transaction.

The Arrangement Agreement, among other things, provides for a mutual non‐completion fee of up to $6.5 million in the event the Transaction is not completed in certain circumstances. The Arrangement Agreement provides that completion of the Transaction is subject to certain conditions, including the receipt of all required regulatory approvals, including the approval of the TSX, the approval of the Court of Queen's Bench of Alberta and the approval of at least two thirds of Spry shareholders voting in person or by proxy at a meeting of Spry shareholders to be scheduled for late April, 2011. The Transaction is anticipated to close no later than May 11, 2011.

ADVISORS

National Bank Financial Inc. is acting as exclusive financial advisor and GMP Securities L.P. is acting as strategic advisor to Whitecap with respect to the Transaction.

Peters & Co. Limited is acting as exclusive financial advisor to Spry with respect to the Transaction and has provided the Board of Directors of Spry with its opinion that, subject to its review of the final form of documents effecting the Arrangement Agreement, the consideration to be received by Spry shareholders is fair, from a financial point of view, to Spry shareholders.

FINANCING

Pursuant to the Transaction, Whitecap has entered into an agreement with a syndicate of underwriters co-led by GMP Securities L.P. and National Bank Financial Inc. (collectively, the "Underwriters"), under which the Underwriters have agreed to purchase for resale to the public, on a bought deal basis, 20 million subscription receipts ("Subscription Receipts") of Whitecap at a price of $6.80 per Subscription Receipt (the "Offering Price") to raise gross proceeds of $136 million. The net proceeds of the Offering will be used to fund the cash component of the Transaction payable by Whitecap pursuant to the Arrangement Agreement and for general corporate purposes. Whitecap has granted the Underwriters an option (the "Over-Allotment Option") to purchase an additional 2 million Subscription Receipts exercisable at the Offering Price on the date of closing of the Offering and for a period of 30 days following the date of closing of the Offering for additional gross proceeds of up to $13.6 million.

Completion of the Offering is subject to certain conditions including the receipt of all necessary regulatory approvals, including the approval of the Toronto Stock Exchange. The Subscription Receipts will be offered in each of the provinces of Alberta, British Columbia, Saskatchewan, Manitoba and Ontario (and other jurisdictions in Canada as agreed by the Company and the Underwriters) by way of a short-form prospectus and in the United States on a private placement basis pursuant to exemptions from the registration requirements under Rule 144A and/or Regulation D of the United States Securities Act of 1933.

Closing of the Offering is expected to occur on or about March 29, 2011. The gross proceeds of the Offering will be held in escrow pending delivery by the Company to the Underwriters of a certificate to the effect that all conditions (other than payment of the purchase price) necessary to complete the Transaction have been completed. If the Transaction is completed on or before May 31, 2011, the net proceeds will be released to Whitecap and each Subscription Receipt will be exchanged for one common share of Whitecap for no additional consideration. If the Transaction is not completed on or before May 31, 2011 or the Arrangement Agreement is terminated at an earlier time, holders of Subscription Receipts will receive a cash payment equal to the offering price of the Subscription Receipts and any interest that was earned thereon during the term of the escrow.

Notes:

(1) Based on Gross Company Reserves which means the company's working interest reserves before the calculation of royalties, and before the consideration of the company's royalty interest. Reserves are Whitecap's internal estimates prepared by a member of management who is a qualified reserves evaluator in accordance with National Instrument 51-101 effective December 31, 2010.
   
(2) Based on current production of 2,600 boe/d.
   
(3) Based on US$90.00/bbl WTI, C$3.75/GJ AECO and US$/C$ exchange rate of 1.00.
   
(4) Based on an April 1, 2011 effective date.

Note Regarding Forward-Looking Statements and Other Advisories

This press release contains forward-looking statements and forward-looking information (collectively "forward-looking information") within the meaning of applicable securities laws relating to the Company's plans and other aspects of Whitecap's anticipated future operations, management focus, strategies, financial, operating and production results and business opportunities, including expected 2011 production, cash flow, operating netbacks, year-end net debt, the Company's planned capital expenditure program, drilling and development plans and the timing thereof. In addition, and without limiting the generality of the forgoing, this press release contains forward-looking information regarding the proposed Transaction, statements with respect to the estimated price of the Transaction; statements with respect to the characteristics and the anticipated growth and development potential of the assets to be acquired; future drilling and development plans of Whitecap and with respect to the assets to be acquired; expectations regarding future production volumes from the acquired assets; the effect of the Transaction on Whitecap's production, reserves, recycle ratio, cash flow, operating netback, debt levels and net asset value; the expected closing date of the Offering and the Transaction; the use of proceeds of the Offering; expected 2011 exit and average production and product mix; expected 2011 financial and operating results including cash flow and operating netbacks. In addition, statements relating to "reserves" are deemed to be forward looking statements as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described can be profitably produced in the future. Readers are cautioned that the foregoing list of factors should not be construed as exhaustive.

Forward-looking information typically uses words such as "anticipate", "believe", "project", "expect", "goal", "plan", "intend" or similar words suggesting future outcomes, statements that actions, events or conditions "may", "would", "could" or "will" be taken or occur in the future.

The forward-looking information is based on certain key expectations and assumptions made by Whitecap's management, including expectations and assumptions concerning prevailing commodity prices, exchange rates, interest rates, applicable royalty rates and tax laws; future production rates and estimates of operating costs; performance of existing and future wells; reserve volumes; anticipated timing and results of capital expenditures; the success obtained in drilling new wells; the sufficiency of budgeted capital expenditures in carrying out planned activities; the timing, location and extent of future drilling operations; the state of the economy and the exploration and production business; results of operations; performance; business prospects and opportunities; the availability and cost of financing, labour and services; the impact of increasing competition; ability to market oil and natural gas successfully, Whitecap's ability to access capital and the receipt of all necessary approvals for completion of the Transaction and the Offering, including the Toronto Stock Exchange; and the completion of the Transaction and the Offering or the timing planned.

Although Whitecap believes that the expectations and assumptions on which such forward-looking information is based are reasonable, undue reliance should not be placed on the forward looking information because Whitecap can give no assurance that they will prove to be correct. Since forward-looking information addresses future events and conditions, by its very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, the risks associated with the oil and gas industry in general such as operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve and resource estimates; the uncertainty of estimates and projections relating to reserves, resources, production, costs and expenses; health, safety and environmental risks; commodity price and exchange rate fluctuations; marketing and transportation; loss of markets; environmental risks; competition; incorrect assessment of the value of acquisitions; failure to realize the anticipated benefits of acquisitions including the Transaction; ability to access sufficient capital from internal and external sources; changes in legislation, including but not limited to tax laws, royalties and environmental regulations, actual production from the acquired assets may be greater or less than estimates; failure to obtain the necessary regulatory approval, stock exchange and other regulatory approvals and on the timelines planned; risks that conditions to closing of the Transaction or the Offering are not satisfied. Management has included the above summary of assumptions and risks related to forward-looking information provided in this press release in order to provide securityholders with a more complete perspective on Whitecap's future operations and such information may not be appropriate for other purposes.

Although Whitecap believes that the expectations represented in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. The Company's actual results, performance or achievement could differ materially from those expressed in, or implied by, the forward-looking information and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking information will transpire or occur, or if any of them do so, what benefits that the Company will derive there from.

Readers are cautioned that the foregoing lists of factors are not exhaustive. Additional information on these and other factors that could affect our operations or financial results are included in reports on file with applicable securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com).

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

Non-GAAP measures

This document contains the terms "cash flow" and "operating netbacks", which do not have a standardized meaning prescribed by Canadian GAAP and therefore may not be comparable with the calculation of similar measures by other companies. Whitecap uses cash flow and operating netbacks to analyze financial and operating performance. Whitecap feels these benchmarks are key measures of profitability and overall sustainability for the Company. Both of these terms are commonly used in the oil and gas industry. Cash flow and operating netbacks are not intended to represent operating profits nor should they be viewed as an alternative to cash flow provided by operating activities, net earnings or other measures of financial performance calculated in accordance with GAAP. Cash flows are calculated as cash flows from operating activities less changes in non-cash working capital. Operating netbacks are determined by deducting royalties, production expenses and transportation and selling expenses from oil and gas revenue. The Company calculates cash flow per share using the same method and shares outstanding that are used in the determination of earnings per share.

Note: "Boe" means barrel of oil equivalent on the basis of 6 mcf of natural gas to 1 bbl of oil. Boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Contact Information

  • Whitecap Resources Inc.
    Grant Fagerheim
    President & CEO
    (403) 266-0767
    (403) 266-6975 (FAX)
    or
    Whitecap Resources Inc.
    Thanh Kang
    VP Finance and CFO
    (403) 266-0767
    (403) 266-6975 (FAX)
    or
    Whitecap Resources Inc.
    500, 222 - 3 Avenue SW
    Calgary, AB T2P 0B4
    (403) 266-0767
    (403) 266-6975 (FAX)
    or
    Spry Energy Ltd.
    Ken Bowie, P.Eng. MBA
    President & CEO
    (403) 265-7770
    (403) 265-7010 (FAX)
    or
    Spry Energy Ltd.
    Bill Lewington
    VP Finance & CFO
    (403) 265-7770
    (403) 265-7010 (FAX)
    or
    Spry Energy Ltd.
    720, 540 - 5th Avenue SW
    Calgary, AB T2P 0M2
    (403) 265-7770
    (403) 265-7010 (FAX)