Vermilion Energy Acquires Oil Assets in Southeast Saskatchewan & Southwest Manitoba

Source: 1/15/2018, Location: North America

Vermilion Energy has entered into an arrangement agreement to acquire a private southeast Saskatchewan producer ('Privateco') for total cash consideration of $90.8 million. Under the terms of the Arrangement, Vermilion has agreed to acquire all of the issued and outstanding common shares in the capital of Privateco, including all Privateco Shares issuable, in accordance with the terms of existing grants of options or warrants, prior to the effective time of the Arrangement, and assume all outstanding debt of the Privateco. The Purchase Price will be funded from Vermilion's existing credit facilities.

The Board of Directors of Privateco has unanimously approved the Arrangement and recommended that Privateco shareholders vote in favour of the Arrangement. The Arrangement remains subject to customary closing conditions, including receipt of applicable court, Privateco shareholder and regulatory approvals, and is expected to close on or about February 15th, 2018.

The Acquisition is comprised of high netback, low base decline, light oil producing fields in the Sinclair and Fertile areas, straddling the Saskatchewan/Manitoba border, approx. 55 km northeast of Vermilion's existing operations in southeast Saskatchewan. The Assets include approx. 42,600 net acres of land (approx. 100% W.I.), three oil batteries, and associated pipelines, along with the necessary water infrastructure to facilitate the existing seven waterflood projects and initiate up to eight additional waterflood projects. The Assets produced approx. 1,150 bbl/d of 40° API oil during Q4 2017, sourced from the Bakken/Three Forks formation. All of the current production and infrastructure will be 100% owned and operated by Vermilion.

Total proved plus probable ('2P') reserves attributed to the Assets at December 31, 2017 are 6.7 mmboe (100% crude oil), based on an independent evaluation by GLJ Petroleum Consultants. The Assets demonstrate a low base decline rate of approx. 15% at present, and are expected to have even lower decline rates over time. Areas under waterflood have decline rates of less than 10% with certain areas of flat or increasing production. Approx. 45% of the production comes from active waterflood projects, leaving significant opportunity to expand the waterflood.

The Acquisition is accretive on a fully-diluted per share basis for all pertinent metrics including production, fund flows from operations, reserves and net asset value. Making no deduction for undeveloped land value, transaction metrics equate to $13.55 per boe of 2P reserves, and $79,000 per flowing barrel of production. Based on 2018 WTI strip pricing of US$61.83/bbl, the operating netback for the Assets is estimated at approximately $51.80 per boe. Using the 2P finding, development and acquisition cost (based on the reserves in the GLJ report) of $19.02 per boe (including future development capital), the Assets are expected to deliver a 2P after-tax fund flows recycle ratio of 2.7 times.

Using the same strip pricing assumption, the total Acquisition cost (including assumed debt) is approximately 5.1 times estimated annualized 2018 fund flows from operations ('FFO'), after deducting incremental interest expense. Calculated on a debt-adjusted cash flow basis, the total Acquisition cost (including assumed debt) is approx. 4.6 times. Pro-forma the acquisition, our year end 2018 debt-to-FFO ratio is forecast to be 2.0 times based on January 11, 2018 strip pricing, as compared to 1.9 times prior to the acquisition.

The Acquisition complements our current southeast Saskatchewan operations and will be managed out of our existing field office in the area. Furthermore, the Acquisition aligns with our sustainable growth-and-income model by targeting low risk assets with high netbacks, strong free cash flow generation, low base decline rates and strong capital efficiencies on future development.

As a result of the Acquisition, and based on a mid-February closing date, we are revising our 2018 production guidance to between 75,000 and 77,500 boe/d (from 74,500 to 76,500 boe/d previously). We are also increasing our 2018 capital budget to $325 million (from $315 million previously) to reflect additional capital activity on these assets planned for the second half of the year.

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Related Categories: Accounting, Statistics  Acquisitions and Divestitures  Asset Portfolio Management  Economics/Financial Analysis  General  Industrial Development  Insurance  Investment  Mergers and Acquisitions  Risk Management 

Related Articles: Accounting, Statistics  Acquisitions and Divestitures  Asset Portfolio Management  Economics/Financial Analysis  General  Industrial Development  Insurance  Investment  Mergers and Acquisitions  Risk Management 

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