i3 Energy plc, an independent oil and gas company with assets and operations in the UK, is pleased to announce the following update.
- i3 has entered into an Option agreement to acquire all issued and outstanding common shares of Toscana Energy Income Corporation ("Toscana" or "TEIC"), a TSX listed company.
- TEIC had 2019 year-end 2P Reserves of 4.65 MMboe (53% oil, 47% gas) with a reserve life index of 14.7 years.
- Toscana's 2019 production averaged 1,065 boepd and generated C$5.5 million (US$3.9mm) in field netback from 13 low-decline, long-life conventional fields producing at an average breakeven price of C$30.43/boe (US$21.74/boe).
- TEIC operates 69% of the producing wells in its portfolio at an average net working interest of 67%.
- i3 is purchasing Toscana at a fraction of going market-based valuations for WCSB oil and gas transactions; the total aggregate consideration being paid by i3 for TEIC's debt and equity totals approximately C$3.95 million (US$2.82mm) representing roughly 0.72x Toscana's 2019 field netback, C$3710/boepd (US$2650/boepd), and C$0.85/boe (US$0.61/boe).
On March 27th, i3 used current cash resources to purchase the rights and interests in Toscana's senior and junior debt facilities (which were in default). i3 has acquired Toscana's C$24.8 million senior facility for C$3.0 million and its C$3.2 million junior facility for C$0.4 million, with cash consideration for each being paid 50% up front and 50% at year-end.
Upon i3's exercise of the Option, Toscana shareholders will be offered up to 4,399,224 i3 shares for TEIC's entire share capital, representing dilution of approximately 4% to the Company's current shareholders and having a market value at March 27th of approximately C$0.55 million.
Following exercise of the Option and on conclusion of the Arrangement Agreement, i3 intends that its enlarged share capital will also be listed on the TSX, satisfying the Company's obligation under its existing Loan Notes to seek a secondary listing for its shares.
Majid Shafiq, CEO of i3 Energy commented:
"This is a highly significant acquisition opportunity for i3 which adds material, low cost per barrel, low-decline production as well as a new growth business with a strong management team and strategy in the Western Canadian Sedimentary Basin.
"In addition to diversifying our portfolio, this transaction will help to stabilise our business with a steady revenue stream while adding considerable upside potential from within Toscana's Clearwater acreage - an opportunity which is comparable to the growth potential of our Serenity discovery. We look forward to welcoming the Toscana management team and staff to i3 and working together to grow our business in the UK and Canada."
Production Acquisition Option
The Company is pleased to announce that it has entered into an option agreement to acquire all of the issued and outstanding common shares in the capital of Toscana Energy Income Corporation, a Toronto Stock Exchange ("TSX") listed oil and gas corporation with assets in the Western Canadian Sedimentary Basin ("WCSB") in Alberta and Saskatchewan, Canada (the "Option"). The Option expires on 30 June 2020 or such later date as agreed between the parties. The acquisition would be consummated via a plan of arrangement and the terms of the proposed transaction (the "Arrangement Agreement") have been agreed with the Board of TEIC. Voting support agreements have been obtained from the directors and management of Toscana. The exercise of the Option is not expected to occur until after the publication of audited 2019 year-end accounts for TEIC and i3. The entering into of the Arrangement Agreement may possibly be classified as a reverse takeover under the AIM Rules for Companies and a determination will be made prior to i3's exercise of the Option (the "RTO Determination"). If a positive RTO Determination is made i3 will not be obliged to exercise the Option.
Toscana Energy Income Corporation
In its annual reserves report prepared by Sproule Associates Limited ("Sproule"), TEIC's wholly owned operating subsidiary, Firenze Energy Ltd., has 2019 year-end 2P reserves of 4.65 MMboe (53% oil, 47% gas) with an after-tax NPV10 of C$40.3 million using Sproule's 31 December 2019 forecast for oil and gas prices (further detail may be found at https://www.toscanaenergy.ca/2020/03/toscana-energy-announces-2019-reserves/ and within Toscana's 2019 Annual Information Form once made available on its website). Toscana's 2019 production was approximately 1,065 boepd (55% 32°+ API oil, 45% gas) from 13 low-decline, long-life, conventional fields, containing 255 gross (175 net working interest) producing wells. In 2019, TEIC generated C$5.5 million (US$ 3.9mm) in field netback (revenue minus royalties minus opex) and produced at an average field break-even price of C$30.43/boe (US$ 21.74/boe). Toscana's portfolio contains a number of low-cost opportunities to enhance production from existing producing fields, in addition to a significant land position atop the Clearwater formation which, by most economic metrics, is a highly-ranked oil play in the WCSB.
Key Terms of the Arrangement Agreement
Under the terms of the Arrangement Agreement, TEIC shareholders will be offered i3 ordinary shares at an exchange ratio of 0.0281 i3 ordinary shares for each TEIC common share. Based on the current fully-diluted share capital of TEIC, this will result in the issuance of up to 4,399,224 i3 ordinary shares to shareholders of TEIC (market value at March 27th of approximately C$0.55 million), representing dilution of approximately 4% to i3's current shareholders. Entering into the Arrangement Agreement will be subject to the outcome of the RTO Determination, and completion of the plan of arrangement will be conditional on a vote in favour of the arrangement resolution by 66 2/3% of TEIC's shareholders voting at a general meeting. TEIC has granted a period of exclusivity until 30 June 2020, during which TEIC will deal exclusively with i3 and not solicit an alternative proposal which would or could reasonably be expected to interfere with or prevent the completion of the Arrangement Agreement with i3. During the exclusivity period, i3 has the right to match the terms of any unsolicited proposal which is superior to that contemplated by the Arrangement Agreement.
Senior and Junior Debt Purchase
As a result of accessing debt to acquire assets in a much stronger commodity environment, TEIC has struggled for some years and was in default under the terms of its debt facility agreements. i3 has purchased the rights and interests in Toscana's C$24.8 million senior and C$3.2 million junior debt facilities using current cash resources of C$3.0 million and C$0.4 million, respectively, with the cash consideration being paid 50% up front and 50% at year-end. The aggregate consideration being paid by i3 for TEIC's debt and equity totals approximately C$3.95 million (US$ 2.82mm) and, in light of TEIC's 2019 production and reserves, represents approximately 0.72x Toscana's 2019 field netback of C$5.5 million (US$ 3.9mm), C$3710/boepd (US$2650/boepd), or C$0.85/boe (US$0.61/boe), and is a fraction of going market-based valuations for WCSB oil and gas transactions.
At such time as i3 exercises its Option and on conclusion of the Arrangement Agreement, i3 intends that its enlarged share capital will also be listed on the TSX, satisfying the Company's obligation under its existing Loan Notes to seek a secondary listing for its shares.
Strategic Rationale for the Transaction
i3 Energy believes it is necessary to diversify its asset portfolio in order to spread and mitigate risk. Ideally this would diversify multiple aspects of our business, including geological, project life cycle, project capital intensity and capital market risks, whilst also being both accretive to shareholders and financeable based on our current balance sheet. We also believe it is critical to add production to our asset portfolio to provide internal free cash flow to grow the company and provide a near-term return to our shareholders. Having considered a number of global oil and gas basins and specific opportunities, including in the UK sector of the North Sea in the context of our acquisition criteria, we have concluded that the WCSB provides a unique, time-limited opportunity to build a portfolio of production assets on superior metrics not achievable elsewhere. A short to medium term lack of infrastructure to transport Canadian oil and gas to international markets in combination with depressed gas prices in North America due to the growth in gas supply from shale gas drilling has led to many small and mid-cap oil and gas producers, particularly those with overleveraged balance sheets and heavily gas-weighted portfolios, to become financially distressed and to have limited access to the North American capital markets to fund maintenance opex or growth capex. Many of these companies contain excellent, long-life, low-decline production assets, with solid growth potential that may be acquirable at attractive metrics.
Though world oil markets are highly volatile at present, TEIC provides revenue from its long-life portfolio of assets which contain a number of low-cost production enhancement opportunities with the potential to add several hundred bopd in the near term or at such time as commodity prices strengthen.
The TEIC portfolio also contains an asset with prolific growth potential. TEIC's large land position in the Marten Hills and Nipisi areas of Central Alberta sits atop the lower cretaceous Clearwater formation, a conventional oil play producing 13° to 23° API crude oil. The Clearwater play has recently seen significant capital investment and production growth; over 150 wells have been spud since the beginning of 2016 and current production from the play is in excess of 20,000 bopd. In terms of economic metrics, the Clearwater consistently ranks amongst the best in Canada due to its low finding and development costs resulting from shallow reservoir depth and simple, unstimulated open-hole horizontal drilling programs, low initial decline rates and low opex (due to minimal water production). TEIC's acreage consists of 45.9 net sections (73 km2), with each section estimated by TEIC's management to have the potential to contain up to 24 MMbbls of STOIIP. Recovery factors are estimated to range from 5% for primary recovery to 15% using water and polymer flooding. TEIC's acreage is well delineated by way of multiple legacy gas wells which have penetrated the Clearwater oil formation, and a drilling programme of 4 to 6 wells is being planned for the Winter 2020/21 season. Further, due to restrictions on mineral rights licensing in the region, i3 sees this acquisition as providing the last near-term opportunity to garner a sizeable position in the Marten Hills and Nipisi Clearwater fairway.
Following completion of the TEIC transaction, i3 intends to leverage the TEIC platform and management team to execute an M&A driven growth strategy to build a large, low capital intensity, long-life production base in Canada. A portfolio of accretive and material opportunities has already been identified and is being evaluated to high-grade those which meet our acquisition criteria.
On completion of the transaction and subject to regulatory due diligence, John Festival will join the board of i3 as a non-executive director. John is a chemical engineer with over 35 years of experience in the WCSB's oil and gas sector and has an excellent track record of founding, growing and monetising oil and gas ventures in Canada. He is currently the CEO of Broadview Energy and was the President and CEO of Black Pearl Resources Inc. prior to its acquisition by International Petroleum in December 2018 in a stock and debt transaction valued at circa C$715 million. He was previously the founder and President of BlackRock Ventures Inc. which was established in 2001 and sold to Shell Canada for C$2.4 billion in 2006.