Spartan Delta Announces Strategic Montney Acquisition

Source: www.gulfoilandgas.com 7/28/2021, Location: North America

Spartan Delta Corp. has entered into a definitive agreement to acquire Velvet Energy Ltd. ("Velvet"), a privately held light-oil Montney producer with operations primarily in the Gold Creek, Karr and Pouce Coupe areas of north-west Alberta (the "Velvet Assets") for total consideration of approximately $743.3 million(1) (the "Acquisition").

The Acquisition will be funded by a combination of cash on hand, a $150.0 million bought deal equity financing led by National Bank Financial Inc., as sole bookrunner, together with CIBC World Markets Inc. as co-lead underwriters (the "Financing"), a five year $150.0 million 7.7% senior unsecured term facility (the "Term Facility") and the Company's revolving credit facility (the "Credit Facility"). Spartan has received confirmation with respect to an increase in the available capacity under the Credit Facility from $100.0 million to $450.0 million concurrent with the completion of the Acquisition.

Acquisition Highlights
- Positions Spartan as the largest producer and acreage holder in the oil window of Canada's Montney fairway
- Average production from the Velvet Assets is expected to be approximately 20,600 boe/d(2) at close
- Pro forma completion of the Acquisition, Spartan expects 2022 production to average between 66,000 to 71,000 boe/d (see "2021 and 2022 Corporate Guidance" for further details)
- Includes approximately 281,700 net acres of high working interest (98%) Montney Crown land across four development areas (Gold Creek, Karr, Pouce Coupe and Flatrock)
- Proved plus probable reserves of 224.6 million boe(3), including 204 booked drilling locations(4)
- 732 net identified Montney locations(4) are expected to provide over 20 years of drilling inventory
- The Acquisition is expected to be 35% accretive to Adjusted Funds Flow per share(8) in 2022 (see "2021 and 2022 Corporate Guidance" for further details)
- Further extends the Company's tax horizon with $1.2 billion of estimated tax pools

Award winning(11) integrated water recycling infrastructure at Gold Creek minimizes freshwater usage in completion operations, providing a solid foundation for long-term sustainable development Top decile liability management rating of 27.0 as at July 3, 2021 Fotis Kalantzis, President and Chief Executive Officer of Spartan, said: "The Acquisition will be a major milestone in Spartan's Montney consolidation strategy and brings the Company closer to achieving its previously stated objective of growing production to 100,000 boe/d. Velvet has been the dominant player in the Montney oil fairway and their team has built a tremendous portfolio of assets concentrated in large contiguous blocks. The Acquisition further consolidates and adds material scale to the Company's Montney focused core development area in northwest Alberta, building on the position acquired during the first half of 2021. Spartan will benefit from Velvet's Montney technical expertise. The Oil weighted production and development of the Velvet Assets will provide further commodity diversification to the Spartan portfolio, complimenting the Company's liquids-rich natural gas properties in the central Alberta Deep Basin."

Ken Woolner, President and Chief Executive Officer of Velvet, said:
"I'm extremely excited to be merging Velvet's top-tier Montney oil assets with such a high quality business. Spartan has the management, balance sheet and business plan to fully realize the value we have built our company towards capturing."

Spartan is also pleased to announce it has received conditional approval from the Toronto Stock Exchange ("TSX") to list its common shares ("Common Shares") on the TSX. In connection with its graduation, the Common Shares will delist from the TSX Venture Exchange ("TSXV"). Final approval for TSX listing is subject to Spartan fulfilling certain standard and customary conditions. The trading symbol for the Common Shares on the TSX will remain unchanged as "SDE".

Benefits of the Acquisition
Production from the Velvet Assets is expected to be approximately 20,600 boe/d at close, consisting of 8,600 bbl/d of oil (42%), 3,000 bbl/d of NGLs (14%) and 54.0 MMcf/d of natural gas (44%). Significant growth opportunities have been identified on the 286,700 gross (281,700 net) acres of Montney lands associated with the Velvet Assets, including 732 net identified Montney drilling locations.(4)

The Acquisition will represent a major milestone in the Company's Montney consolidation strategy, positioning Spartan as the largest producer and acreage holder in the oil window of Canada's Montney fairway. The core assets to be acquired at Gold Creek represent more than 80% of Velvet's current production and include approximately 138,800 net acres (217 sections) of contiguous Montney rights directly offsetting the Spartan assets acquired pursuant to the acquisition of Inception Exploration Ltd. The majority of the Velvet Gold Creek lands have been approved under Alberta's Emerging Resource Program, under which 42 existing wells and 34 future locations will qualify for a 5% Crown royalty until the benefits expire in 2029. The Velvet Assets at Karr are located between the Gold Creek and Simonette areas and will add to Spartan's existing land position at Karr, which was recently acquired through the acquisition of Canoe Point Energy Ltd. Karr will be a focus area for continued development and growth as the wells drilled to date are some of the most prolific Montney oil wells in the Deep Basin. In addition, the Velvet Assets provide further organic growth opportunities through low-risk Montney oil development at Pouce Coupe as well as significant undeveloped upside potential at Flatrock, an emerging resource property located in northeastern British Columbia. The production profile characteristics of the Velvet Assets compliment Spartan's current suite of assets in the Alberta Montney, increasing oil-weighted production and drilling inventory while also providing further commodity diversification to the Company's portfolio.

The Velvet Acquisition includes an estimated $1.2 billion of available tax pools, including $0.6 billion of non-capital losses, which are expected to further enhance Spartan's future tax position by extending the Company's tax horizon.

Details of the Acquisition
Pursuant to the Agreement, Spartan will acquire all issued and outstanding shares of Velvet (the "Velvet Shares") from the holders thereof (the "Velvet Shareholders") in consideration for: (a) the payment of an aggregate of $355.9 million in cash; and (b) the issuance of an aggregate of approximately 2,962,264 Common Shares at a deemed issuance price of $5.30 per Common Share. In addition, Spartan will assume Velvet's Net Debt(8) (estimated to be a maximum of $371.7 million at closing), inclusive of Velvet's transaction costs. The Common Shares issuable pursuant to the Acquisition will be subject to escrow, releasable in one-sixth increments beginning on the date that is one month following the closing date and continuing every month thereafter.

Concurrent with the execution of the Agreement, holders of more than 90% of the issued and outstanding Velvet Shares have executed letters of transmittal irrevocably accepting Spartan's offer and tendering Velvet Shares under the Acquisition (the "Letters of Transmittal"). Upon all of the conditions of the Acquisition having been satisfied or waived, Spartan will take up and pay for the Velvet Shares deposited under the Acquisition in accordance with the terms of the Agreement and the Letters of Transmittal. The Agreement provides for, among other things, a non-solicitation covenant on the part of Velvet. Closing of the Acquisition is expected to occur on or about August 31, 2021, subject to usual closing conditions and regulatory approvals, including the approval of the TSXV and the approval of the Commissioner of Competition pursuant to the Competition Act (Canada).

2021 and 2022 Corporate Guidance
The following table summarizes Spartan's pro forma operating and financial guidance for 2021 and preliminary outlook for 2022. The pro forma guidance for 2021 includes the Velvet Assets for the four-month period following the anticipated closing of the Acquisition on August 31, 2021. The forecasted financial guidance is based on the midpoint of production guidance of 44,000 boe/d and 68,500 boe/d, respectively, for 2021 and 2022.

Based on the Company's preliminary guidance for 2022, Spartan is forecasting Adjusted Funds Flow of approximately $444.0 million on a capital expenditure budget of $300.0 million. Free Funds Flow of $144.0 million forecast for 2022 is expected to be used to reduce Net Debt (Surplus) to approximately $302.0 million at December 31, 2022. Spartan's forecasted 2022 year-end Net Debt (Surplus) is estimated to be 0.7 times trailing Adjusted Funds Flow for 2022.(8)

The Financing
Spartan has entered into an agreement with a syndicate of underwriters led by National Bank Financial Inc. and CIBC World Markets Inc. (the "Underwriters"), pursuant to which the Underwriters have agreed to purchase for resale to the public, on a bought deal basis, 29,703,000 subscription receipts ("Subscription Receipts") of Spartan at a price of $5.05 per Subscription Receipt for aggregate gross proceeds of approximately $150 million. The Underwriters will have an option to purchase up to an additional 15% of the Subscription Receipts issued under the Financing at a price of $5.05 per Subscription Receipt to cover over allotments exercisable in whole or in part at any time until 30 days after the closing of the Financing. The gross proceeds from the sale of Subscription Receipts pursuant to the Financing will be held in escrow pending the completion of the Acquisition. If the Underwriters are satisfied, acting reasonably, that there is no impediment to the completion of the Acquisition in all material respects in accordance with the terms of the Agreement (other than funding the portion of the purchase price therefor to be paid with the net proceeds of the Financing) before 5:00 p.m. (Calgary time) on November 15, 2021, the net proceeds from the sale of the Subscription Receipts will be released from escrow to Spartan and each Subscription Receipt will automatically be exchanged for one Common Share for no additional consideration and without any action on the part of the holder. If the Acquisition is not completed at or before 5:00 p.m. (Calgary time) on November 15, 2021, then the purchase price for the Subscription Receipts will be returned pro rata to subscribers, together with a pro rata portion of interest earned on the escrowed funds.

The Subscription Receipts issued pursuant to the Financing will be distributed by way of a short form prospectus in all provinces of Canada (excluding Québec) and may also be placed privately in the United States to Qualified Institutional Buyers (as defined under Rule 144A under the United States Securities Act of 1933, as amended (the "U.S. Securities Act")) pursuant to an exemption under Rule 144A, and may be distributed outside Canada and the United States on a basis which does not require the qualification or registration of any of the Company's securities under domestic or foreign securities laws. Completion of the Financing is subject to customary closing conditions, including the receipt of all necessary regulatory approvals, including the approval of the TSXV. Closing of the Financing is expected to occur on August 18, 2021.

The net proceeds from the Financing will be used to fund part of the cash portion of the purchase price under the Acquisition.

Advisors
National Bank Financial Inc. and CIBC World Markets Inc. are acting as financial advisors to Spartan in respect of the Acquisition and the Financing. Eight Capital is acting as strategic advisor to Spartan with respect to the Acquisition. Stikeman Elliott LLP is acting as legal counsel to Spartan in respect of the Acquisition, the Financing, the Term Facility and the Credit Facility.


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