Vermilion Energy announces acquisition of Spartan Energy
Vermilion Energy Inc has announced that it has entered into an arrangement agreement to acquire Spartan Energy Corp, a publicly traded southeast Saskatchewan oil and gas producer, with annual production of approximately 23,000 boe/d (91% oil).
Total consideration for Spartan is approximately $1.40 billion, comprised of $1.23 billion in Vermilion shares plus the assumption of approximately $175 million in debt.
The Board of Directors of Vermilion and Spartan have unanimously approved the arrangement and recommended that Spartan shareholders vote in favour of the arrangement. The arrangement remains subject to customary closing conditions, including receipt of applicable court, Spartan shareholder, TSX and NYSE, and other regulatory approvals, and is expected to close on or about 15th June 2018.
Vermilion focuses on high-netback producing areas with favourable fiscal and regulatory regimes. The company entered southeast Saskatchewan with the acquisition of Elkhorn Resources in 2014 and have since continuously evaluated opportunities to expand the company’s position in this area. Vermilion has added approximately 30 sections of land to its southeast Saskatchewan core area through the end of 2017, and further augmented its asset base with the acquisition of a private southeast Saskatchewan oil producer in early 2018. The acquisition of Spartan is a value-adding investment which meets the company’s disciplined mergers and acquisitions criteria. The acquisition significantly increases its position in southeast Saskatchewan and aligns with the company’s sustainable growth-and-income model by appending high-netback, low decline assets with free cash flow and strong capital efficiencies on future development.
Making no deduction for undeveloped land value, transaction metrics equate to $12.33 per boe of proved plus probable ("2P") reserves (based on Spartan's reserve report) and $60,900 per flowing barrel of production. Based on 13th April 2018 WTI strip pricing of $65.19/bbl, the operating netback for the acquired assets is estimated at approximately $38.42 per boe. Using a 2P finding, development and acquisition cost of $19.48 per boe (including future development capital) based on the acquisition consideration and Spartan's reserve report, the acquired assets are expected to deliver a 2P operating recycle ratio of 2.0 times (including the acquisition cost).
Using the same strip pricing assumption, the total acquisition cost (including assumed debt) is approximately 4.7 times estimated annualised 2018 fund flows from operations, after deducting incremental interest expense. Pro-forma including the acquisition, Vermilion’s year-end 2018 net debt-to-FFO ratio is forecast to be 1.7 times based on current strip pricing, as compared to 2.0 times prior to the acquisition.
The acquisition is accretive on a fully-diluted per share basis for all pertinent metrics including production, fund flows from operations, and reserves:
Vermilion believes that this business combination will significantly benefit both the company’s existing shareholders and Spartan's shareholders. The acquired assets' netback, base decline, and capital efficiency characteristics have the capability to grow while generating significant free cash flow and are therefore well-suited to the company’s growth-and-income capital markets model. In addition, Vermilion believes that both shareholder groups will benefit from increased scale in both its operations and in the capital markets and that the combined enterprise will have the operating, technical and financial capability to maximise the value of the southeast Saskatchewan assets.
The Spartan assets are comprised of high-netback, light oil producing properties covering approximately 480,000 net acres of land (80% average working interest), including 400,000 net acres in southeast Saskatchewan with multi-zone potential. In addition, the acquisition includes approximately 80,000 net acres of land in other areas of Saskatchewan, Alberta and Manitoba. Production from the assets is projected to be approximately 23,000 boe/d (91% oil) during 2018. The acquisition also includes ownership and control of producing an infrastructure that is synergistic with the company’s existing assets, as well as significant 2D and 3D seismic data.
Total proved ("1P") and 2P reserves attributed to the assets at 31st December 2017 are 73 mmboe (92% crude oil and natural gas liquids) and 113.5 mmboe (92% crude oil and natural gas liquids), respectively, based on an independent evaluation by Sproule Associates Limited. Vermilion has internally evaluated Spartan's reserves and expects to have the capability to book similar volumes of reserves. The company has identified over 1,000 development locations targeting the Ratcliffe, Midale, Frobisher/Alida, Bakken, and Three Forks/Torquay formations. Most of the future drilling targets are inexpensive open-hole completions not requiring hydraulic fracturing, generating rapid pay-outs. There are also several identified drilling locations in the hydraulically-fractured Midale play. In addition, there is significant waterflood development opportunities in the Ratcliffe and Midale zones. The assets demonstrate a current base decline rate of approximately 23% for the first year and decreasing thereafter. Under the current commodity strip, Vermilion expects the assets to generate cash flow more than capital requirements for continued growth plus the incremental gross dividends associated with the new shares issued.
Because of the acquisition, and based on an expected 15th June 2018 closing date, Vermilion is revising its 2018 production guidance to a range of 86,000 to 90,000 boe/d (from 75,000 to 77,500 boe/d previously). In addition, the company is increasing its 2018 capital budget to $430 million (from $325 million previously) to reflect additional capital activity associated with the acquired assets. Upon closing of the acquisition, the company also intends to eliminate the 2% discount associated with its Dividend Reinvestment Plan, beginning with the June 2018 dividend payable on 16th July 2018.