ARC, EnCap to sell UGR Blair Creek to Painted Pony for $277 mln

Painted Pony Petroleum Ltd (TSX: PPY) has agreed to buy the issued and outstanding shares of UGR Blair Creek Ltd, an operator of natural gas assets in the Montney resource play in British Columbia, close to Painted Pony’s existing asset base. Calgary’s Painted Pony agreed to pay about $277 million, including debt, for the business. The seller is Unconventional Resources Canada LP, a portfolio investment of Canadian private equity firm ARC Financial Corp and U.S. private equity firm EnCap Investments. As a result of the deal, ARC and EnCap will become indirect investors in Painted Pony, and will each be able to nominate a member to the board.

PRESS RELEASE

Painted Pony Announces Strategic Montney Acquisition and $100 Million Equity Financing

CALGARY, ALBERTA–(Marketwired – March 15, 2017) – Painted Pony Petroleum Ltd. (“Painted Pony” or the “Corporation“) (TSX:PPY) is pleased to announce that it has entered into a share purchase agreement (the “Agreement“) to acquire all of the issued and outstanding shares of UGR Blair Creek Ltd. (“UGR“) (the “Acquisition“), a privately held 100% controlled subsidiary of Unconventional Resources Canada, LP (“URC“), a portfolio investment held in certain private equity funds advised by ARC Financial Corp. (such funds, collectively, “ARC“) and EnCap Investments, L.P. (such funds, collectively, “EnCap“). UGR operates high working interest Montney assets with established production, infrastructure and land holdings jointly with and adjacent to Painted Pony’s assets in northeast British Columbia (“NEBC“). Please refer to the area map (exhibit 1) included in this press release.

Pursuant to the Agreement, total consideration of 41.0 million common shares of Painted Pony (“Painted Pony Shares“) will be issued to URC (the “Purchase Price“). Based on the price per Painted Pony Share in respect of the Offering (as defined below) of $5.60, implying total share consideration of $229.6 million. At closing, Painted Pony will assume UGR’s net debt which at December 31, 2016 was approximately $47 million. Painted Pony will also assume other expected transaction costs of ARC, EnCap, URC and UGR.

In addition, Painted Pony has entered into an agreement with a syndicate of underwriters led by Cormark Securities Inc. and TD Securities Inc. (collectively the “Underwriters“), pursuant to which the Underwriters have agreed to purchase for resale to the public, on a bought-deal basis, 18,018,100 Painted Pony Shares (the “Offered Shares“) at a price of $5.60 per Painted Pony Share for gross proceeds of approximately $100.9 million (the “Offering“), details of which can be found later in this press release.

A portion of the proceeds will be used to fund drilling on the acquired assets and on existing Painted Pony lands. The balance of the proceeds will be used to reduce bank indebtedness and general corporate purposes.

ACQUISITION HIGHLIGHTS

Total Consideration (the “Consideration“) for UGR of approximately $276.6 million (the “Purchase Price“) is compelling in the context of recent industry Montney consolidation transactions in the area;
Current production of UGR is over 51 MMcfe/d (8,500 boe/d) based on field estimates;
Proved plus probable (“2P“) reserves of approximately 2.0 Tcfe (325.1 MMboe) with a 2P before tax net present value at December 31, 2016 discounted at 10% (“NPV10“) of $1.3 billion per UGR’s independent third-party qualified reserves evaluator McDaniel & Associates Consultants Ltd. (“McDaniel“);
Increases Painted Pony’s total proved (“1P“) reserves by 29% or 768 Bcfe (128 MMboe);
Increases Painted Pony’s NEBC Montney acreage by approximately 52% to 314 net sections (201,009 net acres) including UGR’s 108 net sections (69,143 net acres);
Includes UGR-owned and third-party firm processing capacity of 155 MMcf/d, approximately 105 MMcf/d of which is currently unutilized by UGR;
Increases Painted Pony’s anticipated 2017 annual average daily production by 12% from approximately 260 MMcfe/d (43,000 boe/d) to expected pro forma production of approximately 290 MMcfe/d (48,400 boe/d) with exit production expected to be approximately 447 MMcfe/d (74,500 boe/d);
Increases Painted Pony’s 2018 expected annual average daily production by 41% from approximately 360 MMcfe/d (60,000 boe/d) to expected pro forma production of approximately 509 MMcfe/d (84,800 boe/d) with exit production expected to be approximately 538 MMcfe/d (89,600 boe/d). In the near term, filling existing capacity and developing UGR licensed locations comes at a lower cost than standalone development and is consistent with Painted Pony’s strategy of profitable and fiscally responsible development under current strip pricing;
Provides Painted Pony with additional firm transportation of 106 MMcf/d on the Enbridge T-North pipeline system;
Will result in ARC and EnCap becoming indirect investors in Painted Pony and each of ARC and EnCap will have a nominee added to the Corporation’s board of directors, subject to the approval of each nominee by the Corporation and the Toronto Stock Exchange (“TSX“) and each of ARC and EnCap entering into a lock-up agreement with the Corporation that reflects their commitment to realization of value from this transaction (see section titled ‘Consideration’ for specifics).

STRATEGIC RATIONALE

“As partners and neighbours, UGR’s assets fit like a glove with our existing asset base. While the acquired under-utilized processing capacity and transportation service will facilitate prudent growth in production and cash flow in the near term, Painted Pony’s significantly lower drilling and completion costs relative to UGR will generate material synergies and accretion as we execute our business plan on an expanded land base. Several of our most prolific Montney wells have been drilled on lands adjacent to or on jointly-held UGR lands. This Acquisition is consistent with our long-term strategy of cost-effective, counter-cyclical growth,” said Pat Ward, President and Chief Executive Officer of Painted Pony.

Strategic consolidation of an area operator and joint working interest partner

The Acquisition is a strategic expansion of Painted Pony’s world-class Montney project in NEBC. The Corporation’s Montney land position will increase by 52% to 314 net sections (201,009 net acres at an average 94% working interest) in one of the most productive areas of the Montney in British Columbia. Several of Painted Pony’s most prolific Montney wells were drilled on the Daiber area lands that are either contiguous with UGR acreage or on lands held jointly with UGR. Of the 35 gross Montney wells drilled on UGR lands to-date, 20 have been drilled in partnership with Painted Pony. Of the 218 gross undeveloped 2P locations on UGR lands as at December 31, 2016 per McDaniel, 57 gross drilling locations are located on lands jointly held with Painted Pony. The Acquisition includes 197 net 2P drilling locations which will complement the Painted Pony inventory and are expected to drive near-term growth in the Corporation’s proved developed producing (“PDP“) reserves. Painted Pony management estimates over 1,000 additional unbooked drilling locations on UGR lands.

Attractive purchase price relative to the value of reserves acquired

The Acquisition significantly increases Painted Pony’s reserves base, increasing 2P reserves by 39% or 2.0 Tcfe (325.1 MMboe) and 1P reserves by 29% or 768 Bcfe (128 MMboe). The before tax net present value at December 31, 2016 discounted at 10% (“NPV10“) of approximately $1,297 million was assigned to UGR assets by McDaniel.

Added liquids-rich potential and inventory in the Beg and Jedney blocks

Painted Pony believes the Beg and Jedney blocks are prospective for liquids-rich natural gas with wells on off-setting lands.

Stable production and cash flow base with licenced drilling locations

UGR is currently producing approximately 51 MMcfe/d (8,500 boe/d) from its assets, based on field estimates. UGR has a number of drill-ready locations which, together with excess processing and takeaway capacity, is expected to provide Painted Pony with a number of low-cost, low-risk, near-term production volume additions. A total of 17 wells are currently licensed and are ready for drilling on existing pads.

Strategic, unutilized infrastructure and take-away capacity

Painted Pony is acquiring processing facilities and takeaway capacity not fully utilized by UGR. UGR has 155 MMcf/d of natural gas processing capacity (98 MMcf/d owned; 57 MMcf/d third party) of which 105 MMcf/d is currently unutilized by UGR. UGR has 96 MMcf/d of firm takeaway capacity on the Enbridge T-North pipeline, increasing to 106 MMcf/d of capacity in November 2018.

Attractive capital efficiencies on near term production, cash flow and reserves additions

Painted Pony believes the Acquisition provides a significantly expanded and de-risked platform from which the Corporation can accelerate production, cash flow, and reserves growth and further position Painted Pony as a dominant, full-cycle and low-cost structure producer in the Montney.

ACQUISITION SUMMARY

(See figures and notes here)

INCREASED PRO FORMA DRILLING ACTIVITY & PRODUCTION

Painted Pony believes accelerating drilling activity will continue to drive higher efficiencies, lower costs, and improved margins. Painted Pony’s 2017 pro forma capital program includes drilling 71 wells and 64 completions, an increase from a previously forecasted program of 58 drills and 51 completions. The expanded program would take Painted Pony’s 2017 capital program to $348 million from the current forecast of $288 million with the intention of filling excess capacity at UGR facilities by the end of 2017.

Annual average daily production is expected to increase by 12% from 260 MMcfe/d (43,000 boe/d) to 290 MMcfe/d (48,400 boe/d) and 2018 expected annual average daily production by approximately 41% from 360 MMcfe/d (60,000 boe/d) to 509 MMcfe/d (84,800 boe/d). Painted Pony believes that these incremental activities will drive production and cash flow accretion in the first full year of ownership.

(See figures and notes here)

CREDIT FACILITY

Painted Pony’s syndicate of lenders led by TD Securities and Scotiabank Global Banking reconfirmed the Corporation’s reserve-based credit facility in October 2016 at $325 million. Pro forma the Acquisition, the Corporation expects its total syndicated credit facility to increase to approximately $500 million, which includes a development line of approximately $100 million. On or before April 30, 2017, a borrowing base review on the combined operation is expected to be completed by Painted Pony’s syndicate of lenders at which time a definitive borrowing base is expected to be established.

CONSIDERATION

Pursuant to the Agreement, Painted Pony will issue 41.0 million Painted Pony Shares and will assume UGR’s net debt of approximately $47 million and other expected transaction costs of ARC, EnCap, URC and UGR (the “Consideration“). Based upon the equity-offering price of $5.60 per Painted Pony Share, the total transaction value is approximately $276.6 million.

THE AGREEMENTS

Painted Pony, UGR and URC have entered into the Agreement whereby Painted Pony will acquire, from URC, all of the issued and outstanding shares of UGR in exchange for the equity portion of the Consideration and the assumption by Painted Pony of UGR’s net debt and other expected transaction costs of ARC, EnCap, URC and UGR at closing of the Acquisition.

A copy of the Agreement will be filed on Painted Pony’s SEDAR profile and will be available for viewing at www.sedar.com.

SHAREHOLDER VOTE AND SPECIAL MEETING

The Acquisition is expected to close on or about May 16, 2017. Closing of the Acquisition is subject to certain customary conditions and regulatory approvals including the approval of the TSX and the required approvals under the Competition Act (Canada). In accordance with the rules of the TSX, the issuance of 41.0 million Painted Pony Shares to URC as consideration pursuant to the Acquisition requires the approval of a majority of Painted Pony’s shareholders by way of ordinary resolution (the “Share Issuance Resolution“), as it will be in excess of 25% Painted Pony’s issued and outstanding Painted Pony Shares upon closing of the Acquisition. The Share Issuance Resolution will be presented to the Painted Pony shareholders for consideration at the next Annual and Special Meeting of Painted Pony Shareholders to be held on May 11, 2017 (the “Painted Pony Meeting“). It is expected that a management information circular and proxy statement dated no later than March 31, 2017 will be sent to Painted Pony shareholders. Shareholders of record as of April 11, 2017 will be entitled to vote on the Share Issuance Resolution.

The board of directors of the general partner of URC, the sole shareholder of UGR, and the board of directors of UGR have reviewed and irrevocably approved the Acquisition (subject to the conditions set forth in the Agreement). No further approvals of the Acquisition are required from UGR or URC.

Painted Pony has also entered into separate lock-up agreements (the “Lock-Up Agreements“) and governance agreements (the “Governance Agreements“) with each of ARC and EnCap who, following completion of the Acquisition and the Offering, will collectively hold or exercise control over approximately 26% of the issued and outstanding Painted Pony Shares.

Pursuant to the Lock-Up Agreements, each of ARC and EnCap agrees not sell or trade the Painted Pony Shares received by URC pursuant to the Acquisition that are beneficially owned by ARC or EnCap, as applicable, except as follows: (i) 1/3 of such Painted Pony Shares received shall be eligible for disposition on the date that is three months after closing of the Acquisition; (ii) an additional 1/3 of such Painted Pony Shares shall be eligible for disposition on the date that is six months after closing of the Acquisition; and (iii) the remaining 1/3 of such Painted Pony Shares shall be eligible for disposition on the date that is nine months after closing of the Acquisition.

Pursuant to the Governance Agreements, each of ARC and EnCap shall have the right to designate one person to serve on the board of directors of Painted Pony (the “Board“), subject to approval of such nominee by Painted Pony and the TSX, for so long as each of ARC and EnCap continue to hold more than 50% of the Painted Pony Shares received by URC pursuant to the Acquisition that are beneficially owned by ARC or EnCap, as applicable.

BOARD APPROVAL AND FINANCIAL ADVISORS

The Board has approved the terms of the Acquisition and unanimously recommends that all Painted Pony shareholders vote in favour of the Share Issuance Resolution at the Painted Pony Meeting.

TD Securities Inc. and Cormark Securities Inc. acted as financial advisors to Painted Pony in respect of the Acquisition. TD Securities has provided the Painted Pony Board of Directors with an opinion that the Consideration is fair, from a financial point of view, to Painted Pony.

THE OFFERING

In connection with the Acquisition, Painted Pony has entered into an agreement with a syndicate of underwriters co-led by Cormark Securities Inc. and TD Securities Inc. (collectively, the “Underwriters“) pursuant to which the Underwriters have agreed to purchase for resale to the public, on a bought-deal basis, 18,018,100 Painted Pony shares (the “Offered Shares“) of Painted Pony at a price of $5.60 per Offered Share for gross proceeds of approximately $100.9 million (the “Offering“).

The Underwriters will have an option to purchase up to an additional 10% of Offered Shares issued under the Offering at a price of $5.60 per Offered Share to cover over-allotments exercisable in whole or in part at any time until 30 days after the closing. If the Over-Allotment Option is exercised in full, the gross proceeds from the Offering are expected to be about approximately $111.0 million.

The Painted Pony net proceeds from the Offering will be used to: (i) fund a portion of Painted Pony’s capital program in respect of the Acquisition and for general corporate purposes; and (ii) if the Acquisition does not close, for the development of Painted Pony’s assets and for general corporate purposes.

In conjunction with the Offering, certain insiders and employees of Painted Pony identified by Painted Pony intend to participate by purchasing approximately 375,000 Offered Shares at a price of $5.60 per Offered Share.

The Offered Shares issued pursuant to the Offering will be distributed by way of a short form prospectus in all provinces of Canada, except Québec, and in the United States on a private placement basis pursuant to an exemption from the registration requirements of the United States Securities Act, as amended, and in jurisdictions outside of Canada and the United States on a private placement basis in accordance with all applicable laws. Completion of the Offering is subject to customary closing conditions, including the receipt of all necessary regulatory approvals, including the approval of the TSX. Closing of the Offering is expected to occur on or about April 4, 2017.

RE-APPOINTMENT OF OFFICER

Following a brief medical leave, Mr. John Van de Pol has been re-appointed as Senior Vice President and Chief Financial Officer. Stuart Jaggard has been re-appointed Vice President and Controller. Painted Pony thanks Mr. Jaggard for his leadership during this period.

ABOUT PAINTED PONY

Painted Pony is a publicly-traded natural gas Corporation based in Western Canada. The Corporation is primarily focused on the development of natural gas and natural gas liquids from the Montney formation in northeast British Columbia. Painted Pony’s common shares trade on the Toronto Stock Exchange under the symbol “PPY”.

Painted Pony Petroleum Ltd.
Patrick R. Ward
President and CEO
(403) 475-0440

Painted Pony Petroleum Ltd.
John H. Van de Pol
Senior Vice President and CFO
(403) 475-0440

Painted Pony Petroleum Ltd.
Jason Fleury
Director, Investor Relations
(403) 776-3261

Photo courtesy of Reuters/Todd Korol