CPPIB to help fund TORC’s $430 mln acquisition of light oil assets

TORC Oil & Gas Ltd (TSX: TOG) has agreed to acquire light oil producing assets in southeast Saskatchewan and Manitoba that are complementary to its existing assets in the region. The purchase price is $430 million, payable in cash to an undisclosed Canadian oil and gas company. In support of the proposed transaction, which is expected to be completed in June, TORC’s cornerstone investor, the Canadian Pension Plan Investment Board (CPPIB), has agreed to commit up to about $150 million in additional funding. Established in 2010, the Calgary-based TORC is focused on the acquisition, exploration, development and production of crude oil and natural gas assets.

PRESS RELEASE

TORC Oil & Gas Announces Strategic Acquisition in Southeast Saskatchewan, Bought Deal Financing, Concurrent Private Placement to Cornerstone Investor and Increase to 2015 Production Guidance

CALGARY, ALBERTA–(Marketwired – April 27, 2015) –

TORC Oil & Gas Ltd. (“TORC” or the “Company”) (TSX:TOG) is pleased to announce that it has entered into an agreement to acquire high quality, light oil assets which are complementary to TORC’s existing assets in southeast Saskatchewan. The strategic acquisition (the “Acquisition”) includes 4,750 boepd (~98% light oil and liquids) of low decline, high netback, light oil producing assets in southeast Saskatchewan and Manitoba (the “Acquired Assets”). In addition, the Acquired Assets include ownership of freehold mineral title on more than 80 net sections of land in southeast Saskatchewan. Total consideration for the Acquisition is $430 million, payable in cash.

In conjunction with the Acquisition, TORC’s cornerstone investor, the Canadian Pension Plan Investment Board (“CPPIB”), has committed to invest up to a maximum of $149,985,000 through a private placement of subscription receipts (the “CPPIB Investment”). Additionally, TORC has entered into an agreement for a $250,480,000 bought deal prospectus offering of subscription receipts (the “Bought Deal Financing” and together with the CPPIB Investment, the “Financings”) offered through a syndicate of underwriters (the “Underwriters”) as described below, for total gross equity proceeds of $400,465,000.

The Acquisition and Financings further strengthen TORC’s business model which is focused on delivering disciplined growth and a sustainable dividend to shareholders.

THE ACQUISITION

Pursuant to a purchase and sale agreement (the “Agreement”) with an independent Canadian oil and gas company, dated April 26, 2015, TORC has agreed to acquire the Acquired Assets for cash consideration of $430 million, prior to customary closing adjustments. The Acquired Assets are complementary to TORC’s existing operations in southeast Saskatchewan and provide operating and strategic synergies. Included in the Acquired Assets are 80 net sections of fee title lands which are located in areas with increasing industry activity in southeast Saskatchewan. The undeveloped portion of the fee title acreage, in conjunction with 40,000 net acres of additional undeveloped land and significant proprietary seismic data being acquired in this transaction, has been conservatively valued by TORC at $85 million. The effective date of the Acquisition is May 1, 2015 with closing expected in June 2015.

The Acquisition is consistent with TORC’s strategy to capitalize on opportunities to enhance the quality of its asset base throughout the commodity price cycle. The Acquisition is accretive to TORC on a reserves, production and cash flow per share basis. The Acquired Assets are 98% light oil and liquids and have an average decline rate of approximately 20%, providing a dependable free cash flow stream. Additionally, TORC has identified approximately 170 (net) high quality light oil drilling locations on the Acquired Assets, which are expected to provide some of the highest relative economic returns in the Western Canadian Sedimentary Basin in all commodity price environments. The Acquisition will improve TORC’s decline profile, operating netback and light oil drilling inventory further strengthening TORC’s disciplined growth plus sustainable dividend business model. With TORC having a long history operating properties in the area, integration and go forward operations are anticipated to be seamless.

The Acquisition has the following characteristics: See information here.

The Acquisition is expected to close in June 2015, subject to customary conditions and regulatory approvals including the approval of the Toronto Stock Exchange (the “TSX”) and the required approval under the Competition Act (Canada).

TD Securities Inc. and National Bank Financial Inc. are acting as financial advisors to TORC with respect to the Acquisition. CIBC and FirstEnergy Capital Corp. are acting as strategic advisors to TORC with respect to the Acquisition.

Acquisition Financing

Financing of the Acquisition is expected to be funded primarily through the Financings, described more fully below, for total gross proceeds of $400 million, and the remainder drawn on the Company’s revolving credit facility which is currently $425 million. Upon closing of the Acquisition it is anticipated that this facility will be increased to $550 million. TORC expects to be approximately 45 percent undrawn on its credit facility following the closing of the Acquisition.

Bought Deal Financing

In connection with the Acquisition, TORC has entered into an agreement on a “bought deal” basis for a prospectus offering with a syndicate of underwriters led by Macquarie Capital Markets Canada Ltd. (“Lead Underwriter”), and including TD Securities Inc., National Bank Financial Inc., BMO Nesbitt Burns Inc., CIBC World Markets Inc., Cormark Securities Inc., FirstEnergy Capital Corp., GMP Securities L.P., RBC Dominion Securities Inc., Canaccord Genuity Corp., Desjardins Securities Inc., Peters & Co. Limited and Scotia Capital Inc. for an offering of 24,800,000 subscription receipts (“Subscription Receipts”) at an issue price of $10.10 per Subscription Receipt for gross proceeds of $250,480,000 (“Bought Deal Financing”). TORC will grant the Underwriters an option to purchase from treasury an additional 3,720,000 Subscription Receipts, on the same terms, exercisable in whole or in part at any time up to the 30th day following closing of the Bought Deal Financing. Closing of the Bought Deal Financing is expected to occur on or about May 20, 2015 and is subject to customary conditions and regulatory approvals. The net proceeds from the Subscription Receipts will be used to partially fund the purchase price for the Acquisition.

The gross proceeds from the Bought Deal Financing will be held in escrow pending the receipt by the escrow agent and the Lead Underwriter of a notice from TORC that all conditions precedent to the completion of the Acquisition have been satisfied or waived. If the Acquisition is completed on or before July 31, 2015, the proceeds and any interest will be released to TORC and each Subscription Receipt will be exchanged for one common share of TORC for no additional consideration as a step to the Acquisition closing procedures. If the Acquisition is not completed on or before July 31, 2015 or the Acquisition is terminated at an earlier time, holders of the Subscription Receipts will receive a cash payment equal to the offering price of the Subscription Receipts and any interest that was earned thereon during the time of escrow. It is anticipated that the subscription receipts issued as part of the Bought Deal Financing will be listed and posted for trading on the Toronto Stock Exchange for the period until the conversion of the Subscription Receipts into Common Shares is completed.

Private Placement by CPPIB

Concurrent with the Acquisition, TORC has entered into an agreement with CPPIB whereby CPPIB has committed to subscribe for, on a private placement basis, 14,850,000 subscription receipts at a subscription price of $10.10 per subscription receipt for aggregate gross proceeds of $149,985,000. The completion of the CPPIB Investment is subject to various conditions, including the negotiation and execution of formal agreements in respect of such subscription by CPPIB, the concurrent closing of the Bought Deal Financing and receipt of all necessary regulatory approvals. Proceeds from the CPPIB Investment will be used to partially fund the purchase price of the Acquisition. Similar to the Bought Deal Financing, the gross proceeds from the CPPIB Investment will be held in escrow pending completion of the Acquisition.

Scott Lawrence, Managing Director and Head of Relationship Investments with CPPIB, commented: “We are pleased to continue our partnership with the management team and Board of TORC as they execute their strategic business model focused on light oil opportunities and are well positioned to enhance returns for all shareholders. Our investment aligns with Relationship Investment’s strategy to provide strategic, long-term capital to leading public companies where CPPIB can participate in the future success of the issuer and help create greater value through ongoing partnership with the company.”

Pro forma the Financings, CPPIB is expected to increase its ownership of TORC from approximately 21 percent of the outstanding common shares to approximately 25%.

BMO Capital Markets is acting as exclusive financial advisor to TORC with respect to the CPPIB Investment.

Strategic Rationale

Brett Herman, President and CEO stated, “The Acquisition complements our light oil platform and will provide a strong and stable cash flow base further strengthening the sustainability of our business model while the high quality drilling inventory will enhance our capital program to create long term value for our shareholders.”

The Acquired Assets are weighted approximately 98% to light oil and liquids providing for a strong operating netback and increasing TORC’s light oil and liquids weighting to over 89% from 86% currently. The Acquired Assets have a long established decline profile of approximately 20% further solidifying TORC’s underlying production base. With the addition of the Acquired Assets, TORC’s decline profile will improve to 23% from 24%. Overall, the Acquisition enhances TORC’s sustainable business model and is accretive on all key per share measures.

TORC has identified approximately 170 (net) light oil development drilling locations on the Acquired Assets. The Acquired Assets are greater than 90% operated, providing control over the development of the Acquired Assets. The majority of the identified locations are low risk infill locations in established high quality light oil pools which are expected to provide attractive economics even in a lower commodity price environment. In addition, the Acquired Assets include ownership of freehold mineral rights associated with more than 80 net sections of land in an active area of southeast Saskatchewan.

With a low decline profile and high quality drilling inventory, TORC estimates that it can maintain the production from the Acquired Assets by drilling less than 17 net wells per year. With minimal capital reinvestment required, the Acquired Assets are expected to provide an ongoing positive free cash flow stream with more than a 10 year high quality drilling inventory.

In addition to the identified lower risk development drilling inventory, TORC believes there is substantial additional upside associated with these high quality assets through additional down spacing, water flood opportunities and exciting potential pool and resource extensions on the undeveloped acreage acquired through the Acquisition.

DISCIPLINED BUDGET

Following the Acquisition TORC intends to maintain the previously announced 2015 budget of $125 million which TORC estimates will result in a payout ratio of approximately 100% at current strip pricing. Pro forma the Acquisition, the capital budget will be reallocated to include the drilling of a number of high quality locations on the Acquired Assets that are highly economic in the current oil price environment. The addition of these locations will reduce TORC’s overall estimated normalized corporate capital efficiency to approximately $37,000 per boepd from $38,000 per boepd.

Service cost savings experienced early in 2015 range between 5-10%. As the low oil price environment continues to persist, it is now anticipated that service cost reductions of 10-15% can reasonably be expected for the remainder of 2015. It is anticipated that TORC’s normalized capital efficiency of its 2015 second half capital program of $37,000 per boepd will improve as a result of these reductions in service costs.

With the volatility of commodity prices, TORC will continue to actively monitor 2015 capital expenditure plans in the context of expected cash flow, additional potential service cost adjustments and portfolio allocation in order to prudently manage TORC’s payout ratio and maintain financial flexibility.

TORC’s pro forma net debt is estimated to be approximately $310 million on an anticipated pro forma bank line of $550 million positioning TORC with financial flexibility and a strong balance sheet.

TORC currently has an average of 1,750 bbls/d hedged in the second half of 2015.

TORC’s 2015 capital budget demonstrates a measured approach to the current uncertainty in the world oil price environment and reflects a balance between managing long term organic production growth, protecting the Company’s strong financial position and sustaining the dividend.

Production Guidance

TORC anticipates that the 2015 budget will now result in 2015 average production of greater than 15,400 boepd (87% light oil and liquids) from 13,000 boepd (86% light oil and liquids) previously with an exit rate of greater than 18,200 boepd (89% light oil and liquids) from 13,450 boepd (86% light oil and liquids) previously.

Dividend

TORC’s dividend is reviewed regularly with the Board of Directors and is an important component of TORC’s overall strategy. TORC’s current dividend policy is $0.045 per share per month. TORC is committed to maintaining a disciplined approach during the current volatility in the world oil markets. TORC’s priorities are to act prudently to protect TORC’s financial flexibility while positioning the Company to continue to achieve per share growth over the long term while paying out a sustainable dividend.

OUTLOOK

TORC has built a sustainable growth platform of light oil focused assets. The stability of the high quality, low decline, light oil assets in southeast Saskatchewan and the low risk Cardium development inventory in central Alberta combined with exposure to the emerging light oil resource plays at Monarch in southern Alberta and in the Torquay/Three Forks in southeast Saskatchewan, positions TORC to provide a sustainable dividend along with value creation through a disciplined growth strategy.

Pro forma the Acquisition, TORC has the following key operational and financial attributes: See information here.

READER ADVISORIES: See information here.

For further information please contact:
Brett Herman
President and Chief Executive Officer
TORC Oil & Gas Ltd.
Telephone: (403) 930-4120
Facsimile: (403) 930-4159
Jason J. Zabinsky
Vice President, Finance and Chief Financial Officer
TORC Oil & Gas Ltd.
Telephone: (403) 930-4120
Facsimile: (403) 930-4159

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