Riverstone and GMT Capital back Pipestone Energy Corp

Pipestone Energy Corp, a Calgary-based oil and gas exploration and production company, has secured C$70 million in convertible preferred share financing.

Pipestone Energy Corp, a Calgary-based oil and gas exploration and production company, has secured C$70 million in convertible preferred share financing. The investors are Riverstone and GMT Capital. The deal’s proceeds will be used to accelerate the company’s development plan.

PRESS RELEASE

CALGARY, Alberta, Aug. 05, 2020 (GLOBE NEWSWIRE) — Pipestone Energy Corp. (“Pipestone Energy” or the “Company”) is pleased to announce that it has entered into subscription agreements with Riverstone V EMEA Holdings Cooperatief U.A. (“Riverstone”), GMT Capital Corp. (“GMT Capital”), and GMT Exploration Company LLC (“GMT Exploration” and collectively with Riverstone and GMT Capital, the “Investors”) in respect of the financing (the “Financing”).

Pursuant to the terms of the subscription agreements, the Investors have agreed to acquire convertible preferred shares (the “CP Shares”) in the Company with an initial liquidation preference of $70 million (the “Liquidation Preference”), equivalent to 70,000 CP Shares. The CP Shares have a conversion price of $0.85 per Common Share (the “Conversion Price”), and have a term of five years. The CP Shares were sold at a price of $970 per share, and entitle the Investors to an annual dividend of 6.5% per year that is payable quarterly in-kind, or in cash after 2 years from issuance, at the sole option of Pipestone Energy. At close, the expected proceeds to Pipestone Energy are approximately $67 million, net of anticipated transaction costs.

“This financing is an exceptional opportunity for Pipestone Energy, providing the Company with the necessary capital to accelerate development activities in the fall of 2020” said Paul Wanklyn, President and CEO of Pipestone Energy. “Pipestone can deliver attractive full-cycle returns at US$40+ WTI. The accelerated development program brings forward value and materially increases our future free cash flow generation capability. The significant financing commitment by our largest existing investors speaks to the high-quality nature of Pipestone’s assets, as well as the support for our business plan and team.”

Description of the Financing
The CP Shares are, subject to certain conditions, convertible into common shares of the Company (the “Common Shares”) at a conversion price of $0.85 per Common Share, subject to customary adjustments. After two years, if among other things, the closing price of the Common Shares is above 200% of the Conversion Price for 20 days over a 30-day trading period, the CP Shares will automatically convert into Common Shares at the Conversion Price. The Conversion Price represents a 70% premium to the 30-day volume weighted average trading price of the Common Shares on August 4, 2020, the last trading day prior to entering into the subscription agreements. Holders of the CP Shares will be entitled to vote on all shareholder matters alongside existing holders of the Common Shares on an “as-converted” basis. Post the Financing, the CP Shares will represent approximately 30% of Pipestone Energy’s pro forma shares outstanding on a fully diluted basis. After the five year term the CP Shares will automatically convert into Common Shares at either the Conversion Price, if the Common Shares are trading at a price in excess of the Conversion Price or, otherwise, at a price based on the previous 20-day volume weighted average share price multiplied by 95%.

While the CP Shares will not be listed on any stock exchange, the Company has applied to reserve the underlying Common Shares issuable upon conversion of the CP Shares for listing on the TSX Venture Exchange (the “TSXV”) and received conditional approval. Final listing approval from the TSXV is subject to the satisfaction of certain filing requirements by the Company.

Closing of the Financing is subject to shareholder approval, including (i) a majority of not less than 66⅔ percent of votes cast in person or by proxy and (ii) a “majority of the minority” vote to be held in accordance with Policy 5.9 of the TSX-V and Multilateral Instrument 61-101 – Protection of Minority Security Holders in

Special Transactions.
The Company’s board of directors, on recommendation from an independent committee of directors, has determined that the Financing is in the best interest of the Company and, after receiving advice from its financial and legal advisors, has unanimously approved the Financing. In addition, the Company’s three largest shareholders, Canadian Non-Operated Resources L.P. (“CNOR”), GMT Capital and GMT Exploration, have entered into voting support agreements to support the Financing. CNOR holds approximately 54.5% of the outstanding Common Shares. GMT Capital and GMT Exploration collectively own approximately 13.8% of the outstanding Common Shares.

The shareholder vote will be held at Pipestone Energy’s Annual General and Special Meeting to be held on September 14, 2020 at 2:30pm (Calgary time) at the Calgary Petroleum Club (McMurray Room). Further details about the Financing and other annual and special items of business will be described in a management information circular to be mailed to the shareholders on or about August 17, 2020.

At closing of the Financing, the Company will enter into: (i) a registration rights agreement with Riverstone and GMT Capital that provides customary demand and piggy-back registration rights and (ii) nomination agreements with Riverstone and GMT Capital that provide for certain director nomination rights.

Strategic Rationale of the Financing
Highly Economic Drilling Inventory at Current Commodity Prices
º The Company has reduced drilling and completion costs approximately by 40% since early 2019
º New wells are expected to generate an IRR of approximately 50% and deliver a payout of less than 2 years on a half-cycle basis at US$40 WTI

Optimized Development and Returns
º Installed infrastructure capacity supports production growth from 17,000 boe/d currently to approximately 34,000 – 38,000 boe/d average in 2022
º Minimal infrastructure capital required to further optimize and de-bottleneck to 40,000 boe/d of capacity
º Significant capital investment by Pipestone Energy through a continuous drilling and completion program should result in optimized corporate returns
º The Company expects to generate $75 million in annual free cash flow above maintenance capital in 2022+ at US$44 WTI or $115 million at US$50 WTI

Enhanced Scale and Improved Competitive Positioning
º Peer leading production and cash flow per share growth and leading net debt to cash flow
º Execution of the growth plan through 2022 is expected to position Pipestone Energy as one of the larger condensate-rich Montney focused producers
Attractive Financing Terms for Pipestone Energy and its Shareholders
º Conversion Price is an attractive premium to current common share trading price
º Execution of Pipestone Energy’s accelerated development plan is expected to generate higher per share metrics on a fully diluted basis than the status quo at current commodity prices
º Materially enhances the financial liquidity available to the Company

Credit Facility
In conjunction with the Financing, the Company has re-confirmed and executed an amendment (the “Amendment”) to its $225 million reserve-based lending facility (the “Credit Facility”) with its corporate banking syndicate, consisting of National Bank Financial Inc., Bank of Montreal, ATB Financial, and Canadian Western Bank. In light of the significant equity capital injection and accelerated capital plan, the banking syndicate has agreed to forgo the normal fall borrowing base review with the next redetermination scheduled for May 2021. In addition, the previously imposed capital spending restrictions from the June 2020 re-determination have been removed, and Pipestone Energy has committed to implement a robust hedging program with respect to expected condensate volumes through calendar 2021.

On July 16, 2020, Pipestone Energy also closed on a $15 million unsecured letter of credit facility under Export Development Canada’s performance security guarantee (“PSG”) program. The Company has transferred its ~$14 million letters of credit from its Credit Facility to the PSG facility, further enhancing the liquidity available under the Credit Facility.

Pro Forma Liquidity and Net Debt
As at June 30, 2020, the Company had $183 million drawn on its Credit Facility, excluding letters of credit, and a $13 million working capital deficit, for a combined net debt of approximately $196 million. Pro forma, including net proceeds of $67 million from the Financing, Pipestone Energy will have net debt of approximately $129 million and approximately $109 million of available capacity remaining on its Credit Facility.

Advisors
Peters & Co. Limited, National Bank Financial, BMO Capital Markets, and ATB Capital Markets are acting as private placement advisors to Pipestone Energy with respect to the Financing. Osler, Hoskin & Harcourt LLP is acting as Pipestone Energy’s legal advisor.

Q2 2020 Financial Statements and Conference Call
Second quarter results are expected to be released before market open on August 12th, 2020. A conference call has been scheduled for August 12th, 2020 at 9:00 a.m. Mountain Daylight Time (11:00 a.m. Easter Daylight Time) for interested investors, analysts, brokers, and media representatives.
Conference Call Details:
Toll-Free: (866) 953-0776
International: (630) 652-5852
Conference ID: 3775111

Pipestone Energy Corp.
Pipestone Energy Corp. is an oil and gas exploration and production company with its head office located in Calgary, Alberta. The company is focused on developing its pure-play condensate-rich Montney asset in the Pipestone area near Grande Prairie. Pipestone Energy is committed to building long term value for our shareholders and values the partnerships that it is developing within its operating community. Pipestone Energy shares trade under the symbol PIPE on the TSX Venture Exchange. For more information, visit www.pipestonecorp.com.