Canadian oil and natural gas investment firm Canetic Resources Trust (CNE, CNE-UN.TO) and its peer Penn West Energy Trust (PWE, PWT-UN.TO) Wednesday announced a merger deal to form a combined oil and gas trust with an enterprise value of over C$15 billion.
The transaction is expected to be closed in mid-January 2008. Upon the completion of the deal, the combined trust will operate under the Penn West name, led by William Andrew as chief executive officer.
Under the terms of the combination agreement, Canetic unitholders will receive 0.515 of a Penn West unit for each Canetic unit on a tax-deferred basis. Based on the closing price of Penn West units on the Toronto Stock Exchange, or TSX, as at October 30, 2007, the Canetic unitholders will receive an aggregate price of C$15.84 for each Canetic unit. This price represents a premium of 7.1% to the Canetic units' closing price on the TSX on October 30, 2007.
Immediately prior to the closing, a one-time special distribution of $0.09 per unit will be paid to the Canetic unitholders.
Canetic said the companies have agreed not to solicit or initiate any discussions concerning the pursuit of any other business combination. Further, both the companies have agreed to pay a non-completion fee of $125 million to the other in certain circumstances.
The deal is subject to the approval of at least 66 2/3 percent of the Canetic unitholders. Canetic's Board and officers have agreed to vote their units in favor of the proposed combination. The Board has also recommended the Canetic unitholders to vote in favor of the deal.
On the deal closure, the Penn West unitholders will own approximately 67% of the combined trust, while the Canetic unitholders will hold the remainder. Penn West will continue to be listed on both the TSX and the NYSE.
Scotia Waterous is acting as financial advisor to Penn West, while BMO Capital Markets and TD Securities Inc. are providing financial advice to Canetic with respect to the transaction.
Operational Synergies
The transaction is expected to create Canada's flagship energy trust and the dominant independent light oil producer in Western Canada, with production of about 200,000 to 210,000 barrels of oil equivalent per day, or boe/d in 2008. Of the estimated production, 45% will be light oil and natural liquids, while 42% will be natural gas and 13% will be heavy oil. The combined trust's conventional proven plus probable reserves are expected to be in excess of 800 million boe.
While announcing the results for the recently completed second quarter, Canetic confirmed its fiscal 2007 production guidance of 76,500 to 80,000 boe/d. Penn West's third-quarter results are expected to be announced on November 5.
Canetic said the combined asset portfolio will include interests in a significant number of Western Canada's conventional oil and natural gas pools. The portfolio will also include a number of non-conventional growth opportunities including oil sands, coalbed methane, shale gas and enhanced oil recovery.
The companies also expect that the combined trust's increased liquidity and enhanced financial flexibility will allow domestic and international expansion.
In addition, the combined trust's distribution is expected to be set at C$0.34 per unit per month, beginning with the first distribution, payable following the completion of the combination. This distribution level will result in a 2008 payout ratio of approximately 67% to 72%.
If the deal closure proceeds as planned, the Canetic unitholders will receive their first monthly distribution effective with the January 2008 Penn West distribution, payable on or about February 15, 2008.
Management
The management team of the combined trust will include senior executives from both Penn West and Canetic. Paul Charron will serve as president and David Middleton as chief operating officer of the combined trust. Also, John Brussa from Penn West will lead the combined trust's Board as chairman and Jack Lee from Canetic will serve as vice chairman.
The management team will include Richard Tiede as senior vice president, Business Development and Thane Jensen as senior vice president, Exploration & Development. Mark Fitzgerald will serve as senior vice president, Operations and Eric Obreiter will hold the position of senior vice president, Production.
Todd Takeyasu and David Broshko will serve as senior vice president, Finance - Treasury and senior vice president, Finance - Financial Reporting, respectively.
Brian Evans will serve as senior vice president of General Counsel & Corporate Secretary, while Keith Luft will hold the post of senior vice president, Stakeholder Relations.
Recent Transactions
Last month, Penn West announced a deal to acquire Vault Energy Trust for nearly C$380 million, including the assumption of Vault Energy's total debt. Penn West expects that the Vault Energy acquisition will be earnings accretive to its unit holders on a production, cash flow and reserves basis.
Earlier this month, Canetic announced the signing of a pre-acquisition deal with Titan Exploration Ltd. Pursuant to the agreement, Canetic would make an offer to buy all of the issued and outstanding shares of Titan in exchange for 0.1917 of a Canetic trust unit for each Titan Class A Share and 0.6609 of a Canetic Unit for each Titan Class B Share.
The total value of the deal is about $116 million, including Titan's net debt of about $17.5 million.
Stock Quote
CNE closed Tuesday's trade at US$15.53 on the NYSE, down US$0.34, on a volume of 1.21 million shares. CNE-UN.TO traded at C$14.80 on the TSX.
PWE dropped US$0.57 on Tuesday and traded at US$32.21 on the NYSE, on a volume of 668,400 shares. PWT-UN.TO closed Tuesday's trade at C$30.59 on the TSX.
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