On July 23 Gear Energy Ltd. to announced that it would be acquiring Steppe Resources Inc., a private oil and gas company in a stock deal worth a total $70.4 million.
In a press release, Gear said the terms of the arrangement will see Steppe shareholders receive, for each Steppe share held, 0.1445 Gear common shares. As a result, Gear will issue in aggregate 21,896,087 Gear shares pursuant to the arrangement. Additionally, Gear will assume the net debt of Steppe of approximately $40.9 million, after taking into account expected Steppe transaction costs. In aggregate, the total consideration represents a Steppe enterprise value of $70.4 million based on the July 23 closing price of the Gear shares of $1.35 on the Toronto Stock Exchange.
Steppe's assets are focused in the Tableland area of southeast Saskatchewan. This is where Steppe has established a material land position and grown light oil production through multiple years of reservoir expansion drilling and consistent improvement in completion results, primarily in the Torquay formation, near Torquay. Gear noted this acquisition provides it with “an exceptional opportunity to leverage its success with fractured drilling in Gear's Wilson Creek assets to an area with higher netback oil and a significantly larger areal extent. In addition, Gear believes that the Ratcliffe formation in the Tableland area could be very amenable to multi-lateral, un-lined horizontal drilling techniques, similar to those employed successfully by Gear throughout its heavy oil portfolio.”
The deal includes production of approximately 1,175 barrels of oil per day (boepd) for June 2018, with estimated second half 2018 annualized funds from operations of $24 million, assuming no drilling and strip pricing (an acquisition metric of approximately three times funds from operations on a proved developed producing production forecast).
Gear characterized it as high margin, high netback, light oil providing netbacks of $52 per barrel for the first quarter of 2018, which would have increased Gear's pro-forma Q1 2018 netbacks by 23 per cent to $26.50 per boe.
There is also a “Meaningful, delineated drilling inventory of an estimated 100 future light oil locations in the Torquay (essentially 100 per cent working interest in more than 50 net contiguous sections) with additional multi-zone potential in the Ratcliffe and Bakken.”
Gear said there’s an ability for the Steppe assets to deliver more than 15 per cent production growth in 2019 while spending less than cash flow generated by the assets, complementing the performance of Gear's existing Saskatchewan and Alberta oil operations.
It includes 100 per cent ownership of two oil batteries with significant remaining capacity, enabling growth of production volumes with limited infrastructure spending.
It will also improve Gear’s existing 2.2 liability ration, as the Steppe liability ratio is approximately 5.3 times.
The acquisition of Steppe is being conducted at approximately three times estimated annualized second half 2018 funds from operations and less than $60,000 per boepd. It is also forecast to deliver competitive future growth while investing less than cash flow for many years to come, consistent with Gear's business model for its existing operations. The acquisition improves Gear's netbacks, balances the inventory of drilling opportunities between light oil and heavy oil, and delivers visibility for Gear to exceed 10,000 boepd of oil-weighted production in the near term while continuing to deliver strong per-share performance measures.
For 2019, and assuming completion of the arrangement, Gear is forecasting the execution of a 6 well light oil drilling program on the Steppe assets, which management of Gear has predicted to result in 1,400 to 1,500 boepd annual production, based on $18 million in capital expenditures.
The deal is expected to close in the third quarter of 2018.