On Jan. 15, Vermilion Energy Inc. announced that it has entered into an arrangement agreement to acquire a private southeast Saskatchewan producer for total cash consideration of $90.8 million.
Under the terms of the arrangement, Vermilion has agreed to acquire all of the issued and outstanding common shares in the capital of that private company, including all its shares issuable, in accordance with the terms of existing grants of options or warrants, prior to the effective time of the arrangement, and assume all outstanding debt of the private company. The purchase price will be funded from Vermilion's existing credit facilities.
The board of directors of the private company has unanimously approved the arrangement and recommended that its shareholders vote in favour of the arrangement. The arrangement is expected to close on or about Feb. 15, 2018.
The acquisition is comprised of high netback, low base decline, light oil producing fields in the Sinclair and Fertile areas, straddling the Saskatchewan/Manitoba border, approximately 55 kilometres northeast of Vermilion's existing operations in southeast Saskatchewan. The assets include approximately 42,600 net acres of land (approximately 100 per cent working interest), three oil batteries, and associated pipelines, along with the necessary water infrastructure to facilitate the existing seven waterflood projects and initiate up to eight additional waterflood projects. The assets produced approximately 1,150 barrels per day (BPD) of 40° API oil during Q4 2017, sourced from the Bakken/Three Forks formation. All of the current production and infrastructure will be 100 per cent owned and operated by Vermilion.
Total proved plus probable (2P) reserves attributed to the assets at Dec. 31, 2017 are 6.7 mmboe (100 per cent crude oil), based on an independent evaluation by GLJ Petroleum Consultants Ltd. The assets demonstrate a low base decline rate of approximately 15 per cent at present, and are expected to have even lower decline rates over time. Areas under waterflood have decline rates of less than 10 per cent with certain areas of flat or increasing production. Approximately 45 per cent of the production comes from active waterflood projects, leaving significant opportunity to expand the waterflood.
The acquisition is accretive on a fully-diluted per share basis for all pertinent metrics including production, fund flows from operations, reserves and net asset value. Making no deduction for undeveloped land value, transaction metrics equate to $13.55 per barrel of oil equivalent (boe) of 2P reserves, and $79,000 per flowing barrel of production. Based on 2018 WTI strip pricing of US$61.83/bbl, the operating netback for the Assets is estimated at approximately $51.80 per boe. Using the 2P finding, development and acquisition cost (based on the reserves in the GLJ report) of $19.02 per boe (including future development capital), the Assets are expected to deliver a 2P after-tax fund flows recycle ratio of 2.7 times.
Using the same strip pricing assumption, the total acquisition cost (including assumed debt) is approximately 5.1 times estimated annualized 2018 fund flows from operations (FFO), after deducting incremental interest expense. Calculated on a debt-adjusted cash flow basis, the total Acquisition cost (including assumed debt) is approximately 4.6 times. Pro-forma the acquisition, Vermilion’s year end 2018 debt-to-FFO ratio is forecast to be 2.0 times based on January 11, 2018 strip pricing, as compared to 1.9 times prior to the acquisition.
The acquisition complements Vermilion’s current southeast Saskatchewan operations and will be managed out of its existing field office in the area. Furthermore, the acquisition aligns with its sustainable growth-and-income model by targeting low risk assets with high netbacks, strong free cash flow generation, low base decline rates and strong capital efficiencies on future development.
As a result of the acquisition, and based on a mid-February closing date, Vermilion is revising its 2018 production guidance to between 75,000 and 77,500 boepd (from 74,500 to 76,500 boepd previously). Vermilion are also increasing our 2018 capital budget to $325 million (from $315 million previously) to reflect additional capital activity on these assets planned for the second half of the year.
