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Vermilion Energy announces acquisition of Spartan Energy for USD 1.4 billion


16 Apr 2018

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Vermilion Energy has entered into an arrangement agreement to acquire Spartan Energy, a publicly traded southeast Saskatchewan oil and gas producer, with annual production of approx. 23,000 boe/d (91% oil). Total consideration for Spartan is approx. $1.40 billion, comprised of $1.23 billion in Vermilion shares plus the assumption of approx. $175 million in debt.

Under the terms of the Arrangement, Vermilion has agreed to acquire all of the common shares of Spartan issued and outstanding at the effective time of the Arrangement. Spartan shareholders will receive 0.1476 of a Vermilion share for each Spartan common share. Based on Vermilion's closing price of $44.04 on April 13, 2018, the exchange ratio translates to $6.50 per Spartan common share, representing a 5% premium to Spartan's closing price. All of the officers and directors of Spartan have entered into voting support agreements and agreed to vote their Spartan shares in favour of the Arrangement.  The Arrangement includes a reciprocal break fee of $40 million.

The Board of Directors of Vermilion and Spartan have unanimously approved the Arrangement and recommended that Spartan shareholders vote in favour of the Arrangement. The Arrangement remains subject to customary closing conditions, including receipt of applicable court, Spartan shareholder, TSX and NYSE, and other regulatory approvals, and is expected to close on or about June 15, 2018. 

Strategic Rationale

Vermilion focuses on high-netback producing areas with favourable fiscal and regulatory regimes.  We entered southeast Saskatchewan with the acquisition of Elkhorn Resources in 2014, and have since continuously evaluated opportunities to expand our position in this area. We added approx. 30 sections of land to our southeast Saskatchewan core area through the end of 2017, and further augmented our asset base with the acquisition of a private southeast Saskatchewan oil producer in early 2018. The acquisition of Spartan is a value-adding investment which meets our disciplined M&A criteria. The Acquisition significantly increases our position in southeast Saskatchewan, and aligns with our sustainable growth-and-income model by appending high-netback, low decline assets with free cash flow and strong capital efficiencies on future development. 

Making no deduction for undeveloped land value, transaction metrics equate to $12.33 per boe of proved plus probable ('2P') reserves (based on Spartan's reserve report(1)), and $60,900 per flowing barrel of production. Based on April 13, 2018 WTI strip pricing of US$65.19/bbl, the operating netback for the acquired assets is estimated at approx. $38.42 (2) per boe. Using a 2P finding, development and acquisition cost of $19.48 per boe (including future development capital) based on the Acquisition consideration and Spartan's reserve report, the acquired assets are expected to deliver a 2P operating recycle ratio of 2.0 times (including the Acquisition cost). 

Using the same strip pricing assumption, the total Acquisition cost (including assumed debt) is approx. 4.7 times estimated annualized 2018 fund flows from operations ("FFO"), after deducting incremental interest expense. Pro-forma including the Acquisition, our year end 2018 net debt-to-FFO ratio is forecast to be 1.7 times based on current strip pricing, as compared to 2.0 times prior to the Acquisition.

Spartan Asset Summary

The Spartan assets are comprised of high-netback, light oil producing properties covering approx. 480,000 net acres of land (80% average working interest), including 400,000 net acres in southeast Saskatchewan with multi-zone potential. In addition, the Acquisition includes approx. 80,000 net acres of land in other areas of Saskatchewan, Alberta and Manitoba. Production from the assets is projected to be approx. 23,000 boe/d (91% oil) during 2018. The Acquisition also includes ownership and control of producing infrastructure that are synergistic with our existing assets, as well as significant 2D and 3D seismic data.

Total proved ('1P') and 2P reserves attributed to the assets at December 31, 2017 are 73 mmboe(1) (92% crude oil and natural gas liquids) and 113.5 mmboe(1) (92% crude oil and natural gas liquids), respectively, based on an independent evaluation by Sproule Associates Limited. Vermilion has internally evaluated Spartan's reserves, and we expect to have the capability to book similar volumes of reserves. We have identified over 1,000 development locations targeting the Ratcliffe, Midale, Frobisher/Alida, Bakken, and Three Forks/Torquay formations. Most of the future drilling targets are inexpensive open-hole completions not requiring hydraulic fracturing, generating rapid payouts. There are also a large number of identified drilling locations in the hydraulically-fractured Midale play. In addition, there are significant waterflood development opportunities in the Ratcliffe and Midale zones. The assets demonstrate a current base decline rate of approximately 23% for the first year, and decreasing thereafter. Under the current commodity strip, we expect the assets to generate cash flow in excess of capital requirements for continued growth plus the incremental gross dividends associated with the new shares issued.

Click here for full announcement

Source: Vermilion Energy





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