REGINA, SK – ROK Resources Inc. (“ROK” or the “Company“) (TSXV:ROK) (TSXV:ROK.WT) is pleased to announce that it has entered into an Asset Exchange Agreement (the “Acquisition“) to acquire certain oil & gas assets (the “Assets“), currently producing approximately 1,500 boe/d (69% Liquids), in Southeast Saskatchewan from an Intermediate Energy Producer (“Intermediate Energy Producer“) in exchange for total consideration of: (i) $26.5 million CAD in cash, before adjustments1 (the “Cash Consideration“), and (ii) an asset divestiture to the same Intermediate Energy Producer of our non-core assets, currently producing approximately 475 boe/d (100% Liquids), in Southwest Saskatchewan (the “Non-Core Assets“).
The Acquisition is accretive to ROK shareholders on key per share measures, adds high quality drilling and exploration inventory and consolidates our core focus operating area within Southeast Saskatchewan.
Key features include:
- All-cash transaction provides per share accretion on corporate metrics
- Desirable land positions within economic conventional and unconventional resource plays
- Restructuring of credit facility and reduction in interest rate
- Significant booked reserve base and long-term resource development upside
- Stable base production yields significant Free Funds Flow potential
- Strongly integrated operations deliver low-cost structures
- Maintains manageable Abandonment Reclamation Obligation (“ARO“) requirements and improvement to Saskatchewan Limited Liability Ratio (“LLR“)
Core Area Acquisition
The Assets, located in the Pinto, Steelman & Gainsborough areas of Southeast Saskatchewan, are currently producing ~1,500 boe/d (69% liquids)2 of low-decline, liquid-weighted production, primarily producing from the Midale formation. The Assets include 59,435 gross (48,720 net) acres of land, which contain 80+ gross (65+ net) booked drilling locations3 and generate an operating netback of ~$40/boe CAD at $US80/bbl WTI. The Assets, 80% of which are operated, are expected to provide the Company with $10.0 to $12.0 million4 of incremental annualized net operating income (“NOI“) from existing production and drilling upside, providing additional growth potential and balance sheet stability.
Based on a McDaniel & Associates engineering report dated September 1, 2022, the Assets have a before-tax Total Proved (“TP“) net present value (“NPV“) 10% of approximately $96 million and a before-tax Total Proved Plus Probable (“TPP“) NPV10% of approximately $155 million. With the Acquisition, the Company adds >18 years of reserve life, not including secondary recovery from future waterflood applications.
Non-Core Area Disposition
The Non-Core Assets being sold to an Intermediate Energy Producer include ~475 bbls/d (100% liquids) of production in the Butte area of Southwest Saskatchewan, including non-operated interests in the Butte Voluntary Unit, Bone Creek Unit and Eagle Lake Unit. ROK’s average working interest in the Non-Core Assets is 15%, with the balance primarily owned and operated by the Intermediate Energy Producer.
Senior Loan Facility
In connection with the Acquisition, ROK expects to enter into a commitment letter (the “Commitment Letter“) with respect to a senior secured loan facility with a Canadian Chartered Bank for an aggregate principal amount of $75 million (the “Senior Loan Facility“). The Senior Loan Facility is expected to be comprised of: (i) line of credit in the amount of $22.5 million (the “Line of Credit“), and (ii) a term loan in the amount of $52.5 million (the “Term Loan“). The Senior Loan Facility would be used to fund the Acquisition and completely payout ROK’s existing higher cost debt facility, held by Anvil Channel Energy Solutions, which is estimated at $42 million at Closing and carries no pre-payment penalties. The Senior Loan Facility is subject to the execution of mutually acceptable Commitment Letter, credit documentation, and the satisfaction of the other customary conditions to closing, including the satisfaction of all conditions to the completion of the Acquisition.
Highlights & Strategic Rationale
The Acquisition is aligned with ROK’s long-term business strategy to grow into a premier energy producer through responsible exploration and development, complemented by strategic acquisitions of diversified and sustainable assets in favorable operating areas where the management team has a track record of value creation through successfully building and exiting four prior companies.
The highlights of the Assets and the anticipated benefits include the following:
- Desirable Land Positions within Highly Economic Conventional and Unconventional Resource Plays
- Large land position of 59,435 gross (48,720 net) acres of land within Southeast Saskatchewan
- Average working interest of ~80%
- No significant near-term expiries and unrestricted access
- All-cash transaction provides per share accretion on corporate metrics, including debt-adjusted cash flow and reserves
- >15% accretive to 2023 debt-adjusted cash flow per share
- >75% accretive to Total Proved + Probable Reserves per share
- Significant Booked Reserve Base & Long-Term Resource Development Upside
- Significant 1P reserve base of 7.1 million boe and TPP reserve base of 10.4 million boe
- Estimated TPP Reserve Life Index of 18.5 years
- 90+ internally identified drilling locations on Assets (including 81 booked locations)
- Ample primary development and secondary/tertiary enhanced oil recovery (“EOR“) potential
- Stable Base Production Yields Significant Free Fund Flow Potential
- Stable base production of approximately ~1,500 boe/d
- Light oil weighted production, 30-35° American Petroleum Institute (“API“) gravity, with attractive operating netbacks and capital efficiencies (~$23,000/boe/d)
- Integrated Operations to Deliver Low-Cost Structures
- Higher working interest and operatorship ensures control over pace of capital development
- Readily available processing capacity and strategic access to markets
- Low royalties (14%) and operating costs ($25/boe)
- Estimated annualized net operating income of $10.0 to $12.0 million4
- Manageable ARO Requirements & Improvement to Saskatchewan LLR
- Increases ROK’s licensee liability ratio in Saskatchewan to 1.50x
- Proforma ARO estimated at $66MM (~$21MM Inactive)
- ARO obligations to be fully serviced with an estimated ~$1.0 million per year
The Acquisition has an effective date of October 1, 2022 and is expected to close on or about January 24, 2023 (“Closing“), subject to finalizing the Senior Loan Facility and certain customary conditions and regulatory and other approvals, including any necessary approvals of the TSXV Exchange.
Post-Closing of the Acquisition, ROK plans to provide its 2023 capital budget and guidance.
Acquisition Summary
| Daily Production | 1,500 boe/d (69% Liquids) |
| Annualized 2023E Operating Income | $10 to $12 million |
| Reserves3 | |
| PDP Reserves (the “PDP Reserves“) / NPV 10% | 2.3 MBoe / $36 million |
| Total Proved Reserves (the “TP Reserves“) / NPV 10% | 7.1 MBoe / $96 million |
| Total Proved + Probable Reserves (the “TPP Reserves“) / NPV 10% | 10.4 MBoe / $155 million |
Acquisition Metrics (Net of Non-Core Divestiture & Including Estimated Adjustments)
| Production Cost | $23,000 /boe/d |
| 2023E NOI Multiple4 | 2.9x – 3.1x |
| Reserves5 | |
| PDP Reserves | $16.20/boe |
| TP Reserves | $3.78/boe |
| TPP Reserves | $2.51/boe |
Notes
1. Normal closing adjustments resulting in an estimated $3.5 million reduction in the Cash Consideration
2. Comprised of approximately 740 bbls/d of light crude oil, 2,770 mcf/d of conventual natural gas, and 300 bbls/d of NGLs
3. McDaniel & Associates engineering report dated September 1, 2022. (See: “Reserve Disclosure”)
4. Assuming a WTI pricing range of US$70/bbl to US75/bbl and F/X of 0.75
5. Reserves associated with Non-Core Area Disposition are based on ROK’s internally estimated reserve values. (See: “Reserve Disclosure”)
Advisors
McDougall Gauley LLP is acting as legal advisor to ROK with respect to the Acquisition.
Qualified Person
The technical content of this news release has been reviewed and approved by Bryden Wright, P. Eng., a qualified person for the purpose of National Instrument 51-101.
