Canacol Energy Ltd. ("Canacol" or the "Corporation") (TSX: CNE, BVC: CNE.C) is pleased to announce the formal closing of the Shona Energy Company, Inc. (“Shona”) (TSXV: SHO) transaction, effective December 21, 2012.
Charle Gamba, CEO and President of Canacol, stated “The Shona assets bring Canacol 17 million standard cubic feet per day (“mmscfpd”) of net gas production (2,700 barrels per day of oil equivalent) (“boepd) under long term contracts, 95 billion cubic feet (“bcf”) of net proved plus probable (“2P”) reserves (15.8 million barrels of oil equivalent) (“mmboe”), and significant gas and conventional heavy oil upside on 4 exploration contracts in Colombia, making Canacol the 5th largest public exploration and production company in Colombia on a reserves basis, with net 2P reserves totaling 32 mmboe at a net present value discounted at 10% of US$736 million. The Corporation anticipates exiting calendar 2012 with net production of approximately 8,000 boepd net after royalty. The focus for 2013 is straight forward: firstly to grow production from both our light oil and gas producing properties to increase cash flow, which includes our two recently announced light oil discoveries in Colombia, and secondly to continue the successful exploration of our significant conventional and non-conventional oil and gas assets in Colombia to add reserves. The diversity of our production and exploration portfolio make Canacol unique as a junior oil and gas company in Colombia, balancing high decline, short reserve life Llanos Basin oil production with lower decline, long reserve life light oil production from Ecuador and now gas production from the Lower Magdalena Basin.”
The Corporation has net 2P reserves of approximately 32 million barrels of oil equivalent reserves with a pre-tax NPV10 of US$736 million, and interests in 29 E&P contracts totalling 3.3 million net acres. Core areas include light oil production and exploration in the Llanos Basin (which includes the recently announced Labrador light oil discovery on the LLA 23 E&P contract), conventional and non-conventional light oil exploration in the Middle Magdalena Basin (which includes the recently announced Mona Arana oil discovery on the VMM 2 contract) gas production and exploration in the Lower Magdalena Basin, heavy oil production and exploration in the Caguan Basin, and light oil production in the Oriente Basin of Ecuador.
Pursuant to an arrangement agreement (the "Arrangement Agreement") between the Corporation and Shona dated October 15, 2012, Canacol acquired, by way of a statutory plan of arrangement (the "Arrangement"), 100% of the issued and outstanding class "A" common shares of Shona ("Shona Common Shares") in exchange for 0.10573 of a post-Consolidation (as defined below) common share of Canacol (“Canacol Share”) and C$0.0896 cash for each Shona Common Share (the "Consideration") and 100% of the issued and outstanding series "A" preferred shares of Shona ("Shona Preferred Shares") in exchange for US$100.00 cash for each Shona Preferred Share. The Consideration represents a value of approximately C$0.56 per Shona Common Share, based on the volume weighted average price of the Canacol Shares on the Toronto Stock Exchange (the "TSX") for the 15 trading days ended October 12, 2012.
As previously announced, shareholders of Canacol approved the 10 to 1 consolidation (the “Consolidation”) of the Canacol Shares associated with the closing of the Arrangement. The Corporation completed the Consolidation effective December 14, 2012 and the Canacol Shares began trading on a post-Consolidation basis on the TSX and the Colombia Stock Exchange on December 20, 2012.
Under the terms of the Arrangement Agreement, all of Shona's outstanding options were surrendered and terminated prior to the closing of the Arrangement. In addition, all holders of Shona warrants are entitled to receive, in lieu of the number of Shona Common Shares otherwise issuable upon the exercise thereof, the number of Canacol Shares adjusted for an exchange ratio of 0.12587 of a post-Consolidation Canacol Share per Shona Share and the exercise price of the warrants has been reduced with respect to the exchange ratio of 0.12587 such that the warrants maintain their economic equivalency.
Canacol issued an aggregate of 24,600,758 post-Consolidation Canacol Shares to Shona Common Shareholders in connection with the Arrangement, at a deemed purchase price in respect of the Arrangement of approximately C$4.449 per post-Consolidation Canacol Share. After giving effect to the Arrangement and the Consolidation, Canacol has 86,499,001 post-Consolidation Canacol Shares outstanding.
In connection with the closing of the Arrangement, the Corporation entered into a senior secured credit agreement with an affiliate of Credit Suisse for US$45 million, the proceeds of which were used to fund the cash payments to the Shona Common Shareholders and Shona Preferred Shareholders, as well as to fund transaction costs of the Arrangement and the financing. This credit facility carries a term of one year, is repayable in full upon maturity, bears interest at 15% per annum, payable quarterly, and is secured by the assets of Shona. In consideration for entering into the credit agreement, the Corporation agreed to a “phantom warrant payment” arrangement such that the Corporation will pay an amount (in cash or Canacol Shares (subject to the approval of the TSX), at the election of the Corporation) equal to the in-the-money amount of 2,697,292 post-Consolidation common share purchase warrants of the Corporation at an exercise price of C$4.50 per Canacol Share. The phantom warrant payment may be demanded partially or in full at any time for a period of three years. The Corporation’s existing reserve-based revolving credit facility is currently subject to redetermination by its lenders and the Corporation expects to receive notice of a reduction in the borrowing base under the facility in the near term. However, as a result of the closing of the Credit Suisse facility described above, the Corporation does not expect any material change in the overall borrowing amounts under its combined credit facilities after such redetermination.