Austin, TX-based Victory Energy Corp., which is focused on the Permian Basin, and Lucas Energy, a cash-strapped Houston-based independent with operations in the Eagle Ford Shale and Austin Chalk, said Wednesday they have executed a letter of intent and term sheet for a proposed merger.

The deal is contingent on signing a definitive merger agreement, which would contain customary terms and conditions. The companies expect that the business combination would involve issuing equity by Lucas to Victory’s shareholders with no cash payment. They also expect that once the merger is completed, shareholders of Victory and its partner, Navitus Energy Group, would own more than a majority of outstanding Lucas shares.

The companies are also negotiating the terms of a funding agreement intended to provide the capital necessary for Lucas to satisfy its obligations for several Eagle Ford wells and critical accounts payable, and to provide it with necessary working capital during the period prior to the consummation of the business combination.

Handicapped by deflated oil prices, Lucas said this week that it defaulted on a debt payment in December. The company said it failed to make a required principal payment that was due on Dec. 13; the lender notified Lucas Jan. 26 that it had defaulted on the payment.

“Consequently, the amount owed under the loan agreement of approximately $7.7 million will accrue at a default interest rate of 18% per annum,” Lucas said. The lender also waived an interest payment that was due in January, the company said. CEO Anthony C. Schnur earlier this week said tumbling crude oil prices required the company “to reconsider all alternatives.”

Over the past six weeks, Lucas slashed its general and administrative and operating expenses by approximately $160,000 per month, he said. At the same time, production “has been maintained at current levels considering natural declines, and we continue to anticipate drilling on our Eagle Ford Shale acreage in Karnes County as soon as we are able to finalize alternative financing arrangements.”

Lucas and Victory said they expect that as part of their deal seven of Lucas’ high-grade Eagle Ford wells from a portfolio of 130 future drilling locations will be funded and brought into production by June.

“Based on nearby EOG Resources and Marathon Oil well production volumes, in addition to internal economic reservoir calculations, the parties anticipate that the monthly production revenue from these combined wells will exceed $1.1 million of revenue to the company interest, assuming a price per barrel of oil of $50, which would bring both companies into a positive cash-flow position and add significant proved producing reserves to the combined 2015 company portfolio,” they said.

Current Victory CEO and Director Kenny Hill would become CEO and president of the combined company. Other executive and officer appointments will be determined at a later date.

“The expected combination of the two companies will allow Victory and Lucas shareholders to enjoy the benefits of a much larger NYSE MKT-listed company, the synergies of a single management structure and reporting company, which will hold valuable assets in two of the most active and profitable basins in North America, the Permian and the Eagle Ford,” Hill said.

Victory is a growth-oriented oil and gas exploration and production company focused on the acquisition and development of stacked multi-pay resource play opportunities in the Permian Basin that offer predictable outcomes and long-lived reserve characteristics. Assets include interests in the Spraberry, Wolfcamp, Wolfberry, Mississippian, Cline and Fusselman formations.

Lucas assets include 5 million bbl of proved reserves in the Eagle Ford and other oil reserves, according to the company.

The market reacted favorably to the merger announcement. By midday Wednesday, Victory shares (VYEY) were trading at 21 cents, up more than 5 cents from the previous day’s close. Lucas shares (LEI) were trading at 10.5 cents, up 3.6 cents from Tuesday’s close.