Calgary-based Esprit Exploration — known until a year ago as Canadian 88 Energy Corp. — is remaking itself once again after the board unanimously approved a proposal to reorganize into a new energy trust that would own approximately 90% of the company’s existing producing assets.
Esprit shareholders would receive common shares in a new, publicly listed, high growth, exploration-focused producer called Exploreco, which would own some of Esprit’s natural gas weighted assets and undeveloped lands in southern Alberta, west central Alberta and the deep Western Canadian Sedimentary Basin (WCSB). Until the announcement, Esprit has focused almost exclusively on natural gas on the western side of the WCSB, centered on the Olds, West Central Alberta, High River/Medallion and Three Hills/Swalwell areas.
As part of the arrangement, Esprit also entered into an agreement with an unrelated third party to sell prospective coalbed methane (CBM) and shallow gas properties in Central Alberta for C$37.7 million. Following the reorganization, Esprit intends to distribute the cash proceeds from this sale, representing C22 cents/share to Esprit shareholders.
“This transaction represents an unbundling of significant value for Esprit shareholders,” said CEO Stephen Savidant. “Our mature assets, anchored by our Olds gas property with an 18-year reserve life index, are ideally suited to the energy trust model.”
Esprit’s reorganization divides the assets into three distinct groups:
“Initially, Exploreco’s growth will be funded by production at Medallion, the company’s low risk core area,” Savidant said. “Exploreco has accumulated a large land base in the Deep Basin over the past year. A significant drilling program will commence in the Deep Basin this fall targeting highly prospective stacked Cretaceous targets.”
Last year, Canadian 88 voted to rename the independent as Esprit to capture the “spirit, energy and determination of our company, and particularly, our team,” said Savidant (see Daily GPI, April 7, 2003).
Energy trusts in Canada have grown in popularity because of their tax advantages. However, the Esprit trust would be one of the few so far established to have such a high weighting to natural gas and also one of the longest reserve life indices.
Esprit trust shareholders will receive trust units that would pay monthly cash distributions derived from 11,800 boe/d of production, comprised of 60 MMcf/d of gas and 1,800 bbl/d of crude oil and liquids. The assets are 85% natural gas, have a reserve life index of 12.2 years (proved plus probable) and include 150,000 net acres of undeveloped land. The trust’s primary mandate would be maintaining reserves and production with a strong focus on cost control, and acquisitions were not ruled out. Management estimated that the trust can maintain current production volumes over the next 12-18 months and would expect to distribute approximately 75% of overall net cash flow.
Once established, the Esprit trust is intended to provide a tax-efficient vehicle to deliver cash flow to unitholders from its mature long-life natural gas weighted assets. The trust would have access to low-cost capital required to compete effectively for acquisition and development opportunities, and unitholders would benefit from the tax-efficient cash flow stream. Esprit management also believes the significant growth potential of the assets within Exploreco would attract a greater value in an exploration focused company. Both the trust and Exploreco would be managed by Esprit’s current management teams.
The exploration arm, Exploreco, will receive Esprit’s working interests in some of the southern and western Alberta properties, which currently produce 1,500 boe/d, 95% weighted to gas, and a large undeveloped land base of 210,000 net acres. Approximately 30,000 net acres of land has been accumulated over the past year in a highly prospective, stacked, Cretaceous play trend in the WCSB. This would become a core area for Exploreco with drilling expected to begin this fall.
Exploreco’s key natural gas producing property is Medallion, located south of Calgary. Current production at Medallion is 1,200 boe/d, which would be approximately 80% of Exploreco’s total production. Subsequent to the private placement, Exploreco would have no debt and a capital expenditure program for the last three months of 2004 of C$10 million.
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