U.S. onshore operators Lucas Energy Inc. and Victory Energy Corp. have canceled their merger plans, and the two sides are working toward finalizing terms for a mutual settlement and release agreement.

In a statement Friday, Austin, TX-based Victory said it notified Lucas on May 11 that it did not intend to proceed with the merger and was terminating a nonbinding letter of intent. Victory also said it would not extend any further credit to Lucas, which started under a pre-merger loan and funding agreement on Feb. 26.

The companies executed the letter of intent and a term sheet for a proposed merger in February, then followed up with separate collaboration and funding agreements in March (see Shale Daily, March 6; Feb. 4). The merger agreement would have provided equity to Victory’s shareholders, while the funding agreement would have given Lucas the funding necessary to satisfy its obligations on several Eagle Ford Shale wells, among other things.

Both companies said they were in the process of undoing their intended merger. In a separate statement Friday, Lucas said the two were “negotiating a mutually agreeable unwinding of the steps previously taken in anticipation of the proposed business combination,” while Victory added they were “working…toward the finalization of terms of a mutual settlement and release agreement.”

“Although the merger with Lucas is no longer moving forward, we remain in a very good position to rapidly grow the company and have done so in the last few months,” said Victory CEO Kenny Hill, adding that the company anticipates exiting 2Q2015 with production of more than 103 boe/d, up from 30 boe/d at the end of 2014.

Lucas CEO Anthony Schnur said he was also disappointed that the merger with Victory was scuttled, but added that Lucas was now reaching out to other companies. Specifically, it was revisiting deals that were abandoned after the collapse in crude oil prices.

“We are encouraged about the opportunities available to us now that crude oil prices have stabilized and drilling costs have been declining,” Schnur said. “Reduced drilling costs have significantly improved the economics of our Eagle Ford shale development wells. The favorable drilling metrics also reduce our total capital needs required to participate in the development of two Eagle Ford wells in Karnes County, TX; two of which are scheduled and require Lucas’ funding.

“We will continue to discuss potential business combinations or financing ventures that are a fit with our company and potentially less dilutive to our shareholders.”

Both companies are independent oil and gas producers. Lucas is focused on the Austin Chalk and the Eagle Ford, while Victory is trained on the Permian Basin.