With its founder and former CEO now back at the helm, Vintage Petroleum Inc. on Thursday agreed to sell its underperforming Canadian oil and natural gas properties to Calgary-based Midnight Oil and Gas Ltd. in a cash-for-stock transaction worth C$350 million (US$270 million).

The assets include properties Vintage bought in 2001 with its purchase of Genesis Exploration Ltd. for $572 million (see Daily GPI, March 29, 2001). Vintage first entered Canada in 2000 with the acquisition of Canadian-based Cometra Energy Ltd. for $71 million (see Daily GPI, Nov. 30, 2000). However, poor results, coupled with negative reserve revisions related to proved undeveloped reserves, led the company to reexamine its options and to decide to sell all of them at a loss.

Canadian operations account for about 12% of estimated 2004 production, but the 14.6 MMboe contributed only 3% of year-end 2003 reserves, according to Lehman Brothers analyst Thomas Driscoll. He said the Standardized Measure of Future Net Cash Flows relating to Canadian proved reserves was $210 million after taxes at year-end 2003, which was about 9% of Vintage’s total.

In the agreement with Midnight, the Tulsa-based independent committed to sell its wholly owned Canadian-based subsidiary, which holds all of its Canadian assets. The transaction includes estimated working capital of C$27.5 million (US$21 million) as of June 30, the effective date of the transaction. The boards of directors of both Vintage and Midnight approved the transaction, and expect to close by Nov. 30. There is a financing contingency that has to be satisfied by early October, and Midnight’s shareholders also have to approve the deal.

“We are pleased with this agreement as it represents a significant step in the execution of our 2004 plan to improve shareholder value,” said CEO Charles C. Stephenson Jr. “In addition, the anticipated proceeds and book gain from this transaction will result in reducing our net debt-to-book capitalization ratio below the 40% range, thus achieving our stated financial target, and the enhancement of our flexibility to fund future production growth.” Vintage plans to use the sale proceeds to reduce its outstanding debt and for other general corporate purposes.

Driscoll noted that the sale of the Canadian assets “could help provide Vintage some firepower to make a modest to large acquisition.” Vintage, which is 65% weighted to oil, has had a “troubled” couple of years “as evidenced by production decrease of about 20% since the 2001 peak.” However, Driscoll said the “balance sheet has now improved and founder and Chairman Charles Stephenson is back at the helm as president and CEO as well.” Stephenson resumed his positions in February after S. Craig George resigned.

This year, Driscoll said Vintage’s shares have risen nearly 60% on higher commodity prices, improved production results and “optimism that new management initiatives will lead to improved performance.” Vintage “plans to be more focused on making acquisitions than in the recent past.” He said “a disappointing acquisition in Canada (and the subsequent write-offs) and the disruptions related to Argentina’s financial crises are in the past, and the company is preparing to resume delivering strong production growth.”

Midnight, which plans to use the acquisition to transform itself into a Canadian-based tax-sheltered income trust, said the transaction will give it access to Vintage’s undeveloped land base and also offer better access to capital. Once established, the trust would distribute up to 70% of its overall net cash flow.

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