Dana Acquires UKCS Interests From Petro-Canada UK Limited

abarrelfullabarrelfull wrote on 02 May 2013 06:57
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08 September 2010

Dana is pleased to announce that the Company (through its subsidiary Dana Petroleum (E&P) Limited) has entered into an agreement with Petro-Canada UK Limited (“Petro-Canada UK”), a wholly owned subsidiary of Suncor Energy Inc. (“Suncor”), to acquire Petro-Canada UK's interests in certain UK assets (the “PCUK Assets”) for a cash consideration of £240 million (approximately $372 million) (the “Acquisition”). The cash consideration will be adjusted at completion for various working capital balances at 1 July 2010 and movements in the interim period which are expected to result in a net benefit to Dana. In addition, on completion Dana will also gain additional UK capital allowances of £60 million.

The package consists of two main production hubs in the UK Continental Shelf ("UKCS"). These are the Petro-Canada UK operated fields around the Central North Sea Triton Area and the Nexen-operated Scott/Telford Moray Firth fields. Additionally, the Acquisition includes the prospective Inner Moray Firth exploration portfolio.

Key Acquisition Highlights

The Acquisition provides to Dana significant technical, operational and value benefits, including:

an additional 33.5 million barrels of oil equivalent (“mmboe”) of proven and probable reserves and 44.3 mmboe of proven, probable and possible reserves as at 1 July 2010. The additional proven and probable and possible reserves have been evaluated by an external, independent expert, Senergy (GB) Limited (“Senergy”), and Senergy has valued the proven and probable assets at £368 million using a Brent oil price forecast as specified in the report and valued the proven and probable and possible assets at £555 million1;

an ability to rapidly utilise the £60 million of capital allowances, received as part of the Acquisition, due to the high level of cash generation from the producing assets;

  • an attractive acquisition price equivalent to approximately US$11.1 per barrel of proven and probable reserves, based on the £240 million consideration and, after accounting for post-tax synergies, falling to less than US$10 per barrel;
  • additional net production to Dana of approximately 20,000 barrels of oil equivalent per day (“boepd”) upon completion, an increase of approximately 40% on Dana’s current production giving a predicted exit production rate at the end of 2010 for Dana of approximately 70,000 boepd;
  • additional value in the development and exploration portfolio, with discoveries including the Surprise, Nutmeg, Dee and Maria fields adding 44.4 mmboe of Contingent Resources and an unrisked prospective exploration resource portfolio totalling 57 mmboe;
  • an immediate, significant contribution to Dana’s existing portfolio, with an expected enhancement of earnings per Dana share in the first full year following the Acquisition;
  • a predominantly oil based production portfolio with oil comprising 95% of the proven and probable reserves;
  • an increase in Dana’s total number of producing fields from 55 to 63 providing further opportunities to enhance future production performance;
  • two further significant production hubs in Dana’s core North Sea area, including the operatorship of five subsea fields in the Central North Sea, strengthening Dana’s existing North Sea operating capabilities; and
  • the opportunity to create significant additional value via infill drilling and production optimisation in the producing fields, potential developments in the core areas and exploitation of the exploration prospectivity, particularly in the Petro-Canada UK operated Inner Moray Firth area.

Finance for the Acquisition will be provided by the Royal Bank of Canada Europe Limited (“RBC Capital Markets”) and certain other banks, who are lenders under Dana’s existing US$900m facility, via a US$300 million extension of Dana’s existing facility. The enlarged facility of US$1.2 billion will allow Dana to fund the Acquisition, maintain its planned development and exploration expenditure and should also ensure that Dana retains the capacity to re-pay the 2.90 per cent. convertible bonds, issued by Dana Petroleum (Jersey) Limited and guaranteed by Dana, should bondholders exercise the investor put set out in the terms of the convertible bonds in July 2012.

Given the requirement for third party consents, regulatory approvals and the existence of certain pre-emption rights under the terms of the relevant Joint Operating Agreements relating to the PCUK Assets, Dana expects the Acquisition to complete before the end of 2010. The effective date of the Acquisition will be 1 July 2010.

Commenting on the Acquisition, Tom Cross, Chief Executive Officer of Dana, said:

“Dana’s acquisition of these Suncor UK assets is strongly value accretive. The Acquisition is directly in line with our strategic goals of increasing Dana’s operated North Sea reserves and production. With this deal, Dana becomes a much stronger business, increasing our OECD oil production and cash flow significantly. By year-end 2010, our total daily production will have risen to around 70,000 boepd, which is nearly double the production rate at the start of the year.”

Background to and reasons for the Acquisition

Dana’s strategy is to build a balanced portfolio of assets at all stages in the exploration and production life-cycle. Following the acquisition by Dana and its subsidiary undertakings (the "Group") of Petro Canada Netherlands B.V., which completed on 13 August 2010, the Group increased its proven and probable reserves to an estimated 254 mmboe and is currently producing from 55 fields. Dana also has a full and on-going programme of field development opportunities and on 11 August 2010 announced first gas production from phase one of the Babbage field development in the Southern North Sea. In addition, Dana has an active exploration drilling programme, with a total of 22 exploration wells (including Dana Petroleum Netherlands B.V.) planned for 2010, offering the potential for material additions to the Group’s reserves and resources base with six discoveries in 2010 to date. These discoveries deliver 23 mmboe of proven and probable reserves.

As part of Dana’s strategy, and alongside the Group’s commitment to achieving organic growth principally through development and exploration activities, Dana seeks to identify opportunities to acquire reserves and production on a commercially attractive basis. The board of directors of Dana (the "Board") believes that the Acquisition represents an important step in the execution of this strategy. The Acquisition will significantly add to the Group’s reserves and production, extend the Group’s core operating area of the North Sea, provide synergies with its existing portfolio of assets and further strengthen the Group’s operating capabilities in the UKCS.

Information on Petro-Canada UK Assets

Petro-Canada UK is a wholly-owned subsidiary of Suncor, the Canadian integrated energy company. The sale is part of Suncor’s planned divestment programme following its merger with Petro-Canada in 2009.

Triton Oil Producing Area
The Triton area is located in the UKCS Central North Sea and comprises blocks 21/24a, 21/29a, 21/29b, 21/25, 21/30 21/23, 29/1a and 29/1b. The Triton area consists of the Petro-Canada UK operated fields of Guillemot West (90%) and Northwest (90%), Clapham (100%), Saxon (100%) and Pict (100%) and the Shell operated Bittern field (4.67%). All fields are tied back via sub-sea infrastructure to the Hess-operated Triton floating production, storage and offloading vessel (“FPSO”), in which Petro-Canada UK owns a 33.11% interest. Evacuation of the oil from the FPSO is via shuttle tankers, whilst gas is evacuated via the Fulmar Gas line to St Fergus. Current net production from the Triton area is approximately 17,500 stb/d.

The Board anticipates that future upside in the area may come from increased production by the de-bottlenecking of the Triton FPSO facilities and potential third party business from nearby developments. The de-bottlenecking of the Triton facilities, which is subject to further technical review and Board approval, has the potential to improve current production rates from the Guillemot Area fields. In addition, infill drilling opportunities exist in the Guillemot West, Northwest and Bittern fields.

Scott/Telford Oil Producing Area

The Scott/Telford Area is located in the Outer Moray Firth Area of the UKCS and is operated by Nexen. The Scott field (20.64%), straddling blocks 15/21a and 15/22b, has been developed by means of two bridge linked platforms, with oil exported via the Forties Pipeline System and gas exported via SAGE to St Fergus. The Telford field (9.43%) lies 10km to the south of Scott, across blocks 15/21a and 15/22b, and has been developed as a subsea tie-back to the Scott Production Platform. A recent well in the east part of the Telford field has demonstrated significant further potential in the field.
Production restart from the Scott and Telford fields is imminent, following a shut-in on the 12 July 2010 due to the failure of an actuator on a valve at the Forties Unity Platform, where the Scott field ties in to the Forties Pipeline System. Net production from the field, prior to shut-in, was approximately 5000 stb/d.

Nearby blocks in the area, at 15/18a and 15/28b, offer additional oil potential with existing discoveries and prospects identified. Further scope for third party business also exists across the Scott platform. Given this and the recent Telford well results, abandonment of the Scott platform is not expected until after well beyond 2018.

Inner Moray Firth Exploration Area
The Inner Moray Firth Exploration Area is located around quadrants 12 and 13, approximately 50km from St Fergus and 25km from the Captain field. A number of discoveries exist in this highly prospective area including the Surprise, Nutmeg and Dee oil fields.

Management and employees
A small number of key personnel based in Aberdeen will transfer across from Suncor to Dana under the Transfer of Undertakings (Protection of Employment) regulations (“TUPE”).

Terms of the Acquisition

The Acquisition will be effected through a sale and purchase agreement (“SPA”) between Dana Petroleum (E&P) Limited, as the buyer, and Petro-Canada UK, as the seller. The SPA contains customary provisions for a transaction of this nature in the oil and gas sector. The obligations of Dana Petroleum (E&P) Limited and Petro-Canada UK are guaranteed in the SPA by Dana and Suncor respectively.

The consideration for the PCUK Assets is £240 million. At completion of the Acquisition, the consideration will be adjusted for various working capital balances at 1 July 2010 and movements incurred during the period from the effective date through to completion. Currently, Dana considers that these adjustments will be in Dana’s favour. In addition, £60 million of UK upstream capital allowances are allocated to Dana as part of the deal.

The SPA is conditional upon a number of matters, including regulatory approval, and approval of the Acquisition by Dana's shareholders to the extent necessary pursuant to Rule 21.1 of the City Code on Takeovers and Mergers (the "Takeover Code"), as described below.

In the event that the SPA is terminated in certain circumstances specified therein, a break fee of £5 million may be payable to either party. In the event that the SPA is terminated (i) due to a material breach by Petro-Canada UK of its completion obligations; or (ii) because the conditions precedent to the SPA have not been fulfilled, satisfied or waived by 30 April 2011 (or as otherwise agreed), the break fee will be payable to Dana Petroleum (E&P) Limited. In the event that the SPA is terminated (i) due to a material breach by Dana Petroleum (E&P) Limited of its completion obligations or (ii) because the consent of Dana's shareholders is not obtained (to the extent necessary), the break fee will be payable to Petro-Canada UK. The break fee is to be paid into an escrow account by Dana Petroleum (E&P) Limited following the signing of the SPA.

In the event of (i) a material adverse change event (defined in the SPA as an event that causes material damage or destruction to the Scott and Telford field interests; or to the Clapham, Pict and Saxon field interests; or to the Guillemot West field interest and the Bittern field interest (including the Triton FPSO) (each as defined in the SPA)); occurs and (ii) where such event results in a loss in excess of 30% of the consideration payable in respect of the PCUK Assets being incurred, Dana has the option to exclude the assets affected by the material adverse change from the Acquisition and, to the extent any of the assets are excluded as a result of these provisions, the consideration in respect of the Acquisition will be adjusted accordingly.

The SPA also contains customary provisions and protections for Dana in relation to the manner in which Suncor and Petro-Canada UK may conduct the business of the PCUK Assets in the period between signing the SPA and completion of the Acquisition. The SPA also contains customary warranties and indemnities for an acquisition of this type.

Pre-emption rights

Certain equity co-venturers in the PCUK Assets have pre-emption rights over Petro-Canada’s stakes in those assets. Approximately one third of the proven and probable reserves of the PCUK Assets being acquired are subject to such pre-emption rights by co-venturers. If all of these rights were to be exercised, this would result in such assets being acquired by third parties and not by Dana and the consideration to be paid by Dana to Petro-Canada at completion would be reduced accordingly. Co-venturers in these relevant assets have a period of 30 days from receipt of notice of proposed assignment within which to waive, or notify exercise of, applicable pre-emption rights.

Financing of the Acquisition

On 15 July 2010, the Company entered into new US$900 million term loan and revolving credit facilities with RBC Capital Markets in connection with its acquisition of Petro-Canada Netherlands B.V. and as part of a broader corporate financing initiative (the "Bank Facilities"). RBC Capital Markets have subsequently been joined by a further four banks who were also members of the syndicate that provided Dana's previous facility.

The Company is pleased to announce that it has secured an extension of up to US$300 million to its Bank Facilities (the “Facility Extension” and, together with the Bank Facilities, the “Enlarged Facilities”), which facilitates the Acquisition whilst maintaining Dana’s planned development and exploration expenditure profile over coming years, including the Western Isles and Arran projects in the UK. The Enlarged Facilities should also provide full capacity to re-pay the Group’s convertible bond should bondholders exercise the investor put option set out in the terms of the convertible bonds in July 2012, and to provide for up to US$150 million of letters of credit. Availability of the Facility Extension is subject to terms and conditions typical for a facility of this nature, including the finalisation of the Facility Extension documentation. The final size of the Facility Extension will be determined in light of whether certain assets are pre-empted and do not form part of the Acquisition.

Takeover Code - Rule 21.1

In June 2010, the Company received an unsolicited approach from the Korea National Oil Corporation (“KNOC”) regarding a potential offer for the entire issued and to be issued share capital of the Company and all of the 2.90 per cent. convertible bonds issued by Dana Petroleum (Jersey) Limited and guaranteed by Dana, as announced by Dana on 1 July 2010. The Company is now in an offer period for the purposes of the Takeover Code.

Pursuant to Rule 21.1(b)(iv) of the Takeover Code ("Rule 21"), Dana must not agree to acquire any assets of a material amount without the approval of its shareholders at a general meeting. Accordingly, if the Panel on Takeovers and Mergers (the "Panel") does not waive the application of Rule 21.1 to the Acquisition as a result of KNOC giving its consent to Dana proceeding with the Acquisition and to the extent Dana remains in an offer period under the Takeover Code, the Company will be required to seek approval from its shareholders at a general meeting to comply with Rule 21.1. Dana is preparing a circular to send to shareholders to convene the general meeting in accordance with the terms set out in the SPA. To the extent Rule 21.1 continues to apply to the Acquisition and has not been waived by the Panel, Dana intends to post the circular to shareholders seeking approval for the Acquisition as soon as reasonably practicable.

Accordingly, in the event that the Panel waives the application of Rule 21.1 to the Acquisition as a result of KNOC giving its consent to the Acquisition, or the Company no longer being in an offer period, there will be no requirement, either under the Listing Rules or the Takeover Code, for shareholder approval of the Acquisition.

Financial effects of the Acquisition

The Board expects the Acquisition will enhance earnings per Dana share in the first full year following the Acquisition, and that the enlarged group capital expenditure will increase to approximately £400 million for 2011. This is fully covered within Dana’s forward plans.

Financial information on the PCUK Assets

The PCUK Assets’ average daily production was 16,704 boepd for the year ended 31 December 2009. Based on financial information provided by Petro-Canada UK, adjusted to be on a more comparable basis to Dana’s, we have estimated the aggregated profit before tax for the PCUK Assets for the year ended 31 December 2009 to be approximately £55 million. As at 31 December 2009, the PCUK Assets had estimated gross assets of £448 million.

This financial information, provided by Petro-Canada UK, for the year ended 31 December 2009, was prepared in accordance with Canadian GAAP. Dana has adjusted the profit before tax to be on a more comparable basis to Dana’s, however no detailed review of the differences in accounting policies of the purchaser and vendor has been performed. Accordingly, the Board notes that the financial information on the PCUK Assets has not been specifically prepared on a basis consistent with the accounting policies of Dana.

Advisors

In connection with the Acquisition, RBS Hoare Govett and RBC Capital Markets are acting as joint financial advisors to Dana and Allen & Overy LLP are acting as legal advisors to Dana. McGrigors LLP advised Dana on legal aspects of the Facility Extension. In addition, Dana has been assisted by Aon Energy, in respect of insurance advice and Senergy (GB) Limited in respect of the competent person's report.

8th September, 2010


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