ARC Resources and Seven Generations Energy Announce Strategic Montney Combination

CALGARY, AB, Feb. 10, 2021 /CNW/ – (TSX: ARX) (TSX: VII) ARC Resources Ltd. (“ARC”) and Seven Generations Energy Ltd. (“Seven Generations”) today announce a strategic combination of the two premier Montney producers.

The combined company will continue to focus on significant free funds flow(1) generation through a responsible and disciplined approach to development while creating superior and enduring value for all shareholders. The combination is consistent with ARC’s and Seven Generations’ long-term strategies and is expected to be immediately accretive on a free funds flow and net asset value per share basis to all shareholders.

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The companies have entered into a definitive agreement to combine in an all-share transaction valued at approximately $8.1 billion, inclusive of net debt. The combined company will operate as ARC Resources Ltd. and remain headquartered in Calgary, Alberta. Under the terms of the definitive agreement, Seven Generations shareholders will receive 1.108 common shares of ARC for each common share of Seven Generations held.

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TRANSACTION HIGHLIGHTS

  • The combined company will become the premier Montney producer of low-cost natural gas and high-margin condensate, with combined production expected to total over 340,000 boe(2) per day in 2021, comprising approximately 138,000 barrels per day of liquids and approximately 1.2 Bcf per day of natural gas.(3)
  • The transaction will create a combined company with material size and scale that enhances ARC’s and Seven Generations’ existing commodity and geographic diversification. The combined company will become Canada’s largest condensate producer, third-largest natural gas producer, and sixth-largest upstream energy company.
  • The combination will immediately deliver accretive free funds flow per share to all shareholders, yielding synergies that are expected to deliver approximately $110 million in annual cost savings by 2022. The combined company will continue to pay ARC’s quarterly dividend of $0.06 per share, subject to the approval of the Board of Directors.
  • The combined company is expected to generate significant free funds flow at current commodity prices, which will increase optionality in capital allocation decisions, including the ability to fund development of ARC’s Attachie asset, further development of Seven Generations’ Nest asset, and deliver incremental returns to shareholders.
  • Following the combination, ARC will maintain its strong financial position, with financing for the transaction fully committed. The combined company is expected to have an investment-grade credit rating and plans to manage a low-cost capital structure with ample liquidity. The combination also has a strong deleveraging profile, with net debt expected to be reduced to approximately 1.3 times funds from operations by year-end 2021.
  • The combination will advance both companies’ operational excellence and elevate their standing as prominent ESG-focused companies, with ARC and Seven Generations currently delivering the lowest greenhouse gas (“GHG”) emissions intensity amongst their Canadian exploration and production peer group.
  • The combined company will benefit from the experience of ARC’s Hal Kvisle as Board Chair and Seven Generations’ Marty Proctor as Board Vice-Chair, and will be led by ARC’s Terry Anderson as President and Chief Executive Officer (“CEO”) and director, ARC’s Kris Bibby as Senior Vice President and Chief Financial Officer (“CFO”), and Seven Generations’ David Holt as Senior Vice President and Chief Operating Officer (“COO”).

Sponsor

Material Resource Managment(MRM) is a material management company specializing in site clean up, co-ordination of planning, sourcing, purchasing, moving , storing and controlling materials in an optimum manner so as to provide a pre-decided service to the customer at a minimum cost.

STRATEGIC RATIONALE

Delivers Immediately Accretive Returns to All Shareholders

The transaction is expected to be immediately accretive on a free funds flow and net asset value per share basis to all shareholders. Funds from operations, free funds flow, and the combined company’s net asset value are all expected to meaningfully increase.

The combined company’s balanced portfolio of top-tier, long-life condensate, liquids-rich, and natural gas assets will expand internal investment optionality. Capital allocation can be further optimized across all commodity cycles to enhance returns and deliver increased shareholder value. The premier Montney land base of the combined company will comprise over 1.1 million net acres of Montney land and a deep inventory of high-return, de-risked core development opportunities. Free funds flow will be allocated towards the company’s highest-returning assets for development, debt reduction, and potential return of capital to shareholders through share buybacks and/or dividend increases.

As part of its returns-focused value proposition, the combined company will pay a quarterly dividend of $0.06 per share, subject to the approval of the Board of Directors.

Accelerates Free Funds Flow Generation

The combined company is expected to generate significant free funds flow due to its prolific Montney resource base, its extensive network of owned-and-operated infrastructure, with natural gas processing and sales capacity of approximately 1.5 Bcf per day, and its low cost structure, which will further improve as a result of the combination. Initial annual sustaining capital requirements are expected to be approximately $1.0 billion. Estimated cost savings and synergies from the combination are expected to drive approximately $110 million in annual free funds flow improvements by 2022, attained through corporate cost savings, operating efficiencies, market optimization opportunities, and drilling and completions efficiencies. The combined company expects to capture additional interest savings as it intends to execute an investment-grade long-term financing plan.

Both ARC and Seven Generations share a focus on operational excellence. Additional synergies and efficiencies beyond those currently assigned a monetary value are expected to be realized as a result of the combination, leveraging the best practices and capabilities of both organizations. Through enhanced market diversification activities, the combined company will have the ability to access multiple downstream markets across North America and will execute an active risk management program with a long-term focus on reducing volatility in funds from operations.

Preserves Strong Financial Position

The combined company is expected to have an investment-grade credit rating and is committed to protecting its strong financial position by maintaining significant financial flexibility with its balance sheet. Financing for the transaction is fully committed, with net debt expected to be reduced to approximately 1.3 times funds from operations by year-end 2021, based on current commodity prices. The combined company has a strong deleveraging plan in place and will target a net debt to annualized funds from operations ratio of between 1.0 and 1.5 times over the long term.

In connection with the combination, ARC has entered in a binding agreement with RBC Capital Markets (“RBC”) and CIBC Capital Markets (“CIBC”), who are acting as Joint Bookrunners, to provide the combined company with underwritten aggregate credit facility commitments of up to $3.5 billion which will ensure an ability to optimize the capital structure, including retirement of the Seven Generations outstanding senior notes, while maintaining adequate go-forward liquidity.

Achieves Size and Scale

The complementary assets of ARC and Seven Generations will possess material size and scale, while enhancing existing commodity and geographic diversification. The combined company will be the largest pure-play Montney producer, Canada’s largest condensate producer, third-largest natural gas producer, and sixth-largest upstream energy company. The balanced portfolio of approximately 40 per cent liquids and 60 per cent natural gas at this size and scale results in an enviable and resilient position.

With its increased size and scale, the combined company expects to have improved access to capital and greater relevance in the global energy market. These enhancements are expected to support additional long-term market access and integration opportunities to increase revenue diversification and profitability.

Elevates Position as ESG Leader

ARC and Seven Generations share a commitment to ESG excellence, including managing risks around all aspects of the business, ensuring employees’ and contractors’ safety, and stewarding environmental responsibility, performance, and reporting transparency. ARC and Seven Generations currently have the two lowest GHG emissions intensities amongst their Canadian exploration and production peer group. In addition to delivering strong environmental performance through responsible development activities, good governance, diversity and inclusion, to which both companies share a commitment, strong partnerships, and stakeholder service, will all be part of the combined company’s ESG principles.

PRELIMINARY PRO FORMA 2021 OUTLOOK

Detailed guidance for 2021 will be provided upon closing of the transaction. The preliminary pro forma 2021 outlook estimates capital investments of approximately $1.0 billion to $1.1 billion, which will primarily be focused on sustaining production at ARC’s and Seven Generations’ core operating properties. The combined company is expected to deliver average daily production of over 340,000 boe per day, comprising approximately 138,000 barrels per day of liquids and approximately 1.2 Bcf per day of natural gas. Approximately 60 per cent of production will be produced in Alberta, with the remaining 40 per cent being produced in British Columbia.

GOVERNANCE AND LEADERSHIP

The combined company will bring together the strengths and talents of both organizations to drive superior performance and deliver strong returns to shareholders. Financial strength, disciplined capital allocation, operational excellence, safety, and leading ESG performance, will continue to be key tenets for the organization.

The Board of Directors will consist of 11 members, made up of six directors from ARC and five directors from Seven Generations. ARC’s Hal Kvisle will remain as independent Chair and Seven Generations’ Marty Proctor will join the Board to serve as Vice-Chair. Management will be led by ARC’s Terry Anderson as President and CEO, ARC’s Kris Bibby as Senior Vice President and CFO, and Seven Generations’ David Holt as Senior Vice President and COO.

Additional senior leaders for the combined company will be selected from the senior leadership teams at both organizations and will be named before the close of the transaction.

The combined company will be headquartered in Calgary, Alberta, with field operations headquartered in Grande Prairie, Alberta, Dawson Creek, British Columbia, and Drayton Valley, Alberta.

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TRANSACTION DETAILS

Under the terms of the definitive agreement, Seven Generations shareholders will receive 1.108 common shares of ARC for each common share of Seven Generations held. Following the close of the transaction, ARC shareholders will own approximately 49 per cent and Seven Generations shareholders will own approximately 51 per cent of the total shares outstanding.

The transaction is structured through a plan of arrangement in respect of the securities of Seven Generations under the Canada Business Corporations Act and is subject to the approval of at least two-thirds of the votes cast by holders of Seven Generations common shares. The issuance of ARC common shares is subject to the approval of the majority of votes cast by holders of ARC common shares in connection with the transaction. ARC expects to amalgamate Seven Generations upon closing.

The voting directors of both ARC and Seven Generations have unanimously approved the arrangement agreement. Canada Pension Plan Investment Board, which has been a Seven Generations shareholder since 2012 and controls 16.8 per cent of issued and outstanding shares, has entered into a Support Agreement whereby it will vote in favour of the transaction under the terms of the agreement. A joint information circular, which will include details of the transaction, is expected to be mailed to ARC and Seven Generations shareholders by the end of February.

The transaction is subject to shareholder approval for both ARC and Seven Generations, regulatory approvals, and other customary closing conditions. The transaction is expected to close in the second quarter of 2021.

ADVISORS

RBC is acting as exclusive financial advisor to ARC. RBC has provided a verbal opinion to ARC’s board of directors that the exchange ratio under the plan of arrangement is fair, from a financial point of view, to the ARC shareholders and is subject to the assumptions made and the limitations and qualifications included in the written opinion of RBC. Burnet, Duckworth & Palmer LLP is acting as ARC’s legal advisors for the transaction.

CIBC is acting as exclusive financial advisor to Seven Generations. CIBC has provided a verbal opinion to Seven Generations’ board of directors that the exchange ratio under the arrangement is fair, from a financial point of view, to the Seven Generations shareholders and is subject to the assumptions made, as well as the limitations and qualifications included in the written opinion of CIBC. Stikeman Elliott LLP is acting as Seven Generations’ legal advisors for the transaction.

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