In Market


Elcano Exploration Inc.


PROPOSALS DUE: Phase 1 non-binding proposals due 5:00 PM (MDT), Friday, April 26, 2019






2019 Sale and Investment Solicitation Process

Elcano Exploration Inc. and its affiliates Elcano Exploration Ltd. and Elcano Energy Partnership (collectively, “Elcano” or the “Company”) have obtained an initial order under the Companies’ Creditors Arrangement Act (“CCAA”) from the Alberta Court of Queen’s Bench which has, among other things, approved a Sale and Investment Solicitation Process (“SISP”). Elcano has retained GMP Securities L.P. (“GMP FirstEnergy”) as its SISP Advisor. Elcano is a private exploration and production company focused on light oil in the Williston Basin, primarily in Manitoba. Elcano has organically assembled an operated, high working interest asset base with core properties consisting of North Hargrave, Two Creeks and Manson. All producing areas are connected to a common gathering system and battery. During February 2019, light oil sales from the Lodgepole, Amaranth and Bakken formations averaged 518 bbl/d with more than 340 bbl/d of additional production behind pipe associated with optimization projects identified by the Company. Furthermore, Elcano is in process of finalizing its Amaranth waterflood application and is expecting approval in Q3 2019.

Industry activity in southwest Manitoba has persisted in the current pricing environment due to strong realized prices for light crude oil, and a stable regulatory system with competitive drilling incentives and royalty structure. Since its inception in 2012, Elcano has discovered an estimated 40 MMbbl of OOIP through exploration drilling and utilization of its large database of proprietary and trade 3D and 2D seismic. The Company has developed several prolific Lodgepole and Amaranth light oil pools within its core area (North Hargrave and Two Creeks properties) with 100% ownership in its facilities including an extensive emulsion gathering system and a central battery that has established low operating costs and generates considerable third party processing and water disposal revenue.

KEY ATTRIBUTES OF THE COMPANY

  • Resource rich, high working interest (97%) and operated asset base focused in Manitoba and southeast Saskatchewan.
    • Highly prospective core area for Lodgepole, Amaranth and Bakken low risk development and exploration.
    • 216 km2 (75% proprietary) of 3D seismic and 385 km (97% trade data) of 2D seismic.
    • Significant OOIP estimated at 59.2 MMbbl (23.9 MMbbl net*) within the Lodgepole and Amaranth with low recoveries to date of less than 10%.
    • Lodgepole development has achieved one of the strongest initial production rates in Manitoba’s history.
  • Low cost, light oil focused production base with top tier netbacks.
    • Exposure to Cromer pricing with a 2018 realized price of $67.85/bbl.
    • 2018 NOI of $9.7 MM based on a top decile operating netback of $37.70/bbl and low operating costs of $11.94/bbl.
    • Trucking costs have been renegotiated and reduced 15% to $2.10/bbl for 2019.
  • 100% owned and operated facilities including an emulsion gathering system and central battery with water disposal.
    • Substantial handling capacity for up to 26,000 bbl/d of emulsion.
    • Expansion of emulsion handling capacity to 32,000 bbl/d is underway  and easily expandable to 42,000 bbl/d for an additional $0.6 MM of capital.
    • An additional expansion to over 30,000 bbl/d of emulsion with estimated incremental capital expenditures of $590 M.
    • Material third party income of approximately $377 M in 2018.

     


  • Highly economic asset base with significant free cash flow and a high return on investment in the current price environment.
    • Only $21.5 MM required in development capital to generate $101 MM in 2P undiscounted future cash flows ($68 MM NPV10) for a 4.2x PIR.
    • Due to high deliverability of the Lodgepole reservoir, several pump upgrades have been successfully completed with more scheduled in the current optimization program.
  • Manitoba’s strategic advantage can help develop and expand greater business success.
    • Inventory and Eastern egress by major pipeline and rail at Cromer provides access to higher crude oil prices.
    • Favorable regulatory regime with an absence of LLR and stringent reclamation process.
    • Attractive operating costs including stable and inexpensive supply of hydroelectricity.
  • Substantial asset value relative to liabilities and high value tax pools.
    • High internally estimated liability ratio in Manitoba of over 5.0 with minimal legacy assets or other liabilities.
    • Large tax pool including $38.4 MM of non-capital losses and $9.5 MM of estimated total liabilities as of February 26, 2019.
  • New venture exploration within prospective depositional environment under extensive 3D and 2D seismic coverage.
    • Strong oil shows on strike and down-dip of an identified structural ridge across Elcano’s South Manson lands.
    • Over 10 quarter sections of potential locations.
    • Substantial waterflood potential with numerous analogous pools in close proximity of Elcano assets.

*Gross lease OOIP where Sproule Proved plus Probable reserves have been assigned.

DESCRIPTION OF THE PROCESS

The SSIP is intended to solicit interest in, and opportunities for, a sale of all or part of the assets, property and undertakings of Elcano or for an investment in, restructuring, recapitalization, refinancing or other form of reorganization of all or part of Elcano or its business. A Confidentiality Agreement (“CA”) can be obtained by contacting GMP FirstEnergy directly or on GMP FirstEnergy’s website. Parties who execute a CA will have access to the confidential information available in the online data room. Proposals will be due on Friday, April 26, 2019 at 5:00 PM MDT.

Please direct all correspondence and inquiries to GMP FirstEnergy:

Mark Pearson, P.Eng.
Director, Acquisitions & Divestitures
1.403.262.0677
mcpearson@gmpfirstenergy.com
 
Scott Robertson
Director, Investment Banking
1.403.262.0606
rsrobertson@gmpfirstenergy.com
 
Omid Eslami, P.Eng. (CA Contact)
Associate, Acquisitions & Divestitures
1.403.262.0613
oeslami@gmpfirstenergy.com 
 
Kory Cross
Associate, Investment Banking
1.403.262.0634
krcross@gmpfirstenergy.com 
David Lin, P.Eng. (Data Room Contact)
Analyst, Acquisitions & Divestitures
1.403.262.0660
dlin@gmpfirstenergy.com
Patrick M. Gobran
Analyst, Investment Banking
1.403.262.0612
pmgobran@gmpfirstenergy.com