Vermilion Energy Buying Leucrotta Exploration for $477 million


Leucrotta Exploration Inc. has entered into an arrangement agreement pursuant to which Vermilion Energy Inc. will acquire all of the issued and outstanding securities of Leucrotta for an aggregate consideration of approximately $500-million, excluding value assigned to the newly formed Montney company (ExploreCo).


The transaction will be accomplished by way of a statutory plan of arrangement under the Business Corporations Act (Alberta). Under the terms of the arrangement, the holders of Leucrotta shares will receive $1.73 in cash per Leucrotta share held, plus 1.0 common share of ExploreCo and 0.1917 of one ExploreCo common share purchase warrant. Each ExploreCo arrangement warrant will entitle the holder to acquire one ExploreCo share at an exercise price of 27 cents per share at any time on or before 30 days following the closing of the arrangement. If all ExploreCo arrangement warrants are exercised by the holders, proceeds to ExploreCo will be approximately $15-million.


In conjunction with the Arrangement, Vermilion has agreed to purchase approximately 53.3 million ExploreCo shares at a price of 27 cents per share for total proceeds of approximately $14.4-million, and ExploreCo has agreed to conduct a non-brokered private placement to certain current officers, employees, directors and shareholders of Leucrotta whereby ExploreCo will offer to such subscribers up to approximately 27.8 million units of ExploreCo at a price of 27 cents per ExploreCo unit, for total gross proceeds of up to approximately $7.5-million. Additional details regarding the ExploreCo private placements are provided under the heading "Financings" below.


The closing of the arrangement is subject to the company satisfying certain customary conditions, including, but not limited to: (i) the receipt by Vermilion and Leucrotta of all court, TSX Venture Exchange and other regulatory approvals, (ii) receipt of the requisite securityholder approvals of Leucrotta regarding the arrangement and related matters, (iii) no material adverse change having occurred in respect of Leucrotta, and (iv) a number of other conditions customary in a transaction of the nature of the arrangement.


It is anticipated that a management information circular and proxy statement detailing the arrangement and the ExploreCo private placements, and containing a copy of the written fairness opinion will be mailed to Leucrotta's shareholders in late April or early May of 2022 with a shareholder meeting to be scheduled for late May of 2022. The arrangement is expected to close shortly after the meeting of the securityholders of the company, but in any event no later than July 31, 2022, which is the outside date under the agreement to complete the arrangement.


The agreement provides that Leucrotta will pay Vermilion a non-completion fee of $20-million under certain circumstances. The agreement also provides for customary non-solicitation covenants in favour of Vermilion and customary acquisition proposal provisions and a right to match granted to Vermilion should such acquisition proposal is determined by the board of directors of the company to be a superior proposal to the arrangement.


Strategic rationale for transaction


Leucrotta has accumulated over 270 net sections of Montney lands containing a resource of over 17.8 billion barrels original oil in place and 17.2 trillion cubic feet of original gas in place. While it has recently formulated a plan to start to surface value through the development of the Mica and Alberta projects, there are many tracts of land that would not see any capital for many years.


The company believes Vermilion is well capitalized and suited to surface value sooner on the Mica and Alberta projects than Leucrotta will, and that Vermilion has shared some of that upside in its offer to the mutual benefit of both parties. The arrangement will also permit the ExploreCo lands to be capitalized faster than previously planned, benefiting Leucrotta's shareholders as a result of the lands' accelerated development.


The company believes that Leucrotta shareholders should also benefit from Vermilion's equity participation in ExploreCo (see "Vermilion financing" heading below) through collaborative sharing of information and potential access to future capital.


ExploreCo


ExploreCo is anticipated to be a new junior energy company led by Robert Zakresky as president and chief executive officer and certain members of Leucrotta's current management team. ExploreCo will be a growth-oriented entity with assets focused in the highly prolific Montney resource trend in the Two Rivers area of northeast British Columbia.

Assuming ExploreCo receives the maximum proceeds from all financings described under the "Financings" heading, ExploreCo will have the following characteristics:


  • Approximately $80-million cash (no debt);

  • About 140 net sections of Montney land;

  • Approximately 400 barrels of oil equivalent per day of production;

  • 426 million ExploreCo shares outstanding.


Summary


Leucrotta's board and management view the arrangement as an advantageous transaction for Leucrotta shareholders. As a result of the arrangement, existing Leucrotta shareholders will benefit from realizing on a portion of their investment while still retaining ownership in ExploreCo, which will own certain Montney assets that Leucrotta's management believe to contain significant value and growth potential that can now be accelerated.

Consideration Received by Leucrotta shareholders:


Cash: $1.73/share

One ExploreCo share: 27 cents/share (1)

Total value (not including ExploreCo arrangement warrants): $2/share


(1) Based on cash value, independent reserve value and estimated land value net of total asset retirement obligations (ARO).


Financings


ExploreCo will raise additional capital of up to approximately $36.9-million through the following financings, as outlined in the arrangement.


Exercise of ExploreCo arrangement warrants


As part of the consideration to be received by holders of Leucrotta shares pursuant to the arrangement, ExploreCo has agreed to issue a total of approximately 55.6 million ExploreCo arrangement warrants, each entitling the holder to purchase one ExploreCo share at a price of 27 cents, at any time on or before the date that is 30 days following the closing of the arrangement. If all of the arrangement warrants are duly exercised, ExploreCo would receive gross exercise proceeds of approximately $15-million.


Vermilion financing


Pursuant to and concurrent with the closing of the arrangement, Vermilion has agreed to purchase approximately 53.3 million ExploreCo shares at a price of 27 cents per share for total gross proceeds of approximately $14.4-million pursuant to the Vermilion financing.


ExploreCo unit financing


The ExploreCo unit financing consists of a non-brokered private placement of up to approximately 27.8 million ExploreCo units, at a price of 27 cents per ExploreCo unit, to certain current officers, employees, directors and shareholders of Leucrotta for total gross proceeds of up to approximately $7.5-million. Each ExploreCo unit shall comprise one ExploreCo share and one ExploreCo share purchase warrant, with each warrant to be exercisable to purchase one ExploreCo share at a price of 27 cents until the date that is five years from the date of issuance. The ExploreCo unit financing is expected to close within 30 days following the completion of the arrangement, subject to the receipt of any required shareholder, regulatory or stock exchange approvals, as applicable.


Board of directors recommendation and financial advisers


The board has unanimously determined that the arrangement is in the best interests of Leucrotta and the arrangement is fair to shareholders, has approved the agreement and the transactions contemplated thereby, and unanimously resolved to recommend that the Leucrotta shareholders vote in favour of the arrangement and the financings.


The agreement has the support of all of Leucrotta's management and directors. Directors, officers and entities exercising control or direction over approximately 41 per cent of Leucrotta's fully diluted shares (calculated based on the full exercise of currently issued and outstanding Leucrotta share purchase warrants as of the date hereof) have entered into support agreements in favour of the arrangement.


RBC Capital Markets has provided an opinion to the board of directors of Leucrotta that, as of the date thereof and subject to the assumptions, limitations and qualifications set forth therein, the consideration to be received under the arrangement is fair from a financial point of view to the Leucrotta shareholders.


Advisers


RBC Capital Markets acted financial adviser to Leucrotta and Desjardins Securities Inc. acted as strategic adviser to Leucrotta. Haywood Securities Inc. acted as strategic adviser to ExploreCo. Gowling WLG (Canada) LLP acted as legal counsel to Leucrotta and ExploreCo with respect to the arrangement.