CSP is estimated to have Arctic Island marketable natural gas interests of approximately 927 billion cubic feet equivalent (bcfe), net to CSP, based on available information and CSP's internal estimates. CSP also holds conventional natural gas reserves in southern Yukon and northern British Columbia, currently producing 6 million cubic feet per day, which Canadian Oil Sands intends to sell. The value of these conventional gas reserves, together with CSP's approximately $20 million of working capital, represent roughtly one-half of the company's value, resulting in a net cost for the acquisition of the Arctic gas resource of about $0.10 per thousand cubic feet.
Under its agreement with CSP, Canadian Oil Sands is entitled to receive a break fee of approximately 4 percent of the value of the transaction in certain circumstances, including if CSP enters into an agreement with another party for a takeover of CSP or if the CSP board of directors recommends that its shareholders deposit their shares in favour of another takeover proposal.
This strategic acquisition provides Canadian Oil Sands with a unique opportunity to secure a large, long-life natural gas resource to reduce the risk of significant future natural gas price increase impacts on its Syncrude oil sands production. On a macro-basis, CSP's best estimate of 927 bcfe of natural gas represents the Trust's expected natural gas requirements to produce its share of light, sweet crude oil at post-Stage 3 productive capacity rates for approximately 25 years, thereby providing a long-term hedge against any significant increases in natural gas prices in the long-term.
"For about the equivalent of one month's funds from operations, we are acquiring a frontier gas resource that we believe is equivalent to about 25 years of our natural gas consumption at Syncrude," said Canadian Oil Sands President and CEO, Marcel Coutu. "While creating a hedge against rising natural gas prices, this acquisition also provides us with the opportunity to participate in the development of another long-life energy resource in the future."
Mr. Coutu adds: "CSP's Arctic interests are comprised mostly of carried interests that can be maintained and developed without having to provide any significant capital. The carried interests may also be converted at CSP's option into direct working interests at any time and without penalty upon payment of the cumulative carry amount."
Canadian Oil Sands presently intends to finance the acquisition entirely with bank debt and funds from operations. The acquisition will not impact current distribution levels nor the Trust's plans to continue to follow its distribution strategy with the expectation that this transaction will have only a modest impact on the Trust's debt target time horizon. The Trust has indicated it plans to reduce its net debt to about $1.2 billion before considering further increases to its distributions.
The agreement with CSP provides that CSP must give Canadian Oil Sands 72 hours prior notice of any superior takeover proposal with another party that CSP wishes to accept before entering into any binding agreement with that party. Canadian Oil Sands has the right to match any superior takeover proposal in which event CSP may not accept the proposal from the other party. If Canadian Oil Sands does not match the other proposal, CSP must deposit the break fee with Canadian Oil Sands' counsel before entering into a binding agreement with the other party.
RBC Capital Markets acted as financial advisors to Canadian Oil Sands in this transaction.
Canadian Oil Sands Trust is an open-ended investment trust that generates income from its indirect 35.49-percent working interest in the Syncrude Joint Venture. The trust has approximately 466 million units outstanding, which trade on the Toronto Stock Exchange under the symbol COS.UN. The Trust is managed by Canadian Oil Sands Limited.
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