NAL Oil & Gas Trust has entered into an arrangement agreement with two private oil and gas companies, Tiberius Exploration Inc. and Spear Exploration Inc. pursuant to which NAL will acquire all of the issued and outstanding common shares of the Private Companies by way of a plan of arrangement under the Business Corporations Act (Alberta) for total consideration of approximately $115 million, subject to adjustment, consisting of approximately 2.35 million Trust Units of the Trust and approximately $86.25 million in cash.
The Trust has entered into a further agreement with its strategic partner, The Manufacturers Life Insurance Company ("MLI"), to contribute the assets of the Private Companies to a limited partnership owned as to a 50% interest by each of NAL and MLI immediately following the closing of the Arrangement. MLI will acquire its 50% interest in the limited partnership by payment of one-half of the purchase price for the Private Companies under the Proposed Transaction. Consequently, the total acquisition cost to NAL of its 50% interest in the acquired properties will be approximately $57.5 million, subject to adjustment, comprised of approximately $28.75 million in cash and approximately 2.35 million Trust Units.
In a separate transaction, NAL recently purchased certain assets in the Steelman/Elswick area from a third private company for $6.75 million in cash. NAL currently operates these properties.
The Private Companies own and operate 51/4 sections of land in Southeast Saskatchewan immediately adjacent to NAL's Alida properties. The Proposed Transaction will add 2.1 million barrels of proved plus probable oil equivalent ("boe") reserves in NAL's largest core area. The aggregate January production from the properties to be acquired from the Private Companies was 925 boe per day. The new properties will contribute primarily light oil production from the Tilston formation, along with associated natural gas and natural gas liquids. Royalties are expected to be less than 16 percent and operating costs are in the $7.50 per boe range, resulting in netbacks of over $60.00 per boe at current oil prices. The Steelman/Elswick assets will contribute approximately 75 boe per day of light oil production.
Based on NAL's commodity price and exchange rate assumptions, these acquisitions are anticipated to be accretive to funds flow from operations on a per unit basis in both 2008 and 2009, while the impact on NAL's debt to cash flow ratio is neutral. Going forward, NAL has identified opportunities for reserves additions through incremental drilling and increased recovery factors, as well as savings due to operating cost synergies and consolidation of production infrastructure.
The Boards of Directors of each of the Private Companies and NAL Energy Inc. ("NAL Energy") have unanimously approved the Proposed Transaction. The Boards of Directors of each of the Private Companies has concluded that the Proposed Transaction is fair to the shareholders of the Private Companies, is in the best interests of their respective shareholders, and have resolved to recommend that holders of the Private Companies' common shares vote their shares in favour of the Proposed Transaction. The directors and officers of the Private Companies have entered into support agreements to vote their securities in favour of the Arrangement. The Arrangement Agreement provides for non-completion fees to be payable by each of the Private Companies to NAL in certain circumstances if the Arrangement is not completed.
Closing of the Proposed Transaction is expected to occur on or before the end of February 2008 but no later than March 31, 2008, subject to the satisfaction of certain conditions including approval of the Private Companies' shareholders and the Court of Queen's Bench of Alberta.
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