Southern Pacific to Purchase North Peace Assets

Southern Pacific and North Peace have entered into an agreement whereby Southern Pacific will acquire all of the issued and outstanding shares of North Peace (the "Transaction"). The Transaction is expected to be completed by way of Plan of Arrangement (the "Arrangement") and has been unanimously approved and recommended by the Board of Directors of both Southern Pacific and North Peace. The Transaction is anticipated to close in late November 2010.

Acquisition Highlights

To finance the acquisition, Southern Pacific expects to issue approximately 14.1 million shares to the North Peace shareholders, which represents approximately 4.4% of Southern Pacific's current basic shares outstanding.

The highlights of North Peace's assets include:

  • 135 sections of 100% working interest in the Peace River oil sands area.
  • 2.1 billion barrels of discovered resource based on 27 delineation wells and over 360 legacy well bores.
  • 105 million barrels of 'Best Estimate' contingent resource.
  • 1,000 barrel per day ("bbl/d") Red Earth CSS Pilot Project, constructed at a cost of $16 million in 2009 and operational.
  • Potential growth plans for at least a 10,000 bbl/d thermal project based on current contingent resources.

Byron Lutes, President and CEO of Southern Pacific, commented, "The North Peace acquisition provides the Company with another thermal project with the potential to become commercial in a relatively short period of time. North Peace's Red Earth Cyclic Steam Stimulation ("CSS") Pilot Project is constructed and operational. The project has produced high quality bitumen at acceptable steam-oil ratios. Our technical team has reviewed the property in detail and believes some alternate operating strategies with relatively low capital cost have the potential to improve well productivity and prove commerciality of the project."

North Peace engaged Sproule & Associates Limited ("Sproule") to prepare an evaluation of its bitumen resources at its Red Earth Project as of December 31, 2009. Sproule estimated the volume of discovered bitumen resource on the project as 2.1 billion barrels and the contingent 'best estimate' bitumen resource on the project as 105 million barrels.

"We believe we have the right thermal recovery expertise to unlock the value of this asset," Mr. Lutes said. "This acquisition provides Southern Pacific the opportunity to bring another project to cash flow."

Southern Pacific plans to invest approximately $2.5 million into the Red Earth project over the next nine months to demonstrate commerciality of the Red Earth CSS Pilot Project. Upon success, Southern Pacific has plans within Phase 1 of development to use the existing facilities and fill the plant on a stabilized basis to its licensed capacity of 1,000 bbl/d of production. Phase 2, the larger potential prize, is located about 1.5 miles southeast of the existing pilot project. This is where Southern Pacific believes there is enough bitumen resource already delineated with existing well control to support at least a 10,000 bbl/d commercial facility.

Mr. Lutes further commented. "Over the next year, we will remain focused on the construction of our 12,000 bbl/d design capacity STP-McKay Thermal Project, its future expansion plans and, of course, our operating STP-Senlac Thermal Project. However, the Red Earth project can also be developed concurrently over the next nine months without significant adjustments to our existing budget plans."

Louis Dufresne, President of North Peace, commented, "Over the last five years North Peace has taken the Red Earth asset from land acquisition to the verge of commerciality. Our technical staff has significantly de-risked this asset with their geological and delineation work; a CSS pilot facility was built and operated for two years. This transaction will provide a strong base to take this asset to the next stage of development. In addition, our shareholders will not only participate in the upside at Red Earth but in the upside within Southern Pacific, a company with long-term stable production from their Senlac asset and a high quality thermal asset at McKay, which is expected to be producing bitumen in 2012."

Under the terms of the Arrangement, North Peace shareholders will receive 0.185 of a Southern Pacific common share for each one (1) North Peace common share. This exchange ratio represents a premium of 35% based on the 10 day volume weighted average trading price of Southern Pacific shares for the period ended September 24, 2010 and a price of $0.21 for North Peace shares.

CIBC World Markets Inc. acted as exclusive financial advisor to North Peace in respect of the Transaction and has provided an opinion to the Board of Directors of North Peace to the effect that, as of the date thereof and subject to the assumptions, limitations and qualifications contained therein, the consideration to be received by North Peace shareholders pursuant to the Transaction is fair, from a financial point of view, to North Peace shareholders.

The Transaction will require the approval of 66 2/3% of the votes cast by North Peace shareholders at a special meeting of North Peace shareholders to be called to consider the Transaction. An Information Circular outlining the Transaction is expected to be mailed to North Peace shareholders in late October 2010, with the meeting anticipated to take place in late November 2010, and closing of the Transaction to follow shortly thereafter. The Transaction will also require Court of Queen's Bench of Alberta and other regulatory and stock exchange approvals and the satisfaction of a number of standard conditions. North Peace management, directors and shareholders holding approximately 8.3% of the shares of North Peace have entered into lockup agreements pursuant to which they have agreed to vote in favor of the Transaction. North Peace has agreed that North Peace will not solicit or initiate discussions or negotiations with third parties for any business combination involving North Peace, that Southern Pacific has the right to match any superior proposal, and under defined circumstances has agreed to pay Southern Pacific a non-completion fee. Southern Pacific has also agreed to pay North Peace a break fee in certain circumstances.

Upon completion of the Transaction, existing North Peace warrants expiring December 23, 2010 will entitle the holder to acquire Southern Pacific shares adjusted for the exchange ratio resulting in an exercise price of $4.05 per Southern Pacific share. The expiration date of the purchase warrants will remain December 23, 2010. It is a condition to the completion of the Transaction that all outstanding North Peace options and performance warrants entitling the holder to acquire North Peace common shares shall have been exercised, canceled or otherwise terminated prior to or at closing.


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