Mikaila Adams
OGFJ Associate Editor
Privately-held Torch Energy Advisors Inc., through Resaca Exploitation LP, is set to merge Cano Petroleum Inc. into its oil and gas company through a tax-free, stock-for-stock transaction.
Cano shareholders will receive 2.1 shares of Resaca common stock for every share of Cano common stock and will own approximately 50% of the combined company. Based on the closing price of Resaca common stock on 28 September 2009, the transaction implies total consideration to Cano shareholders of $76.0 million or $1.67 per Cano share and $3.34 per proved barrel of oil equivalent.
Resaca Exploitation was formed in 2006 by Torch Energy Advisors to acquire, develop and explore high quality, long lived oil and gas assets in the Permian Basin of the US. With properties located in the Texas panhandle, Central Texas, Southeastern New Mexico, and Oklahoma, Cano Petroleum's assets fit nicely into that plan.
Combined assets
The newly combined company will have an estimated 63.2 million barrels oil equivalent (MMboe) of proved reserves (81% oil) with a PV10 value of nearly $652.9 million based on July 1, 2009 crude oil and natural gas prices. The combined company will have another 28.5 MMboe of probable reserves attributable to waterflood and tertiary (CO2) recovery with a PV10 value of approximately $375.1 million based on the same day's prices for total 2P reserves of 91.7 MMboe (PV10 of $1 billion).
Resaca's probable reserves are based on third party engineering estimates and Cano's probable reserves are based on internal estimates. The net production for the combined company is estimated at 1,960 net barrels of oil equivalent per day at July 1, 2009.
The exchange ratio represents a near 32% premium over the 30-day volume weighted average price of Cano shares for the period ending September 28, 2009, relative to the 30-day volume weighted average price of Resaca shares during the same time period.
The combined company, to retain the Resaca name, will be headquartered in Houston, and will be led by current Resaca chairman and Torch Energy Advisors CEO, J.P. Bryan, who will become CEO.
John J. Lendrum, III, currently Resaca’s CEO, will become Resaca’s vice chairman. Dennis Hammond, currently Resaca's president and COO, will remain president. Chris Work, currently Resaca's CFO, will remain CFO. Pat McKinney, currently Cano’s SVP of engineering and operations, will become Resaca’s EVP of engineering and operations. Mike Ricketts, currently Cano’s VP and principal accounting officer, will become Resaca’s VP and chief accounting officer. Phillip Feiner, currently Cano’s VP and general counsel, will become Resaca’s VP and General Counsel. The combined company's board will consist of four directors from Resaca and three from Cano.
Both parties anticipate expanded institutional investor interest and capital market assess once the companies are merged and dually-listed on NYSE Amex and the AIM.
Cost saving are being estimated near $4.5-$5.0 million per year.
Bryan sees the transaction as "a case of one plus one equals so much more than two going forward."
He pointed out the companies' common growth strategy of acquiring and exploiting mature properties and implementing secondary and tertiary recovery techniques.
"The combined assets are most complementary geographically and combine the near-term production upside from Resaca's recompletion portfolio with long-term upside from Cano's proved undeveloped waterflood reserves. The fields we both possess are prime candidates for CO2 tertiary recovery," he said.
The future CEO sees CO2 tertiary recovery as "the next great global initiative for recovering substantial quantities of oil from mature fields" and says the new Resaca will strive to be a leader in that effort.
Development plan
The companies have already devised an anticipated development plan in some of their key properties including 2,560 gross acres in the Cooper Jal Unit; 1,200 gross acres in the Jordan San Andres Unit; 15,000 gross acres in the Cato Field; and 22,000 gross acres in the Panhandle Field.
The company will focus on near-term recompletions and infills at Cooper Jal and intends to increase production from 285 boe/d in September to over 500 boe/d in June 2010. In Cato Field, the company will work to expand the waterflood footprint, increasing it from 650 acres to 1,000 acres by adding 2-3 injectors while increasing injection to 21,000 BWIPD. The company is also hoping to increase waterflood production from 320 boe/d in September to 13 over 400 boe/d in June 2010.
As far as liquidity is concerned, discussions about replacing existing first and second lien facilities are currently taking place with lenders. The new company is anticipating an equity raise in the near term with a focus on the US, the UK, Canada and Switzerland.
Jeff Johnson, Cano's founder, chairman and CEO, noted the merger would provide a "solid foundation" to grow the business. "Resaca's near-term production growth potential and synergies will add the cash flows needed for all shareholders to realize the long-term upside of both companies' assets," he said.
Houston-based Torch Energy Advisors Inc. was founded in 1981. The company launched its business originating and managing investments in energy assets for institutional investors. During its 28-year history, TEAI has invested and managed over $3 billion in energy assets.
Resaca is being advised by SMH Capital Inc. and its legal counsel is Haynes and Boone, LLP. Cano is being advised by RBC Capital Markets Corp. and its legal counsel is Thompson & Knight LLP.