Cequence Energy Inc. (TO: CQE) entered into definitive documentation with CPPIB Credit Investments Inc. (CII), a wholly owned subsidiary of Canada Pension Plan Investment Board, for an initial investment of $60 million in unsecured five-year notes.
There will be a further $60 million of notes available at a future date, subject to the approval of both CII and Cequence on terms to be confirmed at the time of issuance. In addition, Cequence has granted CII 3 million warrants to purchase common shares. The investment will allow Cequence to capitalize on its recent successes at Simonette and accelerate the development of this project. Cequence expects to close the transaction on Oct. 3.
"We are extremely pleased to have executed this investment transaction with CPPIB. The notes are expected to provide us with liquidity and financial flexibility which will allow us to prudently accelerate the development of our world class Simonette project in the Deep Basin. We are very pleased to have CPPIB as a strategic financial partner in assisting us to achieve this growth without unduly diluting shareholders, who will benefit from this accelerated development. We believe that the notes are an important and appropriate step in capitalizing Cequence as a larger, more self-sustaining exploration and development company," Paul Wanklyn, Cequence president and CEO, said in the release.
The notes carry a 9% coupon rate and were issued at par. The notes, which have make whole and other change of control provisions, have been issued pursuant to a trust indenture with a Canadian trust company, which will be available under the company's profile on SEDAR. The indenture contains certain covenants regarding the incurrence of additional debt, the creation of liens in connection with indebtedness, dividends and other distributions, asset sales and other matters, and customary events of default. The warrants will expire on Oct. 3, 2020 and were issued with an exercise price of $2.03 which was based at a 30% premium to the 30 trading day volume weighted average trading price of the Cequence common shares on the TSX ending on the day immediately preceding the closing date.
Proceeds will be used for non-permanent repayment of indebtedness, capital expenditures and general corporate purposes. The company's credit facility borrowing base has been re-determined and is now $120 million and will be undrawn after giving effect to the issuance of the notes. The majority of the company's capital expenditures are discretionary and can be adjusted upwards or downwards in light of prevailing market conditions.
Peters & Co. Ltd. was financial advisor. Cormark Securities Inc., GMP Securities LP, and CIBC World Markets were strategic advisors.
The financial flexibility afforded by the notes will allow Cequence to accelerate the development of the company's development of its Simonette project beginning in 4Q 2013. Capital expenditures are budgeted to increase by $13 million to $110 million for 2013 with an additional 3 (2.5 net) wells scheduled to be drilled prior to year end. Average 2013 production guidance for the year will not be affected as Cequence does not expect the additional wells to be producing before year end. The 2013 exit production rate is expected to increase to 12,000 barrels of oil equivalent per day (BOE/d). The company currently has two rigs operating at Simonette and one non-operated rig drilling at Ansell.
Capital expenditures for 2014 are budgeted to be $120 million which the company expects will increase average production to 13,500 to 14,000 BOE/d, representing 40% growth over guidance provided earlier in the year. The capital program will consist of 11 Montney wells at Simonette, 1 Wilrich well at Simonette and 4 (2 net) Wilrich wells at Ansell.
Cequence will remain disciplined in its approach to capital spending and intends to manage its balance sheet accordingly. To protect against fluctuating commodity prices Cequence anticipates increasing its existing hedge positions. Currently, Cequence has hedged 50% of its remaining 2013 natural gas production volumes at an average price of $3.63 per thousand cubic foot (Mcf) and 27% of its 2014 natural gas production volumes net of royalties at an average price of $4.06 per Mcf.
Cequence Energy Ltd. is an independent energy company engaged in the acquisition, exploration, development, and production of petroleum and natural gas reserves in Western Canada. The company is based in Calgary.