Journey Energy Inc. Announces Repurchase of 24.8% of its Outstanding Common Shares, Purchase of Duvernay Lands and Updates 2018 Guidance

January 22, 2018

CALGARY, Jan. 22, 2018 /CNW/ - Journey Energy Inc. (JOY – TSX) ("Journey" or the "Company") announces that it will purchase 12.7 million of its outstanding shares from its largest shareholder, MIE Maple Investments Limited ("MIE") for cancellation. Journey is also providing an update on 2018 activities, including new guidance, and announcing the accumulation of a material land position in an emerging Duvernay resource play.

12.7 Million Share Repurchase for Cancellation

After a review of its corporate obligations, MIE has decided to reduce its investment in Journey, providing the Company with a unique opportunity to purchase 12.7 million of its shares for cancellation (the "Share Repurchase"). The purchase price will be $1.68 per share, for an aggregate cost of $21.3 million.  The price per share represents a 5% discount to the 20 day volume weighted average price of Journey's shares immediately preceding today's date.  After closing of the Share Repurchase, which is currently anticipated to be on February 2, MIE will continue to hold 3.7 million of Journey's 38.5 million pro-forma shares outstanding.  Concurrently with the Share Repurchase, MIE will reduce its Board representation from two members to one.  Mr. Andrew Harper will resign from the Board, while Mr. Ruilin Zhang will continue as a Board member. Journey would like to thank Mr. Harper for his support over the past year and wish him well in his future endeavors.

The Board of Directors of Journey has unanimously approved the Share Repurchase and related financing from Alberta Investment Management Corporation ("AIMCo"), on behalf of certain of its clients, which is discussed in more detail below (the "AIMCo Financing").  As the Share Repurchase will result in MIE, an insider of Journey, receiving aggregate consideration that is greater than 10% of the market capitalization of the Company, the Toronto Stock Exchange (the "TSX") rules require that Journey obtain approval from more than 50% of the disinterested shareholders to proceed with the Share Repurchase.  The approval from disinterested shareholders will be obtained by written consent pursuant to the exemption under Rule 604 of the TSX, which will allow the Share Repurchase and AIMCo Financing to proceed without the need for a shareholder meeting and further facilitate a timely closing of the transactions.  The two major shareholders, whose votes are not counted because they are not considered as disinterested shareholders for the purposes of such approval, are MIE and AIMCo, who collectively own approximately 41.5% of the outstanding stock prior to the Share Repurchase.

The Share Repurchase is not considered an issuer bid under National Instrument 62-104 ("NI 62-104") as the Company is repurchasing shares from a shareholder that is not resident in a local jurisdiction of Canada.  Additionally, neither the Share Repurchase nor the AIMCo Financing are "related party transactions" under Multilateral Instrument 61-101 ("MI 61-101").  As such, neither a formal valuation nor a shareholder meeting is required under MI 61-101.  Although NI 62-104 and MI 61-101 are not applicable in regards to the Share Repurchase and the AIMCo Financing, as noted above, the Company will obtain disinterested shareholder approval in accordance with the rules of the TSX and, in fairness to its disinterested shareholders, is conducting the Share Repurchase at a discount to the trading price of its shares on the TSX.  Concurrently with the closing of the Share Repurchase, the TSX will require the Company to terminate its normal course issuer bid, which is currently set to expire on June 18, 2018.

After the closing of the Share Repurchase, Journey will have approximately 38.5 million common shares outstanding and no individual shareholder will control more than 15% of Journey's outstanding common shares.

Share Repurchase Rationale

Since Journey's initial public offering in June of 2014, the Company has been responding to the rapidly changing environment for oil and gas pricing in the Western Canadian Sedimentary basin.  Although the Company has had considerable success in rationalizing non-core properties; reducing our cost structure; and realigning our shareholder base, the market for junior oil and gas companies like ours remains challenged.  Journey's management and Directors feel that Journey's current share price fails to represent the replacement value of our producing assets and our opportunity inventory.  Journey president Alex Verge remarks, "There are many different ways to create shareholder value. The repurchase of shares from MIE at levels below their proved, producing, net asset value represents a unique, one-time opportunity to realize meaningful value for the shareholders."  The Share Repurchase is significantly accretive to both net asset value and funds flow per share, but will temporarily increase leverage requiring some minor adjustments to Journey's near term business plan.  Over the longer term the reduced share count will allow the Company to achieve higher levels of per share growth, resulting in incremental value accruing to the holders of existing shares.

Financing

The aggregate purchase price of $21.3 million for the Share Repurchase will be financed with a concurrent financing from AIMCo for term debt of $22.0 million.

AIMCo's investment into Journey will be made through the completion of a private placement of 22,000 units (the "Units") at a price of $1,000 per Unit for aggregate proceeds of $22 million.  Each Unit is comprised of: (i) one promissory note (a "Note") with a par value of $1,000 per Note which will bear interest at 7.65% per annum, payable semi-annually; and (ii) 105 common share purchase warrants (the "Warrants"). 

The Notes mature on September 30, 2022 and all or a portion of the principal amount outstanding thereunder can be repaid without penalty after two years. Journey will issue 2,310,000 Warrants in connection with the private placement, with each Warrant entitling the holder to purchase one common share of Journey at an exercise price reflecting a 35% premium to the ten-day weighted average trading price of the common shares of the Company leading up to and including the closing day of the private placement.  In addition, if the volume weighted average price of the common shares of the Company is greater than the exercise price for 60 consecutive calendar days, Journey has the option of requiring AIMCo to exercise all or any portion of the warrants at any time thereafter.  The 60 consecutive calendar days will exclude any and all calendar days during which a change of control transaction has been publicly announced, proposed or made and remains outstanding.  The warrants will be exercisable for 28 months after closing of the financing.

Immediately following the completion of the AIMCo Financing and the Share Repurchase, AIMCo will hold 4,950,000 common shares of Journey, representing approximately 12.8% of the pro-forma issued and outstanding common shares, on a non-diluted basis.  Assuming the conversion of all of the 2,310,000 Warrants, AIMCo would hold 7,260,000 common shares of Journey, representing approximately 17.7% of the post-Warrant conversion, pro-forma issued and outstanding common shares of the Company.

Chief Financial Officer of Journey, Gerry Gilewicz says, "We are extremely happy that AIMCo has chosen to make this additional investment in us. This second investment into Journey in less than 18 months signals to us a strong endorsement of Journey's ability to create shareholder value while effectively managing the additional leverage."

2018 Guidance

The Share Repurchase will result in changes to Journey's 2018 guidance.  Over the near term, Journey plans to underspend funds flow in order to reduce leverage to levels consistent with our peer average.  The current plan for 2018 is as follows:

a)      Asset rationalization

Journey plans a program of minor asset sales to assist in reducing total debt in the near term. Currently Journey has letters of intent in place to sell approximately 200 boe/d (59% gas, 37% NGL's, 4% oil) of production to multiple parties for realized proceeds of approximately $4 million.  Journey anticipates closing these transactions in the first quarter of 2018. Journey is continuing to pursue additional non-core asset sales and will provide further updates in the near term.

b)      Comprehensive hedging program

Given the increased leverage associated with the share repurchase, securing forecasted funds flow levels by fixing pricing levels for its commodities is a key piece of managing Journey's 2018 business. Journey has entered into new hedges to accommodate the execution of our 2018 plan and provide a high degree of certainty that our company will have sufficient funding to reduce pro forma leverage.  A summary of the outstanding hedges is as follows:

Oil Hedges


Period

Bbls/d

Average Floor Price

CDN $ per bbl

Q1 2018

3,500

$68.64

Q2 2018

3,000

$71.50

Q3 2018

3,000

$71.50

Q4 2018

3,000

$70.75

Q1 2019

1,500

$72.00

Q2 2019

1,000

$71.50

 

Natural Gas Hedges


Period

Mcf/d

Average Floor Price

CDN $ per MCF

Q1 2018

12,796

$3.07

Q2 2018

3,318

$2.62

Q3 2018

3,318

$2.61

Q4 2018

3,318

$2.77

 

For 2018 Journey has approximately 62% of its currently forecast liquid (oil and NGL's) volumes hedged while 17% of its natural gas volumes are hedged.

c)      Reduction to capital spending

To accommodate the capital spent on the Share Repurchase, Journey will be adjusting its 2018 capital spending from a $40 million program (previous guidance) to a $27 million program, net of currently planned divestments.  This reduced program incorporates the drilling of 9 (9.0 net) wells from the previous 14 (13.9 net) wells.

The revised 2018 guidance is as follows:





Revised

Previous

Annual average production

10,100-10,500boe/d
(47% liquids)

10,500–10,900boe/d
(47% liquids)

Exploration and development capital

$31 million

$40 million

Wells drilled

9 (9.0 net)

14 (13.9 net)

Net disposition capital

$4 million

-

Funds flow

$36 - $40 million

$45-50 million

Commodity prices:

$60.00

$54.00


WTI (USD/bbl)


AECO (CDN/mcf)

$1.55

$2.25


F/X (US$/CDN$)

$0.80

$0.78

Year-end net debt

$110 - $114 million

$92-98 million

Funds flow (per basic share)

$0.93 – $1.04

$0.88 - $0.98

Corporate annual decline rate

16%

16%

 

Although Journey has increased its 2018 oil price forecast, this has been more than offset by minor increases in foreign exchange, a minor increase in forecasted oil differentials, and a significant reduction in the forecasted pricing for natural gas.  These prices reflect current strip prices which are extremely volatile.  This forecast does not include any additional acquisition and divestment activity, other than that contained within this release, and the 2018 plan assumes no new equity issuances.  Journey will continue to pursue any and all means of reducing total leverage and expanding our business plan should market conditions improve.

Duvernay Land Acquisition

Journey is also pleased to announce that it has, through a series of transactions over the past year, assembled a significant land position in the emerging Duvernay resource play in the heart of our existing Gilby core area in West Central Alberta.  Journey has entered into definitive agreements which will result in Journey having control over approximately 102 sections of 100% owned Duvernay P&NG rights.  It is Journey's belief that these lands are prospective for the emerging Duvernay oil resource play, which is supported by existing well data, recent discoveries, and source rock analysis.  The lands are located within the area serviced by the 75 mmcf/d and currently under-utilized Tidewater 1-4-42-3-W5 processing facility (Journey 43.75% ownership) and an extensive network of Journey-owned and operated pipelines and field compression (Journey 50-100%% ownership).  This contiguous land base is a combination of Crown and Freehold with favorable royalties that sets up for development utilizing two mile lateral horizontal wells.  Industry is actively licensing wells along this Duvernay fairway trend proximal to Journey's significant land position.

The cost of acquiring these lands is included in the above capital spending guidance.  No additional capital spending on these lands has been included as part of Journey's revised guidance for 2018.  Journey is now in the process of developing a comprehensive plan to assess the potential of this resource.  Journey management feels that the opportunity this represents for shareholders makes Journey's value proposition even more compelling and looks forward to updating shareholders on the progress of its development in future press releases.

ABOUT AIMCo

AIMCo is one of Canada's largest and most diversified institutional investment managers with more than $100 billion of assets under management. AIMCo was established on January 1, 2008 with a mandate to provide superior long-term investment results for its clients.  AIMCo operates at arms-length from the Government of Alberta and invests globally on behalf of 32 pension, endowment and government funds in the Province of Alberta. For more information on AIMCo please visit www.AIMCo.alberta.ca.

ABOUT THE COMPANY

Journey is a Canadian exploration and production company focused on conventional, oil-weighted operations in western Canada.  Journey's strategy is to provide investors with growth plus a sustainable yield by focusing on drilling its existing core lands, implementing water flood projects, executing on accretive acquisitions and growing its production base. Journey seeks to optimize its legacy oil pools through the application of best practices in horizontal drilling and, where feasible, with water floods.

ADVISORIES

Information in this press release that is not current or historical factual information may constitute forward-looking information within the meaning of securities laws, which involves substantial known and unknown risks and uncertainties, most of which are beyond the control of Journey, including, without limitation, those listed under "Risk Factors" and "Forward Looking Statements" in the Annual Information Form filed on www.SEDAR.com on March 26, 2017. Forward-looking information may relate to our future outlook and anticipated events or results and may include statements regarding the business strategy and plans and objectives. Particularly, forward-looking information in this press release includes, but is not limited to, information concerning the completion of the Share Repurchase and the AIMCo Financing, Journey's drilling and other operational plans, production rates and long-term objectives. Journey cautions investors in Journey's securities about important factors that could cause Journey's actual results to differ materially from those projected in any forward-looking statements included in this press release. Information in this press release about Journey's prospective funds flows and financial position is based on assumptions about future events, including economic conditions and courses of action, based on management's assessment of the relevant information currently available. Readers are cautioned that information regarding Journey's financial outlook should not be used for purposes other than those disclosed herein. Forward-looking information contained in this press release is based on our current estimates, expectations and projections, which we believe are reasonable as of the current date.  No assurance can be given that the expectations set out herein will prove to be correct and accordingly, you should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While we may elect to, we are under no obligation and do not undertake to update this information at any particular time except as required by applicable securities law.

Readers are cautioned that the above list of risks and factors are not intended to be exhaustive. Additional information on these and other factors that could affect our operating and financial results are, or will be, included in reports filed with the applicable securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com).

Non-IFRS Measures

The Company uses the following non-IFRS measures in evaluating corporate performance. These terms do not have a standardized meaning prescribed by International Financial Reporting Standards and therefore may not be comparable with the calculation of similar measures by other companies.

(1)

The Company considers funds flow from operations (also referred to as "funds flow") a key performance measure as it demonstrates the Company's ability to generate funds necessary to repay debt and to fund future growth through capital investment. Funds flow from operations is calculated as funds from operating activities before changes in non-funds working capital, transaction costs and decommissioning costs incurred. Funds flow from operations per share is calculated as funds flow from operations divided by the weighted-average number of shares outstanding in the period. Journey's determination of funds flow from operations may not be comparable to that reported by other companies. Journey also presents funds flow from operations per share whereby per share amounts are calculated using weighted average shares outstanding consistent with the calculation of net earnings per share, which per share amount is calculated under IFRS and is more fully described in the notes to the financial statements.

(2)

Net debt is a non-IFRS measure and represents current assets less current liabilities and bank debt (but excludes the future liability (or asset) related to the mark-to-market measurement of derivative contracts as well as decommissioning liabilities).

(3)

Operating netback is a non-IFRS measure and equals total revenue less royalties, transportation and field operating costs calculated on a per boe basis. Funds flow netback equals the operating netback less funds finance costs, general and administrative costs, realized gains and losses on derivative contracts, plus any interest income.

 

Barrel of Oil Equivalents

Where amounts are expressed in a barrel of oil equivalent ("boe"), or barrel of oil equivalent per day ("boe/d"), natural gas volumes have been converted to barrels of oil equivalent at six (6) thousand cubic feet ("Mcf") to one (1) barrel. Use of the term boe may be misleading particularly if used in isolation. The boe conversion ratio of 6 Mcf to 1 barrel ("Bbl") of oil or natural gas liquids is based on an energy equivalency conversion methodology primarily applicable at the burner tip, and does not represent a value equivalency at the wellhead. This conversion conforms to the Canadian Securities Regulators' National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities.

Oil and Gas Measures and Metrics

The Company uses the following metrics in assessing its performance and comparing itself to other companies in the oil and gas industry. These terms do not have a standardized meaning and therefore may not be comparable with the calculation of similar measures by other companies:

1)

Corporate Decline is the rate at which production from a grouping of assets falls from the beginning of a fiscal year to the end of that year.

2)

IP 365 is the average daily production rate of a well expressed in boe's.

 

Abbreviations

bbl

barrel

bbls

barrels

boe

Barrel of oil equivalent

boe/d

Barrel of oil equivalent per day

mbbls

Thousand barrels

mmbtu

Million British thermal units

mcf

thousand cubic feet

mmcf

Million cubic feet

mmcf/d

Million cubic feet per day

mboe

Thousand boe

NGLs

Natural gas liquids

$M

Thousands of dollars

 

No securities regulatory authority has either approved or disapproved of the contents of this press release.

SOURCE Journey Energy Inc.

Alex G. Verge, President and Chief Executive Officer, 403.303.3232, alex.verge@journeyenergy.ca; Gerry Gilewicz, Chief Financial Officer, 403.303.3238, gerry.gilewicz@journeyenergy.ca