H1 2013 Canadian Public Oil and Gas M&A Review

2013 Canadian Public Oil and Gas M&A ReviewJanuary 1 - June 30

STIKEMAN ELLIOTT LLP

STIKEMAN ELLIOTT LLP

CONTENTS

TERMS OF REFERENCE ...............................2

H1 2013 TRENDS & KEY METRICS ............... 3

NOTABLE FEATURES ..................................... 4

OVERVIEW ................................................................................5

TRANSACTION PROCESS ........................................................7

VOTING/SUPPORT AGREEMENTS ..........................................8

TRANSACTION TIMING ...........................................................9

MEETING MECHANICS ..........................................................10

DIVIDENDS & DISTRIBUTIONS ...............................................11

MATERIAL ADVERSE EFFECT .................................................12

KNOWLEDGE .........................................................................13

INTERIM PERIOD COVENANTS .............................................14

CONDITIONS ..........................................................................15

COVENANTS ..........................................................................18

REPRESENTATIONS & WARRANTIES .....................................19

TOPPING OFFERS ..................................................................21

MATCHING PERIOD ...............................................................22

TERMINATION ........................................................................23

OTHER REMEDIES ..................................................................28

DEALS SURVEYED .....................................29

ABOUT STIKEMAN ELLIOTT ......................30

STIKEMAN ELLIOTT LLP: 2013 CANADIAN PUBLIC OIL AND GAS M&A REVIEW 2

TERMS OF REFERENCE

Stikeman Elliott prepared this study based on a review of public M&A transactions that were announced between January 1, 2013 and June 30, 2013. Only M&A transactions involving a target which was a “reporting issuer” in Canada and the primary assets of which were involved in upstream, midstream, downstream or oilfield service were included in the study. Reverse takeover transactions involving a going public process were not included in the survey. A total of nine transactions were surveyed (please see ‘Deals Surveyed’ on page 29 for a complete list). When we use the term “deal value” we refer to the total number of outstanding common shares of the target multiplied by the cash value of the buyer’s offer. These numbers have been rounded.

In compiling the study, Stikeman Elliott reviewed acquisition agreements, management proxy circulars, take-over bid circulars, press releases and related publicly available documents on DisclosureNet and the System for Electronic Document Analysis and Retrieval (SEDAR).

The agreements and other disclosure documents surveyed for the purpose of this study contain complex legal language and terms. Most terms and provisions are not identical. Accordingly, Stikeman Elliott has relied on its judgment and exercised its discretion in categorizing and summarizing the information comprising this study. Additionally, this study is based only on publicly available information; non-public information, such as that included in disclosure schedules or letters to the agreements surveyed, may be relevant to the analysis but is not reflected in the study.

This document is a general overview created for informational purposes only and does not constitute legal advice. If you or your business have questions about specific legal issues, legal counsel qualified in the appropriate jurisdiction(s) and familiar with your specific circumstances should always be consulted. The distribution of this document to any person does not create, continue or revive a lawyer-client relationship between Stikeman Elliott LLP and that person or any associated person or entity. We welcome your comments and suggestions.

Please forward any comments, suggestions or questions regarding this publication to: Andrew Wong at [email protected]


H1 2013 TRENDS & KEY METRICS

This six month period has largely reflected the steep decline in equity finance. The market has almost ground to a halt as buyers strike and sellers hang on for better days. The recent rally in mid-cap exploration and production (E&P) stocks may mean that a good financing period lies ahead, which might create more room for M&A, but the start isn’t promising. The fire load continues to build.

• TherehasbeenadeclineinM&Aactivityinvolvingpublictargets.Inthefirsthalfoflastyear,eleven deals had been completed. This year, only six.

• Largedealshavecompletelyvanishedandtransactionvalueshaveplumetted.InH12013,thelargest deal in our survey was worth $157 million, while in H1 2012 the largest value was $5.17 billion. The total value of targets was $492.5 million, or only 3.4% of the total value of deals announced in H1 2012.

• Ofthedealsinthesurvey,onlyfourwerecompletedbystrategics.Alltheotherdealswerecompleted by financials.

• 67% of deals by number were related to E&P companies. There were no midstreamtransactions.

• Therewere four deals that involved acquisitions by larger or controlling shareholders, anunusually large proportion of the deals. Owners were busy.

• Novel structureswereused inWinstarResources,RIAResources andWenzelDownhole -buyers did not shy from creativity.

• Therehasbeennotoppingorcontestedactivitysofarthisyear.

• Twocomplexcorporatestories–ComptonandWenzelDownhole–cametoanendaspublicentities.

This survey does not cover private M&A activity, which remains fairly strong. Public shareholders are not at the party, but the good times continue to roll for certain equity-holders.


NOTABLE FEATURES

Buyer Target Structure features of note Equity valueServiceWestern Energy Services Corp.

IROC Energy Services Corp.

� Discussions took three years - Western moved from an offer of $1.10 to $3.10

� Western is Canadian-managedC$157M

Basin ToolsWenzel Downhole Tools Ltd.

� Wenzel was finally acquired after a long and lawyer-filled history of disputes with government, industryparticipantsandamongstshareholders–theacquisitionwaspreceededbya $14 million judgment against the target

� The buyer held 37% of the target’s shares

� The meeting was adjourned after the target’s financial advisor amended the valuation

C$83M

Domestic mid cap Brookfield Capital Partners Ltd.

Insignia Energy Ltd. � Buyeralreadyheld67%ofthesharesoftarget

� Target holders received a 95% premiumC$78M

Whitecap Resources Inc. Invicta Energy Corp. � The only domestic acquisition by a strategic in H1 C$40M

Domestic small capTuscany Energy Ltd. Diaz Resources Ltd. � Tuscany and Diaz were under majority control by the same shareholder C$16M

Qwest Contrarian Fund RIA Resources Corp. � Buyer was formed to acquire under-performing juniors

� Target’s shareholders received an unlisted non-voting preferred share which will share in a distribution of the assets of the target in five years

C$2.4M

MFC Industrial Ltd. 0915988 B.C. Ltd. � Squeeze-out of the former minority shareholders of Compton

� Buyer held 40% of the target’s sharesC$0.8M

International

Kulczyk Oil Ventures Inc. Winstar Resources Ltd. � The largest shareholder of the buyer backstopped the cash component of the offer in exchange

for shares of the buyer

� The buyer used the transaction to effect its listing on the TSXC$112M

Cub Energy Inc. Anatolia Energy Corp. � CEO and CFO received part of the approximately $500,000 in severance payments made by the

target–whichtriggeredamajorityoftheminorityvote C$3.3M


Sector Deal size

�■ Exploration and production: 67%

�■ Energy services: 22%

■ Other: 11%

Sector

■ Less than $10M: 3 deals

■ $10M to $50M: 1 deal

■ $50 to $100M: 3 deals

■ $100M to $150M: 1 deal

■ More than $150M: 1deal

Deal size

OVERVIEW


Transaction structure Consideration

■ Cash: 22%

■ Stock: 33%

■ Cash + Stock: 45%

Cash/share/mixed

OVERVIEW

All of the surveyed transactions were structured using a plan of arrangement


TRANSACTION PROCESS

Time to completion(measured from time parties enter into definitive agreement until closing)

Number of fairness opinions obtained in respect of the transaction

■ Less than sixty days : 67%

■ Sixty to seventy days : 11%

■ More than seventy days: 22%

TARGET PERMITTED TO SOLICIT ACQUISITION PROPOSAL

FOLLOWING EXECUTION OF TRANSACTION AGREEMENT?

0

20

40

60

80

100

■ None: 11%

■ One: 89% �

FAIRNESS OPINIONS OBTAINED


VOTING/SUPPORT AGREEMENTS

Percentage of common shares locked up by the buyer Where a lock-up is present, how often were the following parties locked up?

WHAT PERCENTAGE OF

■ Zero to 10: 22%

■ 10 to 20: 22%

■ 20 to 30: 11%

■ 30 plus: 45%

0

20

40

60

80

100

■ Directors: 100% of the time

■ Officers: 38% of the time

■ Other shareholders: 50% of the time


TRANSACTION TIMING

Time allowed to prepare and mail the target’s circular for plan of arrangement

Time between date of the transaction agreement and the outside meeting date regarding arrangement

■ "As prompt as possible": 78%

■ Within 30 days: 22%

TIME TO PREPARE AND MAIL CIRCULAR

■ Not speci�ed: 34%

■ Within one month: 22%

■ Within two months: 22%

■ Within three months: 22%

TIME BETWEEN DATE OF TRANSACTION AGREEMENT

AND OUTSIDE MEETING DATE


MEETING MECHANICS

Can the buyer require the target to adjourn the meeting in respect of an arrangement?

■ Yes: 33%

�■ No: 67%

CAN BUYER REQUIRE TARGET TO ADJOURN Can the buyer force a vote of target securityholders

whether or not a superior proposal has been made?

None of the surveyed agreements provided the buyer with the option of forcing a vote of the target security

holders where superior proposals arose

Optionholders entitled to vote at the arrangement meeting?

■ Yes: 11%

■ No: 89%


DIVIDENDS & DISTRIBUTIONS

Does transaction expressly provide that declarations of dividends or other distributions trigger a reduction

in purchase price?

None of the deals expressly provided that declarations of dividends or other distributions trigger a reduction in

purchase price


■ Yes: 89%

■ No: 11%

DOES MAE DEFINITION INCLUDE EFFECT ON TARGET'S ABILITY

TO PERFORM OBLIGATIONS UNDER TRANSACTION AGREEMENT?

MATERIAL ADVERSE EFFECT

Does the “Material Adverse Effect” definition include any adverse effects on the target’s ability to perform its obligations

under the transaction agreement?

Events included in the list of disproportionate effect exceptions

0

10

20

30

40

50

60

70

80

�■ Conditions affecting oil & gas industry generally in any of the jurisdictions in which assets are held: 80%

�■ Changes in global economic or political conditions: 70%

�■ Change in law: 70%

�■ Change in GAAP: 50%

�■ Natural disasters: 40%

�■ Change in trading price of buyer or target shares resulting from the announcement of the agreement: 20%

BREAKDOWN OF THE DISPROPORTIONAL

EFFECT LIMITATION EXCEPTIONS

0

10

20

30

40

50

60

70

80

�■ Conditions affecting oil & gas industry generally in any of the jurisdictions in which assets are held: 80%

�■ Changes in global economic or political conditions: 70%

�■ Change in law: 70%

�■ Change in GAAP: 50%

�■ Natural disasters: 40%

�■ Change in trading price of buyer or target shares resulting from the announcement of the agreement: 20%

BREAKDOWN OF THE DISPROPORTIONAL

EFFECT LIMITATION EXCEPTIONS


KNOWLEDGE

■ Yes: 22%

■ No: 78%

DOES THE DEFINITION OF 'KNOWLEDGE' CONTEMPLATE

DIRECTORS' KNOWLEDGE?Does the definition of the “knowledge” qualifier (used in representations and warranties) include the knowledge of directors?


INTERIM PERIOD COVENANTS

Can the buyer withhold consent unreasonably for exceptions from period restrictions on target business?

STANDARD FOR PARTIES OBTAIN REGULATORY APPROVALS

■ Not speci�ed: 11%

■ Reasonable commercial efforts (or commercially reasonable efforts): 78%

■ Reasonable efforts: 11%

Standard for parties to obtain regulatory approvals

None of the surveyed agreements provided the buyer with the ability to, at its sole discretion, prevent the target from engaging

in conduct that would otherwise fall under an exemption on interim period business conduct


Mutual conditionsStandard (at least 75% of surveyed agreements include the following conditions)

- Interim order granted in substance that is consistent with terms of agreement

- Arrangement resolution approved/adopted by target shareholders

- Final order granted in substance and form that is satisfactory to parties, on terms consistent with agreement

- Articles of arrangement in form satisfactory to both parties and on terms consistent with agreement

- Consummation of agreement not illegal/prohibited by law

- Listing approval (conditional approval to list shares to be issued pursuant to agreement)

- Agreement has not been terminated pursuant to the terms of the agreement

- Mailing Date and Effective Date have occurred on/before dates specified in agreement

Uncommon (10-30% of surveyed agreements include the following conditions)

- Competition Act approval obtained, or waiting period has expired, terminated, or been waived

Rare (Less than10% of surveyed agreements include the following conditions)

- No consents, orders or approvals contemplated by arrangement contain terms or conditions deemed unsatisfactory or unacceptable to either of the parties

- Parties must be satisfied that the shares of the company resulting from amalgamation pursuant to the agreement qualify as an investment for RRSP

CONDITIONS TO THE OBLIGATION TO CLOSE



Conditions to obligations of purchaserStandard (at least 75% of surveyed agreements include the following conditions)

- Target’s representations are true/correct in material respects as of Effective Date

- Target has complied with all covenants, except where failure not expected to have material adverse effect or impede arrangement

- No material adverse change has occurred

- No material adverse action taken by domestic/foreign governmental authority

- No proceedings against target expected to have material adverse effect on target or to impede consummation

- Target has provided copies of all documents required by agreement

- Target’s board approves the transaction

- Arrangement resolution passed by target shareholders

- Holders of no more than a specified percentage of issued/outstanding target shares have exercised dissent rights


- Buyer satisfied all options have been exercised/terminated

- Target’s officers/directors have submitted resignations

- Voting agreements have been entered into, not terminated

- Area of exclusion or non-competition agreements entered into, not terminated

- Target maintains a specified minimum working capital level

- Target obtains required third party consents

- No right of first refusal exercised on target properties

- Target board has not withdrawn or amended recommendation

- Number of outstanding target shares capped

- Target employment or severance-related obligations do not exceed specified amount

- Outstanding loans or interest due under credit agreements dealt with in manner specified by agreement

- Target duly executes or delivers closing loan promissory note

- Outstanding target warrants exercised or terminated


- Target’s expenses in relation to arrangement (e.g. financial advisor or legal fees) cannot exceed specified threshold

- Purchaser shall have received from target a statement that it is not and has not been a United States real property holding corporation



Conditions to obligations of targetStandard (at least 75% of surveyed agreements include the following conditions)

- Buyer’s representations are true/correct as of Effective Date

- Buyer has complied with all covenants, except where failure not expected to have material adverse effect or impede arrangement

- No material adverse change has occurred

- No material adverse action taken by domestic/foreign governmental authority

- No proceedings against target expected to have material adverse effect on target or to impede consummation

- Buyer has provided copies of all documents required by agreement

- Buyer’s board approves transaction

- Target furnishes certified copies of board resolution approving agreement and contemplated transactions

- Buyer has paid/deposited consideration


- Shares issued by buyer free of encumbrances, fully paid, are non-assessable, no restrictions on trading

- Releases are provided to the directors or officers of the target

- Buyer maintains minimum working capital


- Particular debt or liability of purchaser cannot exceed specified threshold


COVENANTS

Mutual covenantsStandard (at least 75% of surveyed agreements include the following conditions)

- Use efforts to complete arrangement on or before specified date and satisfy conditions precedent

- Obtain all necessary consent, approvals from parties to contracts, credit agreements, etc.

- Obtain all other consents, waivers, approvals required by law

- Obtain all regulatory approvals

- Provide other party reasonable access to information required and maintain ongoing communications with other party

- Information provided relating to regulatory approval to only be given to external legal counsel of other party

- Coordinate in obtaining advance ruling certificate from Competition Bureau


- Where competitively sensitive information required, parties must provide information only to external legal counsel or other experts hired by party

- Provide notice of any known misrepresentations in relation to regulatory filings

- Provide notice of any communication with governmental entity

- Provide notice of any material adverse change

- Will not take or permit action, will refrain from acting in manner, that is inconsistent with agreement or would be expected to significantly impede consummation of the transaction.


REPRESENTATIONS & WARRANTIESApproximate number of

representation/warranty paragraphs

■ Zero to 50: 11 %

■ 51 to100: 33%

■ 101 to150: 56%

0

20

40

60

80

100

■ Except as disclosed in disclosure letter: 67%■ Except for default/failure not resulting in “Material Adverse Effect”: 89%■ Except as disclosed in public record: 56%■ Except as arising in the ordinary course of business 22%

Frequency of exemption qualifiers to representations and warranties

Representations made regarding working capital or net debt?

Does agreement permit amendments to representations at closing?

�■ Yes: 33%

�■ No: 67%�■ Yes: 67%

�■ No: 33%


REPRESENTATIONS & WARRANTIES

Parties represent that the listed representations and warranties contain no misrepresentations

�■ Yes: 11%

�■ No: 89%

Cash/share/mixed


TOPPING OFFERS: Restriction on Non-Solicitation

What are requirements for a Topping Proposal to qualify as a Superior Proposal?

When is target permitted to change recommendation?*

The definition of ‘Superior Proposal’ in all agreements included:a) must be written bona fide proposal

b) necessary funds are likely available

c) financially more favorable proposal (after consultation with financial advisor)

d) after consulting with legal advisors, accepting proposal is consistent with fiduciary duties of the board

Over 90% of agreements required that the target must provide:a) prompt notice that it is entering discussions

b) copy of proposal and all related written documents

c) copies of all information provided to third party

d) notice of any inquiries, offers, proposals with respect to Superior Proposal

e) third party identity

f) status updates

Items b) to f) were all required by the purchaser within 24 hours

0

10

20

30

40

50

60

■ Third party will not require access to books/records of target longer than time specified in agreement: 22%

�■ Specified amount of outstanding securities or assets are to be acquired: 11%

�■ Likely to be completed without undue delay: 56%

�■ Complies with all applicable laws: 33%

�■ Did not result from breach of the agreement: 11%

0

10

20

30

40

50

60

■ Third party will not require access to books/records of target longer than time specified in agreement: 22%

�■ Specified amount of outstanding securities or assets are to be acquired: 11%

�■ Likely to be completed without undue delay: 56%

�■ Complies with all applicable laws: 33%

�■ Did not result from breach of the agreement: 11%

Other requirements

*subject to a matching period


MATCHING PERIOD

Is there a right to match?

�■ Yes: 78%

�■ No 22%

DOES RIGHT EXIST? Period in which right to match is open to the purchaser

■ Three days: 57%

■ Four plus days: 43%

PERIOD LENGTH


TERMINATION

Are there termination rights for failure to meet prescribed working capital or net debt levels?

■ Yes: 22%

■ No: 78%

Termination right for failure to meet


TERMINATION

Is a break fee provided for? Purchaser break fee triggers

Over 90% of the deals surveyed contained the following triggers to the payment of a break fee by the target:1) Target board of directors fails to publicly reaffirm recommendations and

approvals, or withdraws, changes, or proposes publicly to withdraw, amend, or change any recommendations or approvals in a manner adverse to the purchaser

2) A superior proposal is publicly announced and target board fails to reaffirm its recommendation

3) Target accepts or moves to implement a superior proposal

4) Target is in breach of any of its covenants or obligations in any material respect

5) Target breaches any representations, warranties, or covenants, which, individually or in the aggregate, would reasonably be expected to result in a material adverse change and where target fails to cure the breach

�■ Yes: 78%

�■ No: 22%

Does the break fee constitute liquidated damages?

In all of the surveyed agreements, the break fee constituted liquidated damages


TERMINATION

Target break fee triggers

Over 90% of the deals surveyed contained the following reverse break fee triggers:1) Purchaser breaches any covenants where the breach is reasonably expected

to result in material adverse change, where purchaser fails to cure the breach within time period granted

2) Purchaser breaches any representations or warranties where the breach is reasonably expected to result in material adverse change, where purchaser fails to cure the breach within time period granted

Only 33% of deals surveyed contained the following as a reverse break fee trigger:1) Purchaser board fails to make any recommendations or determinations,

in a manner adverse to target; or withdraws, modifies, or changes any recommendations in manner adverse to target

Is a reverse break fee provided for?

■ Yes: 67%

■ No: 33%

Is the reverse break fee less than the break fee?

All reverse break fees in the deals surveyed were equal to the break fees


TERMINATION

�■ One business day : 50%�■ Two business days : 50%

PERIOD FOR 3RD PARTY ACQUISITION CONSUMMATION POST TERMINATION?

Reverse break fee payment must be paid within:

Period in which consummation of any third party acquisition must occur post termination to trigger the

payment of a break fee by the target

■ Not speci�ed 70%

■ Six months: 20%

■ Twelve months: 10%


�■ One business day of termination event: 33%�■ Two business days of termination event: 77%�


Break fee payment must be paid within:


TERMINATION

Expense reimbursement in addition to break fee and reverse break fee contemplated?

�■ Yes: 11%

�■ No: 89%

EXPENSE REIMBURSEMENT CONTEMPLATED?


OTHER REMEDIES

Specific performance available as a remedy?

■ Yes: 89%

■ No: 11%

SPECIFIC PERFORMANCE AVAILABLE?


DEALS SURVEYED

Buyer Target Equity Value Announced CompletedWestern Energy Services Corp. IROC Energy Services Corp. $157M February 22, 2013 April 22, 2013MFC Industrial Ltd. 0915988 B.C. Ltd. $0.8M March 11, 2013 April 19, 2013Whitecap Resources Inc. Invicta Energy Corp. $40M March 18, 2013 April 30, 2013Qwest Contrarian Fund RIA Resources Corp. $2.4M April 4, 2013 June 5, 2013Kulczyk Oil Ventures Inc. Winstar Resources Ltd. $112M April 25, 2013 June 24, 2013Cub Energy Inc. Anatolia Energy Corp. $3.3M April26,2013 June26,2013Basin Tools Wenzel Downhole Tools Ltd. $83M May 13, 2013 July 31, 2013Tuscany Energy Ltd. Diaz Resources Ltd. $16M May 17, 2013 July16,2013Brookfield Capital Partners Ltd. Insignia Energy Ltd. $78M May 28, 2013 July 19, 2013

ABOUT STIKEMAN ELLIOTT

Stikeman Elliott is one of Canada’s leading business law firms with offices in Calgary, Toronto, Montréal, Ottawa and Vancouver as well as in London, New York and Sydney. The firm is recognized as a Canadian leader in each ofourcorepracticeareas–corporatefinance,M&A,corporate-commerciallaw,banking,structuredfinance,realestate,tax,insolvency,competition/antitrust,employmentandbusinesslitigation–andweareregularlyretained by domestic and international companies in a wide range of industries.

Our firm has an extensive domestic and international oil and gas practice. We have a leading team of energy lawyers in our Calgary office, with seamless access to national and international coverage through our offices across Canada and abroad.

Our services include mergers, acquisitions, dispositions, corporate finance and securities, the structuring of joint ventures and other commercial arrangements, energy trading and energy derivative products, midstream facility contracts and transactions, infrastructure projects, regulatory matters and litigation. Our Energy Group works regularly with other lawyers in our firm to advise on the tax, environmental, corporate governance, employment and competition and foreign investment aspects of transactions involving participants in the oil and gas sector.

We have acted as trusted advisors on many of the energy sector’s most complex undertakings, from the financing and development of major projects to ongoing operations. Businesses turn to us for expert counsel relating to the exploration, production and refining of conventional oil and gas, oil sands and shale gas as well as the extraction, transportation, processing, storage and marketing of crude oil, bitumen, natural gas, natural gas liquids and liquefied natural gas (LNG) on a worldwide basis.

For more information, please contact our Calgary office at(403)266-9000 or visit www.stikeman.com

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H1 2013 Canadian Public Oil and Gas M&A Review

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Transcript of H1 2013 Canadian Public Oil and Gas M&A Review