Ivanhoe Energy to buy Talisman's Athabasca oil interest
2008-05-29 08:56 ET - News Release
See News Release (C-IE) Ivanhoe Energy Inc
Mr. Robert Friedland of Ivanhoe reports
Ivanhoe Energy Inc. has signed a preliminary agreement with Talisman Energy Canada to acquire all of Talisman's interests in three leases located in the heart of the Athabasca oil sands region in the province of Alberta, Canada. Talisman Energy Canada is an affiliate of Talisman Energy Inc.
The total purchase price is $105-million, of which $30-million is payable at closing. The transaction will see the first commercial application of Ivanhoe Energy's proprietary HTL heavy-oil upgrading technology in a major, integrated heavy-oil project.
Based on the most recent evaluations of the Talisman leases conducted by Sproule Associates Ltd., independent reservoir engineers, two of the three leases are estimated to contain, on a best-estimate basis, approximately 294 million barrels of contingent bitumen resources (with low and high estimates of approximately 216 million and 394 million barrels, respectively), out of approximately 752 million barrels of discovered petroleum initially in place.
The proposed home for Ivanhoe Energy's initial, integrated HTL heavy-oil project will be lease 10, near Fort McMurray. Based on estimates by Sproule of contingent bitumen resources, lease 10 -- the principal block being acquired -- would be capable of producing between 30,000 barrels and 50,000 barrels of oil per day.
Talisman will retain back-in rights of up to 20 per cent in all of the acquired leases for a period of three years. During this period, Talisman will also have the right of first offer to acquire any participation interests in heavy oil projects in Alberta that Ivanhoe wishes to sell, excluding the acquired leases, on mutually agreeable terms. In addition, in order to allow Talisman to effectively monitor the commercial effectiveness of Ivanhoe's HTL technology, Ivanhoe and Talisman will sign an HTL data monitoring agreement.
"We now have achieved our initial objective," said Robert Friedland. "We are anchoring the rollout of our HTL heavy-oil upgrading process with a first-class, high-quality resource asset in the centre of the Athabasca oil sands region. We will now proceed full speed ahead with preparations for an integrated HTL heavy oil project on lease 10, while at the same time progressing discussions relating to additional heavy oil opportunities in Canada and internationally."
Lease 10 to be site for Ivanhoe's first HTL integrated heavy-oil project
Ivanhoe Energy plans to establish its first commercial HTL heavy-oil project on the lease 10 block, the principal lease to be acquired from Talisman.
Lease 10 is a 6,880-acre contiguous block located approximately 10 miles (16 kilometres) northeast of Fort McMurray, immediately south of Suncor's operating Steepbank and Millennium projects. The block also adjoins leases held by ExxonMobil, Laricina Energy and E-T Energy. Talisman has a 100-per-cent working interest in lease 10.
Lease 10 has a relatively high level of delineation (four wells per section). It is believed to be a high-quality reservoir and an excellent candidate for thermal recovery production using the SAGD (steam-assisted gravity drainage) process. The lease 10 reservoir characteristics are believed by Ivanhoe to be similar to those at Petro-Canada's 30,000-barrel-per-day MacKay River project, nearby across the Athabasca River. MacKay River is acknowledged to be one of the most successful and longest-running SAGD projects in the Athabasca oil sands.
Ivanhoe's HTL plant on lease 10 is projected to ultimately be capable of operating at production rates of at least 30,000 barrels per day for approximately 25 years. Ivanhoe intends to integrate established SAGD thermal recovery techniques with its patented HTL upgrading process, producing and marketing a light, synthetic sour crude. Once this acquisition has closed, Ivanhoe will continue the lease 10 delineation program in preparation for the submission of permits for an integrated HTL project. In general, thermal oil sands projects, including SAGD projects, require a period of initial development, including delineation, permitting and field development, which is followed by relatively stable operations for many years. Ivanhoe will provide guidance on expectations regarding development timelines, as appropriate, at a future date. Lease 50 is a second potential HTL site
Lease 50, another lease to be acquired from Talisman, covers a 21,760-gross-acre block located approximately 12 miles (19 kilometres) southeast of Fort McMurray. The block is bordered by Imperial Oil (a subsidiary of ExxonMobil) on three sides and also is adjacent to leases owned by Opti/Nexen and Canadian Natural Resources (CNRL). Talisman has a 75-per-cent working interest in lease 50, which is subject to a right of first refusal in favour of the holder of the remaining 25-per-cent working interest. Although less delineated than lease 10, based on drilling to date, Ivanhoe believes that lease 50 has the potential to host an additional integrated HTL heavy-oil project. The total plant size required to develop and produce the low, best and high estimates of the contingent resources assigned to lease 50 has previously been estimated to be 10,000 barrels of oil per day, 15,000 barrels of oil per day and 25,000 barrels of oil per day, respectively.
Benefits of HTL integration
HTL is a field-located upgrading process that converts heavy oil to a transportable, partially upgraded synthetic crude oil and converts the upgrading byproducts to on-site energy. The process frees the heavy oil producer from the need to purchase diluent for transport, significantly eliminates the need to purchase natural gas to steam the reservoir, and allows the producer to capture the majority of the heavy-oil-light-oil value differential. The net result is enhanced rates of return and reduced earnings volatility. Furthermore, the HTL process is technically and economically scalable down to as low as 10,000 to 30,000 barrels of oil per day, allowing for vertical integration of smaller heavy oil assets in Canada and internationally.
Transaction highlights
A binding preliminary agreement between Ivanhoe Energy and Talisman outlining the key transaction terms was entered into on May 29, 2008. The transaction, expected to close within 45 days, is subject to certain conditions, including completion of definitive transaction documentation and regulatory approval, including approval of the Toronto Stock Exchange.
Purchase details
Ivanhoe will purchase all of Talisman's interests in leases 10, 50 and 6. The total purchase price for the three leases is $105-million, allocated as follows:
$30-million cash, due upon closing;
A $20-million note, with interest at prime plus 2 per cent, to be repaid on or before Dec. 31, 2008;
A $40-million, three-year convertible note, with interest at prime plus 2 per cent with principal convertible at $3.13, which represents a 25-per-cent premium to Ivanhoe Energy's share price based on the volume-adjusted, weighted average closing price for the 10 business days prior to the signing of the preliminary agreement. If the note were fully converted, 12,779,552 common shares of Ivanhoe Energy would be issued to Talisman, representing approximately 4.95 per cent of the issued and outstanding shares of Ivanhoe Energy as of today's date after giving effect to the conversion;
$15-million cash on Ivanhoe Energy receiving requisite government and other approvals to develop the northern border of lease 10, which is subject to a mineral surface lease (MSL) held by Suncor.
Ivanhoe's obligations under the notes and the contingent payment will be secured. Acquisition of lease 50 is subject to the remaining working-interestholder not exercising its right of first refusal in respect of lease 50, in which case the purchase price would be adjusted accordingly. Ivanhoe intends to finance the $30-million initial payment as well as future payments with funds from a combination of strategic investors and/or traditional debt and equity markets, either at the Ivanhoe Energy level or project levels. Talisman will retain back-in rights of up to 20 per cent in all of the acquired leases for a period of three years. During this period, Talisman will also have the right of first offer to acquire any participation interests in heavy oil projects in Alberta that Ivanhoe wishes to sell, excluding the acquired leases, on mutually agreeable terms. In addition, in order to allow Talisman to effectively monitor the commercial effectiveness of Ivanhoe's HTL technology, Ivanhoe and Talisman will sign an HTL data monitoring agreement.
Lease details and resource estimates
Ivanhoe Energy has agreed to acquire the following leases:
A 100-per-cent working interest in lease 10, a 6,880-acre oil sands lease located approximately 10 miles (16 kilometres) northeast of Fort McMurray and immediately south of Suncor's operating Steepbank and Millennium projects;
A 75-per-cent working interest in lease 50, a 21,760-gross-acre oil sands lease located approximately 12 miles (19 kilometres) southeast of Fort McMurray, adjacent to leases owned by Opti/Nexen, Imperial Oil and CNRL;
A 100-per-cent working interest in lease 6, a small, 680-acre block one mile (1.6 kilometres) south of lease 10.
Based on the most recent evaluations conducted by Sproule, lease 10 and lease 50 together are estimated to contain, on a best-estimate basis, approximately 294 million barrels of contingent bitumen resources (with low and high estimates of approximately 216 million and 394 million barrels, respectively). All such resource estimates have been classified as "contingent resources." Lease 6 has not been independently evaluated. The evaluation of lease 10 has an effective date of Aug. 31, 2007, while lease 50 was evaluated as of July 31, 2006. The same reports estimate the discovered petroleum initially in place (which includes the contingent resource volumes) for lease 10 and lease 50, in total, to be approximately 752 million barrels of bitumen on a best-estimate basis. The portion of discovered petroleum initially in place not currently classified as contingent resources does not represent recoverable volumes.
Lease 10 is more delineated than leases 50 and 6. Accordingly, the estimate of recoverable volumes is anticipated to have a higher degree of certainty. Of the total amount of contingent bitumen resources estimated to be contained in all three leases, Sproule has attributed, on a best-estimate basis, approximately 244 million barrels of contingent bitumen resources to lease 10 (with low and high estimates of approximately 188 million and 313 million barrels, respectively), and approximately 50 million barrels of contingent bitumen resources to lease 50 (with low and high estimates of approximately 27 million and 81 million barrels, respectively).
The lease 10 resource target is considered to be of high-quality McMurray sands, with clean and continuous average net pay of approximately 20 metres and no significant top or bottom water or top gas issues. The average porosity is 34 per cent, average bitumen saturation is 79 per cent, and permeabilities are between one and 10 darcies, all of which are considered excellent reservoir characteristics. The high quality of the asset is expected to provide for favourable projected operating costs, including attractive steam-oil ratios (SOR) using SAGD development techniques.
Based on these contingent resource estimates, Ivanhoe's acquisition price of $105-million represents a price of approximately 36 cents per barrel of contingent bitumen resource measured on a best-estimate basis, with a range of approximately 27 cents per barrel on a high-estimate basis to approximately 49 cents per barrel on a low-estimate basis.
Financial adviser
Tristone Capital Inc. is acting as financial adviser to Ivanhoe for this transaction.
The restructuring is planned to enhance Ivanhoe Energy's pursuit of its central mission to develop heavy-oil assets using its HTL technology.
As part of the reorganization, Ivanhoe Energy is establishing a number of geographically focused, self-financing entities. The parent company Ivanhoe Energy will pursue HTL opportunities in the Athabasca oil sands of Western Canada and will hold and manage the core HTL technology. Two new subsidiaries will be established, one for Latin America, and one for the Middle East and North Africa, complementing Sunwing Energy Ltd., Ivanhoe Energy's existing, wholly owned company for China. Dave Martin will lead the subsidiary for Latin America as chairman and chief executive officer, and Leon Daniel will lead the subsidiary for the Middle East and North Africa as chairman and chief executive officer. Ivanhoe Energy initially will own 100 per cent of each of these subsidiaries, although the percentages would be expected to decline as they develop their respective businesses and raise capital independently.
This structure will allow the development and financing of multiple HTL projects around the world, while minimizing dilution of Ivanhoe Energy's existing shareholders. In addition, the alignment with principal energy-producing regions will facilitate financing from region-specific strategic investors, some of which already have been identified, and also will enhance flexibility in accessing global capital markets.
Building an execution team
Over recent months, Ivanhoe has made significant progress in building its execution teams in preparation for this acquisition. The upstream team consists of a number of Calgary-based, experienced heavy oil engineers and geologists hired from firms such as Petro-Canada and Synenco, complemented by a core team of petroleum engineers and geologists located in Ivanhoe's offices in Bakersfield, Calif., a number of which are expected to move to Calgary, Alta., in the summer of 2008. The Houston-based HTL technology team also has been strengthened. Ivanhoe expects to continue filling key positions as it moves into execution mode.
Conference call
Ivanhoe Energy will host a conference call on Tuesday, June 3, 2008, for investors and analysts at 11 a.m. ET (8 a.m. PT) to discuss the acquisition. This conference call replaces the conference call previously scheduled for Monday, June 2, 2008, as announced in Stockwatch March 17, 2008. The conference call may be accessed by dialling 1-866-540-8136 in Canada and the United States, or 1-416-340-8010 in the Toronto area and internationally. A simultaneous webcast of the conference call will be provided. For those unable to participate in the call, it will be archived for later playback by dialling 1-416-695-5800 and entering the pass code 3261239 followed by the number sign. The archived playback will be available until July 4, 2008.
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