Strad Energy Services Ltd. ("Strad") (TSX:SDY) is pleased to announce that it has entered into definitive share purchase agreements with each of Redneck Oilfield Services Ltd. and Raptor Oilfield Services Ltd. (collectively "Redneck") providing for the combination of Strad and Redneck (the "Transaction"). This acquisition creates a stronger, more diverse rental platform to better service customers focused in the Montney and Duvernay plays of North East British Columbia and North West Alberta (the "Deep Basin"). The combined company will operate one of the newest, largest and most diverse fleets of rental equipment in the Deep Basin from key locations in Fort St. John, Dawson Creek and Grande Prairie.
Under the terms of the Transaction, Strad will acquire all of the shares of Redneck in exchange for an aggregate of 11,098,598 class A common shares of Strad ("Strad Shares") plus the assumption of an estimated $11.7 million of net debt (which includes $14.0 million of long-term debt less $2.3 million of net working capital) at closing, representing a total Transaction value of approximately $30.6 million, based on the 20 day weighted average trading price of Strad Shares on the TSX immediately preceding the date hereof. The Strad Shares to be issued to Redneck shareholders pursuant to the Transaction will be subject to a time release escrow agreement and will be released in tranches over the course of a 3 year period following completion of the Transaction. Strad is also pleased to announce that upon completion of the Transaction Lyle Wood, the founder and President of Redneck, will be appointed to the board of directors of Strad (the "Strad Board") and be retained as an integral member of Strad's management team. The employees of Redneck will also be joining the Strad team upon closing of the Transaction.
Redneck is a privately owned business based in Fort St. John, British Columbia, and Grande Prairie, Alberta, with a satellite location in Fort Nelson, British Columbia, and a corporate office in Calgary, Alberta. Product and service lines offered to customers include a full suite of surface equipment rentals including: upright and horizontal storage tanks; well-site trailers; flare, floc and premix tanks; evaporator units; incinerators; generators; shale bins; light towers; rig mats; as well as auxiliary equipment for tank farm packages. Along with equipment rentals, Redneck offers customers an oilfield trucking service, which includes a fleet of transport trucks, trailers as well as service trucks with cranes. Redneck also specializes in supporting customers with cuttings management and waste removal during drilling. The cuttings management and waste removal service includes the use of heavy duty equipment, surface equipment rentals and trucking services.
The Transaction is expected to provide significant benefits to shareholders of both Strad and Redneck including the following:
- Increase Strad's profile as a market leader in the Deep Basin with expanded operations in Fort St. John, Dawson Creek and Grande Prairie;
- Provide a broader more diversified product and service offering to the combined entity's customers operating in the Deep Basin;
- Result in cost savings and improved operating efficiencies through the elimination of redundancies;
- Provide an expanded combined customer base;
- Improve Strad's ability to provide multiple integrated rental packages to larger pad drilling operators in the region;
- Improve liquidity for all shareholders of the combined company over time ; and
- Provide immediate accretion on a cash flow per share basis.
The board of directors of Strad (the "Strad Board") is recommending the Transaction for the following reasons:
- Expands Strad's market leading position in one of the most active oil and gas basins in North America;
- Expands and deepens Strad's customer base;
- Diversifies Strad's product offering;
- Compliments the Strad management team;
- Accretive to cash flow per share and reduces Strad's anticipated pro-forma debt to EBITDA at closing;
- Provides shareholders with enhanced exposure to a recovery in drilling and completions activity; and
- Potentially enhances Strad's liquidity, cost of capital and future access to capital to fund growth and acquisition opportunities.
Key Attributes of Pro Forma Strad
Upon closing of the Transaction, Strad is anticipated to have the following pro forma characteristics:
- One of the largest and most modern fleets of drilling, completion and energy infrastructure support equipment in Canada;
- Strategic locations with a full complement of equipment in the Deep Basin, thus minimizing transportation costs for the operators in the region;
- Pro forma Strad Shares outstanding of 48,378,995 million;
- Strong balance sheet with estimated pro forma debt of $24.1 million as of June 30, 2016;
- Modest leverage ratios; pro forma long-term debt to EBITDA of 1.69x as at March 31, 2016;
- Combined EBITDA of $26.4 million for the year ended December 31, 2015;
- Combined EBITDA of $2.3 million for the first quarter ended March 31, 2016; and
- Transaction value represents approximately 0.8 of the adjusted book value of assets acquired by Strad.
Financial Advisor and Fairness Opinion
Raymond James Ltd. is acting as financial advisor to Strad with respect to the Transaction and has provided the Strad Board with its verbal opinion that the consideration being paid by Strad for the shares of Redneck is fair from a financial point of view (the "Fairness Opinion").
Board Recommendations and Approvals
Based on the recommendation of the independent committee of the Strad Board, after having received the Fairness Opinion, the Strad Board has unanimously approved the Transaction and unanimously determined that the Transaction is in the best interests of Strad and its shareholders.
The Transaction is expected to close on August 31, 2016 but in any event prior to September 30, 2016 and remains subject to receipt of customary third party and regulatory approvals, including the TSX, and satisfaction of conditions of closing. Pursuant to the rules and policies of the TSX, the issuance of the Strad Shares pursuant to the Transaction (the "Share Issuance") requires approval of a simple majority of Strad shareholders represented in person or by proxy at a special meeting (the "Meeting") of Strad shareholders to be called to consider the Share Issuance. An information circular containing details of the Transaction and Redneck will be mailed to Strad shareholders in connection with the Meeting as soon as practicable.
All directors and officers of Strad, representing an aggregate of 19% of the issued and outstanding Strad Shares, intend to vote their Strad Shares in favour of the Share Issuance.
Strad Lender Approvals and Amendment to Credit Facility
Strad's lending syndicate has consented to the Transaction, subject to usual and customary conditions, and has committed to amend the terms of Strad's existing credit facilities (the "Credit Facilities") concurrent with completion of the Transaction. This amendment will provide Strad with further balance sheet flexibility following the Transaction in terms of certain covenant relief as follows:
|Existing Financial Covenants||Amended Financial Covenants|
|Quarter Ending||Funded Debt to EBITDA Ratio||EBITDA to Interest Expense Ratio||Quarter Ending||Funded Debt to EBITDA Ratio||EBITDA to Interest Expense Ratio|
|June 30, 2016||4.00x||3.00x||June 30, 2016||4.00x||3.00x|
|September 30, 2016||4.50x||3.00x||September 30, 2016||5.50x||3.00x|
|December 31, 2016||4.50x||3.00x||December 31, 2016||Waived||1.75x|
|March 31, 2017||4.00x||3.00x||March 31, 2017||Waived||1.75x|
|June 30, 2017||4.00x||3.00x||June 30, 2017||5.50x||2.50x|
|September 30, 2017||3.50x||3.00x||September 30, 2017||4.50x||3.00x|
|December 31, 2017*||3.00x||3.00x||December 31, 2017*||3.00x||3.00x|
*And thereafter until the Maturity Date
The amendment to Strad's existing Credit Facilities will also include an equity cure whereby proceeds from equity offerings may be included as EBITDA in the calculation of Financial Covenants subject to certain conditions.
In addition, the maximum amount of the Credit Facilities will be reduced from CAD $63.0 million plus $7.0 million USD to CAD $43.5 million plus $5.0 million USD upon completion of the Transaction. The maturity date of the Credit Facilities of September 28, 2018 will remain unchanged. Strad's Funded Debt as of June 30, 2016, was estimated at $10.1 million. As noted previously, Strad will be assuming an additional $14.0 million in estimated Funded Debt on closing of the Transaction.
Defined terms used herein with reference to Strad's Credit Facilities have the meanings set forth in Strad's Management Discussion and Analysis which can be found under Strad's profile on SEDAR.
About Strad Energy Services Ltd.
Strad is a North American energy services company that provides rental equipment and matting solutions to the oil and gas and energy infrastructure sectors. Strad focuses on providing complete customer solutions in Canada and the United States.
Strad is headquartered in Calgary, Alberta, Canada. Strad is listed on the Toronto Stock Exchange under the trading symbol "SDY".
Cautionary Statement Regarding Forward-Looking Information and Statements
This news release contains "forward-looking information" within the meaning of applicable securities laws. Forward-looking information is frequently characterized by words such as "intend", "estimate" and "estimated", "expect" and other similar words, or statements that certain events or conditions "may" or "will" occur. The forward-looking information in this news release relates, but is not limited to, statements with respect to the acquisition of Redneck, including risks that: closing of the Transaction is not guaranteed; the parties will not complete the proposed Transaction within the timeframe described in this press release or at all; the integration of employees; the date on which the Transaction is expected to be completed; the impact of the Transaction on Strad's financial condition; the financial assessment of the Transaction including its strategic benefits; value creation; market position; earnings upside; cost savings and efficiencies; cash flow accretion; ability to deploy assets; the anticipated dates for the holding of the Meeting and the mailing of the management information circular respecting the Meeting; the benefits of the Transaction; the amount of Strad's funded debt; the amount of debt being assumed in connection with the Transaction; the nature of the Credit Facility amendments and the benefits thereof; and the timing of completion and execution of the amendments to the Credit Facilities.
The forward-looking information set out in this news release is based on certain expectations and assumptions regarding, among other things, the absence of changes and adverse economic conditions which may adversely affect Strad.
Forward-looking information is subject to known and unknown risks and uncertainties and other factors which may cause actual results, events and achievements to differ materially from those expressed or implied in such forward-looking information. In particular, completion of the Transaction is subject to the risk that the conditions precedent will not be fulfilled or that other events will occur that cause the termination of the definitive agreement with Redneck or otherwise prevent the Transaction from being completed substantially on the terms and within the timeline described herein or at all. Actual results could differ materially from those described in this press release as a result of the risk factors set forth herein and under the section entitled "Risks Factors" in Strad's Annual Information Form dated March 29, 2016 which may be accessed through the SEDAR website (www.sedar.com). Readers are also referred to the risk factors and assumptions described in other documents filed by Strad from time to time with securities regulatory authorities.
Strad undertakes no obligation to update forward-looking information if circumstances or management's estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward looking information.