Journey Energy Inc. will purchase 12.7 million of its outstanding shares from its largest shareholder, MIE Maple Investments Limited (MIE) for cancellation.

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 nine (9.0 net) wells from the previous 14 (13.9 net) wells.

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 purchase price will be $1.68 per share, for an aggregate cost of $21.3 million.  The price per share represents a five per cent 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 Feb. 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.  Andrew Harper will resign from the board, while Ruilin Zhang will continue as a board member.

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.  As the share repurchase will result in MIE, an insider of Journey, receiving aggregate consideration that is greater than 10 per cent of the market capitalization of the company, the Toronto Stock Exchange rules require that Journey obtain approval from more than 50 per cent 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 per cent 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 per cent of Journey's outstanding common shares.

Share repurchase rationale

Since Journey's initial public offering in June 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 its cost structure and realigning its shareholder base, the market for junior oil and gas companies remains challenged. 

Journey's management and directors feel that Journey's current share price fails to represent the replacement value of its producing assets and opportunity inventory.  Journey president Alex Verge stated: "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 million.

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

The notes mature on Sept. 30, 2022 and all or a portion of the principal amount outstanding can be repaid without penalty after two years. Journey will issue 2.31 million 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 per cent premium to the 10-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 4.95 million common shares of Journey, representing approximately 12.8 per cent of the pro-forma issued and outstanding common shares, on a non-diluted basis.  Assuming the conversion of all of the 2.31 million warrants, AIMCo would hold 7.26 million common shares of Journey, representing approximately 17.7 per cent of the post-warrant conversion, pro-forma issued and outstanding common shares of the company.

"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," said Gerry Gilewicz chief financial officer of Journey.

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 its peer average.  The current plan for 2018 is as follows:

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 per cent gas, 37 per cent NGL's, four per cent 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.

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 its 2018 plan and provide a high degree of certainty that the company will have sufficient funding to reduce pro forma leverage.  A summary of the outstanding hedges is as follows:



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

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 nine (9.0 net) wells from the previous 14 (13.9 net) wells.