Cona Resources Ltd., which went private last year, is acquiring  Pengrowth Energy Corporation in a deal valued at $740 million.

Cona is a portfolio company of Waterous Energy Fund. Cona has agreed to repay the outstanding principal amount and accrued interest to the date of the arrangement agreement owing under the company’s credit facility and secured notes and acquire all of the outstanding common shares for cash consideration of C5 cents per share and a potential contingent value payment for each Pengrowth share.  The proposed transaction is to be completed by way of plan of arrangement under the Business Corporations Act (Alberta).

“As a result of the significant decline in oil prices in 2014, which followed on the heels of the largest capital project in Pengrowth’s history at Lindbergh, the company took immediate steps to shore up the company’s balance sheet by selling assets to pay down $1.2 billion of debt,” said Pengrowth chairman Kel Johnston. “Further efforts were undertaken in 2018 to market an additional overriding royalty on the Lindbergh asset and to secure high yield debt to replace the current outstanding secured debt.

“Both funding initiatives proved unsuccessful. The extreme volatility in the price of western Canadian oil in the fall of 2018, coupled with an uncertain political and regulatory environment, has led to a severe funding crisis in the Canadian energy capital markets which impeded the company’s ability to achieve a funding solution.”

With the inability to raise capital to fund its ongoing business, Pengrowth began a strategic review process in the first quarter of 2019 with the main alternatives being to source alternative forms of financing, to negotiate an amendment and extension to the secured debt or to pursue a transaction to merge or sell the company that would provide value to all stakeholders.

“With continued lacklustre oil pricing and increased political and regulatory uncertainty, our ability to achieve an amendment and extension agreement proved increasingly difficult and dilutive to shareholders,” added Pete Sametz, president and CEO of Pengrowth. “As a result, Pengrowth’s board of directors has determined that the best available alternative for the company and its stakeholders is to pursue and support a consensual sale transaction that, in addition to repaying the secured debt, would also provide some measure of value for our shareholders and other stakeholders.

“Despite the discount this transaction represents to Pengrowth’s recent trading price, we strongly recommend our stakeholders support the arrangement agreement as it represents the most attractive alternative for all stakeholders given the current environment where there is essentially no access to capital for the company or participants in the Canadian oil and gas industry, in general.”

The aggregate value of the transaction, including the repayment of the secured debt and the assumption of the transaction costs by the purchaser, is approximately $740 million. As part of the consideration to be received by Pengrowth shareholders, each shareholder will be eligible to receive their pro-rata portion of any funds that may be received by Pengrowth as a result of a pending litigation matter.

The company will seek approval of the transaction by the secured debtholders and Pengrowth’s shareholders at special meetings expected to be held on or about Dec. 18, 2019. The transaction will require the approval of (a) 66 per cent of the votes cast by the shareholders present in person or by proxy at the special meeting of shareholders, and (b) a majority of secured debtholders in number holding not less than 66 per cent of the secured debt voting together in a single class at the special meeting of secured debtholders.

The arrangement agreement provides for a mutual non-completion fee of $45 million payable in the event that the transaction is not completed or is terminated by either party in certain circumstances, including if Pengrowth enters into an agreement with respect to a superior proposal or if the Pengrowth board withdraws or modifies its recommendation with respect to the proposed transaction.

All of the directors and executive officers of Pengrowth have entered into support agreements and agreed to vote in favour of the transaction, subject to the provisions of such support agreements.  Pengrowth is seeking to enter into support agreements with the secured debtholders pursuant to which the secured debtholders agree to support and vote in favour of the transaction and deliver such consents as may be necessary in connection with completion of the transaction.

In the event that Pengrowth fails to receive the requisite approvals and consents of its stakeholders required to effect the transaction, Pengrowth may seek to implement an alternative transaction with the purchaser. In the event of an alternative transaction, there is no expectation that Pengrowth shareholders will receive any consideration in exchange for their shares and shareholders are therefore encouraged to vote in favor of the transaction.

Extension of credit facility

Pengrowth also announced today that it has reached a further agreement to extend the maturity date under its credit facility to Nov. 29, 2019.  The company’s credit facility is provided by a broad syndicate of domestic and international banks and had a scheduled maturity of Oct. 31, 2019.  The extension of the maturity to Nov. 29, 2019 was supported by 100 per cent of the lenders in Pengrowth’s banking syndicate.

Pengrowth previously obtained a 30-day extension of the maturity date under its near term secured notes, which as a result of that extension have a scheduled maturity date of Nov. 18, 2019. In the event that Pengrowth does not obtain, by Nov. 15, 2019, a further extension of the maturity of such secured notes to a date not earlier than Nov. 29, 2019, the maturity date of the credit facility will be Nov. 15, 2019 pursuant to the terms of the amending agreement with Pengrowth’s lenders. The company is in discussions with its secured debtholders regarding the further extension of maturity dates under the secured debt pending the completion of the transaction.

Financial advisors

Tudor, Pickering, Holt & Co. and Perella Weinberg Partners LP acted as financial advisors to Pengrowth in connection with the strategic review and the transaction, and TPH has provided its fairness opinion that, as at the date of the arrangement agreement, the consideration to be received by Pengrowth shareholders pursuant to the arrangement agreement is fair, from a financial point of view, to Pengrowth shareholders.