Victory Energy Corp. (OTC: VYEY) and Lucas Energy Inc. (NYSE MKT: LEI) announced Feb. 4 that they have entered a proposed business combination.
The Austin, Texas-based companies said they executed a letter of intent and term sheet for the proposed combination. Terms of the transaction have yet to be disclosed.
The companies expect that the business combination will involve the issuance of equity by Lucas to Victory's shareholders with no cash payment being made. The companies also expect that upon completion of the business combination, the shareholders of Victory and Victory's partner Navitus Energy Group will own more than a majority of outstanding Lucas shares.
Lucas announced Feb. 2 that the company had defaulted on debt and is weighing its options.
The plunge in crude oil prices has led the company to reconsider all alternatives, said Anthony C. Schnur, the CEO of Lucas, in a statement.
"We are actively and aggressively pursuing options to secure funding through a corporate combination or project financing arrangement," he said.
Victory is a rapidly growing Permian Basin focused oil and gas company. Lucas has assets in the Austin Chalk and Eagle Ford in Karnes County, Texas.
As part of the business combination, seven of Lucas' high-grade Eagle Ford wells with varying working interests from a portfolio of 130 future drilling locations are expected to be funded and brought into production during the period from February through June 2015.
Based on nearby EOG Resources Inc. (NYSE: EOG) and Marathon Oil Corp. (NYSE: MRO) well production volumes in addition to internal economic reservoir calculations, the parties anticipate that the monthly production revenue from these combined wells will exceed $1.1 million of revenue to the company interest, assuming a price per barrel of oil of $50, which would bring both companies into a positive cash-flow position and add significant proved producing reserves to the combined 2015 company portfolio.
Victory and Lucas expect that funding of these obligations will come from a variety of sources, including certain affiliates of Victory. These sources anticipate total funding needs of about $12 million during the business combination with additional funding for post-closing debt reduction and expansion to exceed $8 million.
"The expected combination of the two companies will allow Victory and Lucas shareholders to enjoy the benefits of a much larger NYSE MKT listed company, the synergies of a single management structure and reporting company, which will hold valuable assets in two of the most active and profitable basins in North America, the Permian and the Eagle Ford," said Kenny Hill, CEO of Victory, in a statement.
"We are extremely excited by the opportunity to combine with Victory. We believe that the proposed combination will enhance our access to capital, diversify our asset base, strengthen our balance sheet and allow us to scale. We are pleased to have identified a strategic partner that can help us expand our scope of operations and improve our financial condition," Schnur said in a statement.
The business combination is contingent on the signing of a definitive merger agreement, which will contain customary terms and conditions.
The letter of intent contains a binding exclusivity provision that requires the two companies to work toward a definitive merger agreement to the exclusion of other potential merger partners. Victory and Lucas are also negotiating the terms of a funding agreement that is intended to provide the capital necessary for Lucas to satisfy its obligations for several Eagle Ford wells, critical accounts payable and to provide Lucas with necessary working capital during the period prior to the consummation of the business combination.
Hill is expected to serve as the CEO and president of the combined company. Other executive and officer appointments will be determined at a later date.
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