2009-10-26-2009-10-08

To buy 54 oil and gas leases containing 662 stripper wells, featuring production of 115 BO/d.

Treaty Energy Corp., Houston, (OTCBB: TECO) plans to acquire 54 oil and gas leases in Kansas from an undisclosed seller for an undisclosed price. These leases comprise more than 6,700 acres on a 50-square mile area, and currently include 662 stripper wells with each producing 10 barrels of oil per day or less. The acquisition includes all production equipment now in place on the leases. Of the 662 wells, 450 are currently producing, with the balance of the wells requiring different amounts of rework prior to being returned to production. Current production is about 115 barrels per day. Treaty will be obligated to drill a minimum of 75 new wells per year on the existing 54 leases. Treaty chief executive Randall Newton says, "We have hired a highly credentialed petroleum engineer to produce the 'production and reserve reports' that are required for the audit of these leases prior to the closing which is scheduled to take place no later than December 2009, but could be earlier based on due diligence and how fast the current owner brings production up to the levels specified for the contract to close." A secondary recovery effort has been established by the current owner. In addition, Treaty expects to complete the secondary recovery effort on the current leases in 12 to 18 months with the help of its petroleum engineer. Newton adds, "We see this acquisition in Kansas as a major step forward for our company. This transaction, which employs a combination of bank and owner financing, positions Treaty to generate strong revenues and profits." The New York-based special purpose acquisition company United Refining Energy Corp. (NYSE Amex: URX) plans to acquire Oklahoma City E&P Chaparral Energy Inc. for approximately $580 million in stock, resulting in a combined enterprise value of $1.8 billion. The merged company will be named Chaparral Energy Inc. and will trade on the NYSE under the symbol "CPR." "This merger with URX will allow us to achieve our strategic goal of becoming a publicly traded company on one of the major stock exchanges," says Mark A. Fischer, Chaparral chief executive, chairman and co-founder. "This merger will give Chaparral access to capital we need to exploit our large inventory of drilling and development opportunities and to significantly step up our EOR (enhanced oil recovery) program." In December, Chaparral abandoned a merger with Edge Petroleum Corp., Houston, in an effort to become a publicly traded company due to Chaparral's inability to obtain financing. Edge filed bankruptcy earlier this month and is selling all of its assets. Founded in 1988, Chaparral focuses primarily on later-stage properties and using EOR techniques in the Midcontinent and the Permian Basin with other interests in East Texas, North Texas, the Gulf Coast and Rocky Mountains. As of June 30, Chaparral proved reserves were 146 million barrels of oil equivalent (62% oil). Its average daily production for first-half 2009 was 21,000 barrels of oil equivalent per day. Chaparral expects 2009 production to be approximately 7.6 million barrels of oil equivalent and 2010 production to be approximately 9.9 million barrels of oil equivalent, a 30% increase over 2009, based on an estimated capex of $410 million. United Refining is a special purpose acquisition company formed in December 2007 with approximately $452 million in trust. At closing, Chaparral shareholders will hold approximately 58 million shares of the combined company, a 59% stake, valued at approximately $10 per share. The combined company will have a total of approximately 98 million shares outstanding, with United Refining shareholders holding 35% and the United Refining sponsor 6%. Chaparral will receive approximately $300 million in cash at closing to be used for debt reduction and for working capital and general corporate purposes. United Refining chief executive and chairmant John A. Catsimatidis says, "We have spent almost two years looking for the right target for our SPAC, and I believe this is the best opportunity that we have considered. Chaparral's management team has demonstrated the ability to find lucrative oil and gas properties at prices that have resulted in superior returns on investment. With the additional capital provided by the proposed merger, I believe Chaparral will be even more successful." Chaparral senior management will continue to lead the company, including Fischer as CEO; Joseph O. Evans, CFO, and Robert W. Kelly II, senior vice president and general counsel. Catsimatidis will become executive chairman. Pro forma, Chaparral will have total debt-to-projected 2010 EBITDA ratio of 2.6x and total debt-to-proved reserves ratio of $6.02 per barrel of oil equivalent. At current strip prices, Chaparral's 2010 EBITDA estimate would be approximately $335 million. Its 2010 capital expenditures will be funded through discretionary cash flow anticipated to be around $250 million and additional liquidity provided by the combination. Assuming a combined company stock price of approximately $10 per share, total enterprise value would be $1.8 billion, implying a multiple of 2010 estimated EBITDA of 5.3x. Deutsche Bank Securities Inc. and Maxim Group LLC are financial advisors to United Refining and New Century Capital Partners Inc. provided a fairness opinion. Ellenoff Grossman & Schole LLP is legal advisor. Morgan Stanley & Co. Inc. is financial advisor to Chaparral and McAfee & Taft is legal advisor. Closing is expected by Dec. 11. Standard & Poor's Ratings Services placed its CCC+ corporate credit on Chaparral on CreditWatch with developing implications. "If the transaction is completed as proposed, we think Chaparral's debt leverage could improve to approximately 4x and its liquidity could exceed $100 million by year-end 2009," says S&P credit analyst Paul B. Harvey. Additionally, the added liquidity should enable Chaparral to increase capital spending and, as a result, boost production levels in 2010 and 2011, providing added support for near-term cash flows. However, Harvey says the transaction faces several hurdles, the most challenging being meeting a tight timeline in which United Refining is required to invest its capital by Dec. 11, with a six-month extension possible. Also, Chaparral's existing credit facility due October 2010 must be extended or refinanced, and Chaparral must receive a minimum investment by United Refining Energy of $250 million. "These, as well as other conditions for the merger, pose significant challenges to closing the transaction as planned." Velocity Energy Inc., Houston, (OTCBB: VCYE) has acquired interests in gas wells in West Virginia from privately held, Kentucky-based Classic Oil & Gas Resources Inc. for $1.2 million. Velocity paid half at closing, and will pay the remainder on the one-year anniversary of closing. The assets include approximately 13,500 net acres of partially developed oil and gas leases with 91 gas wells in the Ravencliff, Maxton, Big Lime, Berea, Gordon and the Cleveland and Huron members of the Devonian shale. Velocity and Classic also entered into a farm-out agreement granting Velocity rights to develop and operate 60 drilling areas. In addition, Velocity will also have the right to participate with Classic and other working interest owners in over 40 additional wells under a joint-operating agreement. Production is approximately 2 million cubic feet of gas per day commingled from several producing zones. Proved reserves as of July 1 were 35 billion cubic feet of gas (10 billion net). Velocity president Don Vandenberg says, "We have been pursuing this acquisition and other Appalachian acquisitions as we believe that the long history of successful exploitation of Devonian shale and other shale horizons (Marcellus, Rhienstreet and Java) found throughout the region in Appalachia is the best place to position the company, as a profitable aggregator, of long-lived oil and gas reserves. In addition, our developmental drilling program will give the company the added benefit of the increased opportunity to utilize our drilling rigs." In connection with the closing of the deal, Velocity and its subsidiaries entered into an amendment to the security agreement with Summerline Asset Management LLC that the company and its subsidiaries entered on Nov. 13 with the secured party. Additionally, Velocity granted an aggregate 3% overriding royalty interest in and to the interests acquired from Classic to Longview Marquis Master Fund LP (2.3948%) and Summerview Marquis Fund LP (0.6052%).