Connacher Announces Q1 2018 Results

CALGARY, May 29, 2018 /CNW/ - Connacher Oil and Gas Limited ("Connacher" or the "Company") announces its financial and operating results for the three months ended March 31, 2018 ("Q1 2018") (all amounts are in Canadian dollars unless otherwise noted).

Q1 2018 Highlights

Financial

• Q1 2018 revenue, net of royalties, decreased 28% to $33.9 million (Q1 2017 - $46.9 million), primarily due to unfavourable fixed price sales agreements and increased index exposure to the Western Canadian Select differential ("WCS"), partially offset by higher sales volumes. In Q1 2018, the fixed price sales agreements yielded an unfavourable impact to revenue, net of royalties, of $12.0 million
• In Q1 2018, WTI fixed priced sales agreements affected 76% of barrels sold and will affect 49% of barrels sold in Q2 2018. In Q3 2018 and beyond, the Company is focused on a hedging program to reduce WCS risk
• Q1 2018 adjusted EBITDA decreased to a deficit of $16.4 million (Q1 2017 - $1.9 million), primarily due to lower revenue, net of royalties
• Q1 2018 funds used increased to $28.8 million (Q1 2017 - funds used of $9.5 million), primarily due to a lower adjusted EBITDA
• In Q1 2018, the Company generated a net loss of $57.2 million (Q1 2017 – net loss of $24.6 million). The increase is primarily due to a lower adjusted EBITDA and foreign exchange losses
• Q1 2018 capital expenditures totaled $5.3 million (Q1 2017 - $1.7 million) and focused primarily on well servicing in order to restore and maintain production and capital related to drilling of future infill wells
• The Company closed Q1 2018 with a cash balance of $54.3 million (including restricted cash of $7.1 million) (Q4 2017 - $43.3 million)

Operational

• Q1 2018 production increased 5% to 12,670 bbl/d (Q1 2017 – 12,052 bbl/d). The increase in production reflected the completion of the Company's well restart program in Q2 2017
• Q1 2018 blending costs increased 15% to $16.2 million (Q1 2017 - $14.1 million), primarily due to higher total diluent volumes associated with increased bitumen production and higher diluent pricing
• Q1 2018 transportation and handling costs increased 37% to $10.0 million (Q1 2017 - $7.3 million), primarily due to the increase in dilbit sales volumes and lower plant-gate sales in Q1 2018 compared to the prior period

Q1 2018 Financial Highlights

Q1 2018 Operational Highlights

Companies' Creditors Arrangement Act ("CCAA") Proceeding and Status

On March 31, 2016, the Company entered into a forbearance agreement (the "Forbearance Agreement") with Credit Suisse AG, Cayman Islands Branch, as administrative agent, and certain lenders constituting the "Required Lenders" in respect of US$153.8 million of loans made by the lenders (the "Lenders") under the credit agreement dated as of May 23, 2014 (as amended, restated, supplemented, or otherwise modified from time to time, including as amended pursuant to Amendment No. 1 dated May 8, 2015) (the "Amended Term Loan Facility"). Under the terms of the Forbearance Agreement, the Lenders agreed to, among other things, forbear from exercising enforcement rights and remedies arising from the Company's failure to pay the cash interest and principal payments due on March 31, 2016 until the earlier of April 30, 2016; the occurrence of an event of default under the Amended Term Loan Facility, unrelated to the failure to pay principal and interest due on March 31, 2016; or the occurrence of a default or breach of representation by the Company under the Forbearance Agreement.

On April 30, 2016, the Company entered into a second forbearance agreement (the "Second Forbearance Agreement") which extended the forbearance period until May 16, 2016.

On May 17, 2016, the Company sought and obtained creditor protection under the Companies' Creditors Arrangement Act ("CCAA") pursuant to an order (the "Initial Order") granted by the Court of Queen's Bench of Alberta, Judicial Centre of Calgary (the "Court"). The Court granted CCAA stay protection for an initial period expiring on June 16, 2016. Since the Initial Order, seven Court-ordered stay extensions have been obtained, with the most recent extending the stay of proceedings until and including June 29, 2018 (the "CCAA Stay Period").

Under the Initial Order, Ernst & Young Inc. was appointed by the Court as the monitor (the "Monitor").

The CCAA is a federal insolvency statute that allows an insolvent company which owes creditors in excess of $5 million to restructure its business and financial affairs and stays creditors and others from enforcing rights against the insolvent company.

The Initial Order also approved and authorized the Company and the Monitor to conduct a sale and investment solicitation process (the "SISP"), as set out in Schedule "A" to the Initial Order, to identify one or more purchasers and/or investors in the Company's business and/or property.

As authorized and approved by the Initial Order, the Company secured interim financing in the form of a senior secured debtor-in-possession credit facility (the "DIP") established pursuant to a credit arrangement dated as of May 15, 2016 with certain existing lenders (certain of which are or were also significant shareholders of the Company) (the "Interim Lenders") for up to US$20 million (collectively, the "Total DIP Commitments"), with initial commitments of up to US$11.5 million (the "Initial Commitments").

On October 26, 2016, the Company entered into a Waiver, Approval, and Modification Agreement (the "First DIP Amendment Agreement") with its Interim Lenders related to the DIP. Pursuant to the First DIP Amendment Agreement, the Interim Lenders agreed to waive certain limited defaults under the DIP related to the CCAA SISP timelines and advanced to the Company an additional amount of approximately US$5.0 million of the Total DIP Commitments initially authorized by the Court to support the Company's continuing operations.

On December 16, 2016, the Company entered into a further Approval and Modification Agreement (the "Second DIP Amendment Agreement") with the Interim Lenders related to the DIP. The Second DIP Amendment Agreement extended the maturity date under the DIP from May 17, 2017 to December 31, 2017 and amended certain provisions of the DIP in order to provide the Company with greater flexibility to enter into hedging agreements and other long-term contracts.

On June 27, 2017, the Company entered into Approval and Modification Agreement #3 (the "Third DIP Amendment Agreement") with the Interim Lenders with respect to the DIP.  The Third DIP Amendment Agreement extended the maturity date of the DIP from December 31, 2017 to January 31, 2018.

On January 30, 2018, the Company received approval from the Court in its proceeding under the CCAA to grant a royalty to Burgess Energy Holdings, L.L.C ("Burgess") on all of the lands (the "Royalty Lands") containing bitumen together with the oil sands rights and interests owned by the Company (the "Royalty") for cash consideration. Concurrent with the closing of the Royalty transaction, the Company used a portion of the consideration to repay, in full, the US$16.5 million owing under the DIP. Furthermore, the Company obtained an extension of the CCAA stay of proceeding to June 29, 2018.

On March 28, 2018, the Court approved the Company's entry into a Support Agreement (the "Support Agreement") with certain first lien lenders holding in excess of 75% of the principal amount of debt outstanding under the Amended Term Loan Facility and commencement of a new SISP. The Support Agreement provides the foundation for the Company's exit from CCAA protection by securing majority first lien lender support for the commencement of a new SISP and the implementation of either a: (i) "Superior Transaction" identified during the new SISP (being a transaction that provides greater than $90 million of cash consideration, excluding existing cash on hand, plus payment of all priority claims and assumption of certain liabilities); or, (ii) pre-negotiated credit bid transaction pursuant to which a newly formed entity on behalf of the first lien lenders ("Newco") will acquire the assets of the Company (the "Credit Bid Transaction") in the event a Superior Transaction is not identified during the new SISP.

The Support Agreement also contains a number of financial and non-financial covenants and restrictions on the Company.

The key features of the Credit Bid Transaction include: (i) formation of Newco to acquire all or substantially all of the Company's assets (ii) assumption by Newco of the Company's post-CCAA filing trade payables; (iii) offers of employment being made by Newco to all of the Company's employees; (iv) entry by Newco into a new senior secured facility (the "Newco Senior Secured Facility"); and, (v) distribution of the shares of Newco and the obligation under the Newco Senior Secured Facility to the existing first lien lenders on the terms set out in the Support Agreement and related exhibits. The Credit Bid Transaction, if implemented, would not provide a recovery to stakeholders beyond the existing first lien lenders and creditors with claims that rank in priority to the first lien lenders.

The Company continues to proceed with the new SISP and the pre-determined milestones as approved by the Court.

Further information on the new SISP and the Credit Bid Transaction can be found on the CCAA Monitor's website at www.ey.com/ca/connacheroilandgas.

The Credit Bid Transaction or any Superior Transaction identified pursuant to the new SISP will be subject to approval of the Court.

As at March 31, 2018, in connection with the CCAA proceeding, the Company identified the following obligations subject to potential compromise:

The aforementioned obligations, subject to potential compromise, represent the amounts expected to be resolved through the CCAA proceeding and remain subject to future, potentially material, adjustments. On August 24, 2016, the Court granted a claims procedure order establishing a process for the filing of claims against the Company and its directors and officers by September 26, 2016 (the "Claims Bar Date"). The Company received 89 claims by the Claims Bar Date.

The liabilities that are not subject to the CCAA proceeding are excluded from the liabilities subject to potential compromise and include certain non-restructuring liabilities incurred subsequent to May 17, 2016.

About Connacher

Connacher is a Calgary-based in situ oil sands developer, producer, and marketer of bitumen. The Company holds a 100 per cent interest in approximately 465 million barrels of proved and probable bitumen reserves and operates two steam-assisted gravity drainage facilities located on the Company's Great Divide oil sands leases near Fort McMurray, Alberta.

Forward Looking Information

This press release contains forward looking information including, but not limited to the status of the CCAA proceeding, the new SISP, and Support Agreement, the Company's ability to manage its liquidity position and deploy the capital required to maintain existing reserve and production bases, fund maintenance capital, fund working capital requirements and meet contractual and other commitments; expectations regarding future commodity prices, foreign exchange rates, diluent blend ratio, transportation costs, and production and operating costs in future periods; expectations regarding sales and production, bitumen netbacks, general and administrative expenses, and capital expenditures in future periods; the Company's reserves; and general operational and financial performance in future periods.

Forward looking information is based on management's expectations regarding the Company's future financial position; the Company's future growth, results of operations and production, future commodity prices and foreign exchange rates; future capital and other expenditures (including the amount, nature, and sources of funding thereof), plans for and results of drilling activity; environmental matters; business prospects and opportunities; and future economic conditions. Forward looking information involves significant known and unknown risks and uncertainties, which could cause actual results to differ materially from those anticipated. These risks include, but are not limited to: the risk that the new SISP process may not result in a Superior Transaction, the risk that the CCAA Stay Period will not be extended past June 29, 2018 and that as a result, creditors will be entitled to exercise their various rights and remedies against the Company, the level of indebtedness of the Company, the implementation and impact of any reorganization or restructuring on the assets, business and financial affairs of the Company, future co-operation of the creditors of the Company, the Company's ability to generate sufficient cash flow from operations or to obtain adequate financing to fund capital expenditures and working capital needs and to maintain the Company's ongoing obligations during the CCAA process and thereafter, the ability to maintain relationships with suppliers, customers, employees, shareholders and other third parties in light of the Company's current liquidity situation and the CCAA proceeding, as well as the risks associated with the oil and gas industry (e.g., operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve and resource estimates; the uncertainty of geological interpretations; the uncertainty of estimates and projections relating to production, costs and expenses; and health, safety and environmental risks), risk of commodity price and foreign exchange rate fluctuations, risks associated with the impact of general economic conditions, risks and uncertainties associated with maintaining the necessary regulatory approvals and securing the financing to continue operations and increase production to levels previously achieved.

Reported average production levels may not be reflective of sustainable production rates and future production rates may differ materially from the production rates reflected in this press release due to, among other factors, difficulties or interruptions encountered during the production of bitumen.

Although Connacher believes that the expectations in such forward looking information are reasonable, there can be no assurance that such expectations shall prove to be correct. Any forward looking information included in this press release is expressly qualified in its entirety by this cautionary statement. Any forward looking information included herein is made as of the date of this press release and Connacher assumes no obligation to update or revise any forward looking information to reflect new events or circumstances, except as required by law.

SOURCE Connacher Oil and Gas Limited