Sun Red Capital Corporation announces proposed Qualifying Transaction with
Compass Petroleum Ltd.
/NOT FOR DISSEMINATION IN THE UNITED STATES OR THROUGH U.S. NEWSWIRES/
CALGARY, Feb. 17 /CNW/ - Sun Red Capital Corporation (the "Company" or "Sun Red"), a capital pool company listed on the NEX (the "NEX") (NEX: SSQ.H), is pleased to announce that it has entered into a letter of intent, dated February 12, 2010 (the "LOI"), with Compass Petroleum Ltd. ("Compass"), relating to a proposed business combination involving Sun Red and Compass. The proposed transaction is intended to constitute the qualifying transaction ("Qualifying Transaction") for Sun Red, as defined in Policy 2.4 of the TSX Venture Exchange (the "Exchange"). The LOI provides that the Qualifying Transaction will be undertaken by way of three-corner amalgamation, pursuant to which Sun Red will amalgamate (the "Amalgamation") with a newly formed subsidiary of Compass ("AcquisitionCo") and, as such, approval of the Sun Red shareholders will be required. The LOI contemplates that the existing shareholders of Sun Red will receive one common share of Compass for each 40 Sun Red common shares ("Sun Red Shares") held as of the effective date of the Amalgamation. The Qualifying Transaction will be an arm's length transaction under Policy 2.4 of the Exchange. Upon completion of the Amalgamation, the corporation formed by the amalgamation of Sun Red and AcquisitionCo will be a wholly-owned subsidiary of Compass.
SUN RED CAPITAL CORPORATION
Sun Red is a capital pool company under Policy 2.4 of the Exchange. Sun Red has no active business or operations and has no material assets other than cash. The principal business of the Company consists of the identification and evaluation of potential acquisitions or businesses, and once identified and evaluated, the negotiation of an acquisition or business combination, subject to receipt of regulatory and, if required, shareholder approval. Sun Red is authorized to issue an unlimited number of common shares and there are currently 8,092,540 Sun Red Shares issued and outstanding. Sun Red has also granted options to purchase an additional 466,666 Sun Red Shares, at an exercise price of $0.15, with an expiry date of March 29, 2012.
COMPASS PETROLEUM LTD.
Compass was incorporated on September 23, 2002 under the Business Corporations Act (Alberta). Compass is engaged in the exploration, development and production of oil and natural gas in Alberta and Saskatchewan. The head office of Compass is located in Calgary, Alberta. After giving effect to the Amalgamation, Compass will continue to be engaged in the business of oil and gas exploration, development and production and the outstanding common shares of Compass will be listed on the Exchange, as a result of which Compass will become a reporting issuer under the securities laws in force in Alberta and British Columbia. It is anticipated that, following completion of the Amalgamation, applications will be made to applicable securities regulatory authorities to cause Sun Red to cease to be a reporting issuer under securities legislation in force in British Columbia, Alberta and Ontario.
Major Assets and Properties
The following is a description of the key oil and gas properties of Compass:
Grand Forks
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The Grand Forks property is located in southern Alberta, 190 km southeast of Calgary. Compass holds an average 73% working interest in 39,145 gross acres of land. The primary production is medium gravity oil from the Jurassic Sawtooth sandstone at an average drilling depth of 900 metres. Crude oil and natural gas is also produced from the Devonian Nisku Arcs formation at a depth of about 1,300 metres. A minor amount of gas is produced from the Cretaceous Bow Island and Second White Specks sands at shallower depths.
Compass operates over 74% of its oil production from a total of 54 producing oil wells. There are also six producing gas wells, four of which are operated. Compass holds an interest in seven oil batteries, five of which it operates. All of these batteries have high fluid volume handling capabilities. In December 2009, working interest sales averaged 363 bbls/d and 294 mcf/d of natural gas. Produced water is reinjected in the majority of the pools thereby maintaining reservoir pressure and establishing well defined decline profiles.
Since June 30, 2009, the Corporation has drilled four wells, which are currently awaiting further evaluation, in the Nisku Arcs formation.
Vilna (Clay)
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Compass' Vilna natural gas area, located approximately 100 km northeast of Edmonton, Alberta, is centered on the Clay strike area, but includes Bellis, Edwand, Figure Lake, Hairy Hill, and Stry. Compass holds an average 71% working interest in 27,520 gross acres of land. Natural gas production is obtained from a number of Cretaceous sands including Viking, Grand Rapids (Colony), Sparky, Clearwater, Wabiskaw and McMurray, at shallow depths varying from 350 to 650 metres.
Compass operates virtually all of its production in the area. December 2009 sales volumes averaged 605 mcf/d from a total of 15 producing gas wells. Gas production is currently processed and compressed at four facilities. Compass has a 1.03% working interest in the 1-31-59-13W4 gas plant operated by a third party oil and gas corporation, but has no interest in the other three facilities. Wellhead booster compression has been installed to draw the wellhead pressures down on several wells in order to maintain production rates.
Lacombe
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The Lacombe property is located approximately 120 km north of Calgary and 20 km north of the City of Red Deer. Compass has an average 91% working interest in 10,899 acres of land and operates a total of 18 producing wells, of which 16 are Horseshoe Canyon coal bed methane ("CBM") wells, one well produces gas from Edmonton/Bearpaw sands and one well is a Viking oil and gas producer. Targeted zones for conventional gas production are the Edmonton, Bearpaw and Belly River sands. CBM gas is produced from the Horseshoe Canyon coals at depths less than 750 metres. Viking and Lower Mannville oil and gas production is also present in the area at drilling depths up to 1,900 metres.
The Corporation's working interest gas sales in December 2009 was 522 mcf/d with minor liquids. Compass operates all of its production at Lacombe. Approximately 90% of the production was from Horseshoe Canyon CBM wells. All of the wells are tied in to a third party gathering system, transported to a third party compression facility located at 14-22-42-28W4 and subsequently to an area gas plant for processing. There are four wellhead boosters, which boost the wellhead pressure from between 5-25 psi to line pressure of 70 psi.
Craigend
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Craigend is located approximately 150 km north of Edmonton in T62-65 R10-15W4, adjacent to the Vilna property. Compass has an average 71% working interest in 28,800 acres of land. The Viking, Grand Rapids, Sparky, Clearwater, Wabiskaw and McMurray sands as well as the Grosmont carbonate are all gas productive in this area.
Compass operates all but one well at Craigend. There are nine producing gas wells and four shut-in wells, with all current production being from the Viking sand. In December 2009, working interest sales averaged 49 mcf/d of natural gas. The Corporation's gas production is processed at two third party gas facilities.
Lucky Hills
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Lucky Hills is located in west central Saskatchewan, approximately 10 km northwest of Kindersley. Compass has an average 90% working interest in 16,912 acres of land and owns and operates a gas plant, a gas gathering system, three single well oil batteries, four shut-in oil wells, four producing gas wells and a water disposal facility. Third party processing revenues are generated from the gas plant and water disposal facility.
Production is from several formations, natural gas from the upper Mannville McLaren sandstones at a depth of approximately 750 m and heavy oil and natural gas from the Bakken sandstones at a depth of about 850 m. The shallow Viking sandstones (700 m depth) are light oil and gas bearing through out the area, but the reservoir has poor permeability and wells need to be fractured to obtain any inflow. Offsetting operators have begun to develop the Viking using horizontal wells. Compass has identified 76 potential horizontal Viking drilling locations (approximately 800 metres in length) at Lucky Hills. In December 2009, the Corporation's working interest sales averaged 15 bbls/d of crude oil and 1,201 mcf/d of natural gas.
Since June 30, 2009, the Corporation has drilled a Sparky oil discovery well at Druid, north of Lucky Hills. Follow up locations exist on this prospect.
Other Properties
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Compass has interests in a number of other properties, including Valhalla and Grassland in Alberta, and Druid in west central Saskatchewan. These properties in the aggregate contributed approximately 30 Boe/d to December 2009 sales.
To date in fiscal 2010, Compass has focused its exploration and development efforts in southern Alberta for Nisku Arcs oil and gas and for numerous, primarily crude oil prospects in west central Saskatchewan, including the Viking oil resource play.
Sun Red expects that it will issue an additional news release respecting certain reserves information of Compass upon completion of an updated report on Compass' oil and natural gas reserves.
Capital Structure
Compass is authorized to issue an unlimited number of common shares (the "Compass Shares"). There are currently 23,938,294 Compass Shares issued and outstanding. Compass has also issued share purchase options entitling the holders thereof to acquire up to an additional 1,170,000 Compass Shares. The weighted-average exercise price of those options is $1.53 and the options have expiry dates ranging from October 31, 2012 to December 31, 2013. As well, outstanding share purchase warrants previously distributed by Compass entitle the holders thereof to acquire up to 1,675,000 Compass Shares, at an exercise price of $1.55 (escalating by $0.075 per year), which purchase warrants are exercisable at any time and from time to time until December 31, 2013. Yorktown Energy Partners V, L.P. holds 20 million Compass Shares, being approximately 83.6% of the total number of issued and outstanding Compass Shares (undiluted). Members of management of Compass hold an aggregate of 596,052 Compass Shares, being approximately 2.3% of the total number of issued and outstanding Compass Shares (undiluted). In addition, Yorktown Energy Partners VIII, L.P. (an affiliate of Yorktown Energy Partners V, L.P.) holds a $10,750,000 principal amount convertible unsecured note of Compass, which note was privately placed in September 2009. The principal amount of the note is convertible into a maximum of 8,958,333 Compass Shares (subject to adjustment) until the date of maturity, being September 10, 2019. In addition, certain members of management of Compass hold $170,000 aggregate principal amount of unsecured notes, which are convertible into a maximum of 141,667 Compass Shares until September 10, 2019.
Selected Financial Information
Selected annual financial information, derived from the audited consolidated financial statements of Compass for the three most recently completed financial years, are set forth in the following table.
(000's of dollars except Year Ended Year Ended Year Ended
per share amounts) June 30, 2009 June 30, 2008 June 30, 2007
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Revenue $18,741 $21,869 $16,485
Cash provided from operations 5,213 7,696 7,828
Changes in non-cash working
capital items 761 (991) 46
Funds flow from operations 5,974 6,706 7,875
Net earnings (4,190) 1,496 1,679
Per share (basic) (0.18) 0.07 0.08
Per share (diluted) (0.18) 0.06 0.08
Total assets 54,145 58,083 46,096
Current assets 3,091 5,655 3,548
Current liabilities 4,967 8,167 5,354
Bank debt 10,300 6,550 2,650
Compass currently has a credit facility with a third party financial institution in the amount of $20 million. As at the date hereof, the amount drawn under this facility is approximately $1,650,000.
PROPOSED QUALIFYING TRANSACTION
Completion of the Qualifying Transaction is subject to the satisfaction of a number of conditions, including, but not limited to:
(i) completion of satisfactory due diligence reviews by Sun Red and
Compass;
(ii) receipt of all necessary third-party, regulatory and Exchange
approvals, including the approval by the Exchange of the proposed
transaction as Sun Red's Qualifying Transaction and the listing of
the Compass Shares on the Exchange (with Compass designated as a
Tier 1 issuer);
(iii) negotiation and execution and delivery of a definitive form of
amalgamation agreement (the "Formal Agreement") mutually
acceptable to both Sun Red and Compass, containing the terms and
conditions customary in transactions of like nature;
(iv) approval of the Amalgamation and the Formal Agreement by the board
of directors of Compass and AcquisitionCo;
(v) the completion by Compass of an equity financing, by way of
private placement, of not less than $3 million of Compass Shares
at a price not less than $1.50 per Compass Share;
(vi) Compass being satisfied that the number of existing shareholders
of Sun Red who will hold a board lot of Compass Shares upon
completion of the Qualifying Transaction will be not less than
100;
(vii) the absence of any material adverse change in respect of each of
Sun Red and Compass;
(viii) prior to the effective date of the Amalgamation, all options or
other securities convertible into Sun Red Shares will be exercised
or otherwise cancelled or terminated;
(ix) the execution and delivery of definitive support agreements
between Compass, AcquisitionCo and the holders of not less than
10 % of the outstanding Sun Red Shares;
* the calling of a special meeting of Sun Red shareholders, such
meeting to take place no later than April 25, 2010, and approval
of the Amalgamation by the Sun Red shareholders; and
(xi) all directors and officers of Sun Red shall have resigned before
the effective date of the Amalgamation.
MANAGEMENT AND DIRECTORS OF COMPASS
The directors and officers of Compass are as follows:
Yook L. Mah - Chief Executive Officer, Chairman and Director
Mr. Mah has been a Director of Compass since September 2002 and has over 37 years of experience in the oil and gas sector. In 1993, Yook Mah became the President of Benson Petroleum Ltd., a Calgary-based oil and gas corporation, the shares of which were listed on the Toronto Stock Exchange (the "TSX"). He served as the President of Benson Petroleum Ltd. until its acquisition by Southward Energy Ltd. in 2001. Mr. Mah was an independent businessman until 2003 when he became a Director of Goose River Resources Ltd. Goose River Resources Ltd. merged with Signal Energy Inc. in August 2005. In addition, Mr. Mah has served as a director of Hays River Resources Ltd. and Norwich Resources Canada Ltd.
Don D. Raeburn - Vice President, Production and Director
Mr. Raeburn became a Director of Compass in September of 2002 and is currently the Vice President, Production. Mr. Raeburn has over 30 years of production related experience in the oil and gas industry. He has served in ever increasing roles of responsibility for companies such as Tricentrol Oils, Norwich Resources, UMC Resources and Benson Petroleum.
Christopher J. Whyte - Director
Mr. Whyte has been a member of the board of directors of numerous oil and gas companies. Since 1995, he has been the President and Chief Executive Officer of PetroSantander Inc. a private oil and gas corporation headquartered in Houston, Texas. Through its affiliates and a 50% owned Brazilian corporation, PetroSantander has indirect interests in producing oil and gas properties in the United States, Colombia and Brazil. He is also a director of Approach Resources, Inc. (a public oil and gas corporation, the shares of which are quoted through NASDAQ) ("Approach") and a director of Winstar Resources Ltd. (a public oil and gas corporation, the shares of which are listed on the TSX) ("Winstar Resources"). Mr. Whyte has a B.A. from the University of Pittsburg and has been a director of Compass since August 2003.
Bryan H. Lawrence - Director
Mr. Lawrence is a founder and Senior Manager of Yorktown Partners, LLC, the manager of the Yorktown group of investment partnerships, which hold various investments in the energy industry. Mr. Lawrence served as the Managing Director of Dillon, Read and Co. Inc. from 1966 until its merger with SBC Warburg in 1997. Mr. Lawrence also acts as a director of a number of other energy industry companies such as Crosstex Energy, Inc. (a public corporation, the shares of which are quoted through NASDAQ), Hallador Energy Co. (a public corporation, the shares of which trade over the counter), Star Gas Partners, L.P. (a public limited partnership, the units of which are listed on the New York Stock Exchange), Approach and Winstar Resources. Mr. Lawrence has been a director of Compass since May 2003 and holds a M.B.A. from the University of Columbia.
Gordon K. Case - Director
Mr. Case joined the board of directors of Compass in October of 2007 following the indirect acquisition by Compass of Los Altares Resources Inc. Mr. Case is the former Vice President and Chief Financial Officer of Tusk Energy Corporation (a public oil and gas corporation, the shares of which were listed on the TSX), where he held such positions from November 2004 to March 2007. In addition to serving as a director of Compass, Mr. Case is also the Chief Operating Officer and Chief Financial Officer of Opengate Properties Ltd., a private development corporation.
Graham Barnes - Chief Financial Officer
Mr. Barnes has been the Chief Financial Officer of Compass since July 2003. Mr. Barnes is the former Controller and Chief Financial Officer of Benson Petroleum Ltd. where he held such positions from February 1995 to March 2001. Prior to joining Benson Petroleum, Mr. Barnes was Accounting Manager for Amax Petroleum of Canada from March 1992 to August 1994 and prior to that he served as Controller of Domtar Energy Inc. from November 1982 to January 1990.
SPONSORSHIP
The Qualifying Transaction will be subject to the sponsorship requirements of the Exchange. Compass expects to make an application to the Exchange to exempt the Qualifying Transaction from the sponsorship requirements and the granting of this approval by the Exchange is a condition of the completion of the Qualifying Transaction.
In connection with the dissemination of this Press Release, the trading of the Sun Red Shares has been halted by the NEX. Trading will recommence on a date determined by the NEX.
BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of six Mcf: 1bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Completion of the transaction is subject to a number of conditions, including but not limited to, Exchange acceptance and, if applicable pursuant to Exchange Requirements, majority of the minority shareholder approval. Where applicable, the transaction cannot close until the required shareholder approval is obtained. There can be no assurance that the transaction will be completed as proposed or at all.
Investors are cautioned that, except as disclosed in the management information circular or filing statement to be prepared in connection with the transaction, any information released or received with respect to the transaction may not be accurate or complete and should not be relied upon. Trading in the securities of a capital pool company should be considered highly speculative.
The TSX Venture Exchange Inc. has in no way passed upon the merits of the proposed transaction and has neither approved nor disapproved the contents of this press release.
ON BEHALF OF THE BOARD OF DIRECTORS OF
SUN RED CAPITAL CORPORATION
"Greg Hansen"
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Greg Hansen
Chief Financial Officer
Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.
%SEDAR: 00024900E
For further information: Greg Hansen, Chief Financial Officer of Sun Red Capital Corporation, Suite 210, 815 - 10th Avenue S.W., Calgary, Alberta, by telephone at (403) 397-0186, by fax at (403) 245-2723 or by email at [email protected]
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