PRY

CALGARY, Nov. 21, 2012 /CNW/ - Pinecrest Energy Inc. (TSX-V: PRY) ("Pinecrest") and Spartan Oil Corp. ("Spartan") (TSX: STO) are pleased to announce that they have entered into an arrangement agreement (the "Arrangement Agreement") providing for the combination of Pinecrest and Spartan (collectively, the "Combined Company") to form a premier light oil weighted entity that will provide shareholders with a sustainable model of income and production growth.  The Combined Company will have an enterprise value approaching $1 billion and an attractive suite of high netback light oil projects.

Under the terms of the Arrangement Agreement, the merger will be completed through the acquisition by Pinecrest of all of the outstanding common shares of Spartan (the "Spartan Shares") on the basis of 2.738 common shares of Pinecrest (the "Pinecrest Shares") for each outstanding Spartan Share (the "Transaction"). The exchange ratio in respect of the Transaction represents a deemed price of $5.12 per Spartan Share and a deemed price of $1.87 per Pinecrest Share.  The combination of Pinecrest and Spartan creates a premier light oil weighted entity that will provide shareholders with a sustainable model of income and growth.  The Combined Company is targeting a medium and long term payout ratio of less than 100%; the forecasted 2013 capital spending and dividend payments are expected to represent approximately 103.8% of the funds from operations.

Pinecrest's existing executive team, led by Wade Becker, will manage the Combined Company.  At closing, and prior to the proposed 3 for 1 share consolidation to be completed under the terms of the Arrangement Agreement, the Combined Company will have approximately 513.4 million shares outstanding with Spartan shareholders owning approximately 49 percent of the Combined Company (assuming the exercise of certain Pinecrest warrants and options).  It is contemplated that Richard McHardy and Don Archibald, currently members of Spartan's Board of Directors, will be appointed to the Board of the Combined Company at closing.

Creating a Sustainable Premier Light Oil Income and Growth Company

The combination of high netback oil weighted assets at Red Earth and Pembina allow for the transition to an income and growth model that supports sustainable dividend payments to shareholders and provides the opportunity for annual per share growth. Through industry leading netbacks (greater than 91% light oil and liquids) and greater than $190 million of anticipated credit facility capacity, the Combined Company will have the discretionary ability to accelerate production and cash flow growth.  The combination of a high corporate netback, low risk drilling, decreasing corporate decline and year round drilling access allows for efficient long term sustainability. The key attributes to the Combined Company sustainability under the dividend model are as follows:

• Industry leading Netbacks
• • Combining the top 2 netback E&P juniors
  • 91% oil and liquids weighting provide $60.00/ boe combined operating netback (2013 combined pro forma)
• Measured Corporate Decline and Capital Efficiency Management
• • Complement horizontal multistage drill program with 7 waterflood schemes to be implemented in 2013
  • • Waterflood capital efficiency forecasted at $10,000/bbl
  • Attractive capital efficiencies on low risk development drilling opportunities at Pembina of approximately $30,000 per boe
  • Forecast corporate declines of:
  • • 40% in 2013
    • 33% in 2014
    • 27% in 2015
• Two core light oil resource play areas provide operational diversity and extensive inventory of horizontal drilling locations across large oil in place assets
• • Red Earth Slave Point carbonate play:
  • • Planned implementation of 7 waterflood schemes in 2013
  • Pembina Keystone Cardium play:
  • • Low risk, repeatable drilling; year round access; extensive existing infrastructure
• Financial Flexibility
• • The Combined Company will have the strongest balance sheet among both the intermediate and the yield Canadian E&P universe; proforma 0.2 x Debt/ cashflow
  • Annual cash flow in excess of $200MM supports dividend and capital program
  • A $225 million anticipated credit facility to accelerate growth, including through strategic acquisitions
  • Anticipated hedging program of up to 5,000 boe/d for 2013 to ensure stability of cash flows
• Experienced Board of Directors and Management Team
• • Technically focused with a proven track record of value creation

Subject to the completion of the Transaction, Pinecrest's Board of Directors has approved an initial annualized dividend of $0.155 per share that is anticipated to be declared in the first month subsequent to the completion of the Transaction. Based on Pinecrest's closing share price on November 20, 2012 of $1.87, the dividend translates to an 8.3 percent yield.

The dividend, on an annualized basis, will require $79.6 million or 39.8 percent of the Combined Company's estimated 2013 pro-forma cash flow of approximately $200 million (Cdn $85.00/bbl and $3.00/mcf, AECO) based on estimated average pro forma 2013 production of 9,200 - 9,600 boe/d (91% oil and liquids). Subject to board of director approval, Pinecrest anticipates allocating approximately $130 million to 2013 capital expenditures for an estimated 2013 all-in payout ratio of 103.8 percent. With pro forma tax pools of approximately $535 million, the Combined Company has sufficient tax pool coverage to provide shareholders with a tax efficient yield vehicle.

The Combined Company's capital expenditures will continue to be focused in the Cardium light oil resource play in the Pembina area of central Alberta and the Slave Point light oil play in Otter/Evi and Red Earth areas of northern Alberta.  The Combined Company's significant low risk development drilling inventory, together with attractive capital efficiencies and the high netback nature of these plays supports the sustainability of the Combined Company's cash flow and dividends for the foreseeable future.

In addition, the Combined Company will look for opportunities to acquire stable, low decline, assets with attractive netbacks. As a larger, dividend paying company, Pinecrest management believes the Combined Company will be well positioned to compete for acquisitions.  Management feels that the Combined Company's balance sheet will give it a unique competitive advantage that will enable it to generate measurable accretion, while maintaining a conservative debt to cash flow ratio.

Upon completion of the transaction the Combined Company may operate under a different name to be released at a later date.

Key Attributes of the Combined Company:

• An enterprise value approaching $1 billion (based on the current trading price of the Pinecrest and Spartan Shares and the net debt at the time of closing);
• Unlevered balance sheet with an estimated working capital deficit of approximately $35 million at closing, relative to an anticipated credit facility of $225 million.
• Expected pro forma 2013 average production of approximately 9,200 - 9,600 boe/d (91% light oil and liquids);
• Top-decile operating netbacks of greater than $60.00/boe;
• 39.1% basic payout ratio and 103.8% all-in payout ratio;
• Shallowing corporate declines year over year;
• Proved reserves of 20.1 mmboe and Proved plus Probable reserves of 29.8 mmboe based on the independent reserve reports as at December 31, 2011;
• RLI of 8.7 years (based on mid range 2013 average production of 9,200 - 9,600 boe/d); and
• Greater than 500 (gross) horizontal light oil drilling locations targeting between the Slave Point at Red Earth and the Cardium at Keystone.

Arrangement

The Transaction is to be effected by way of an arrangement under the Business Corporations Act (Alberta). Completion of the Transaction, which is anticipated to occur in mid January, 2013, and is subject to, among other things, the approval of shareholders holding at least 66⅔ percent of the Spartan Shares and Pinecrest Shares voting on the Transaction, the approval of the Court of Queen's Bench of Alberta, the receipt of all necessary regulatory and stock exchange approvals, and certain closing conditions that are customary for a transaction of this nature.

The Directors of each of Spartan and Pinecrest that are eligible to vote have unanimously approved the Transaction and resolved to recommend that their respective shareholders vote in favour of the Transaction. Wade Becker, a director of both Pinecrest and Spartan, abstained from voting on the Transaction. Directors and officers of Spartan, who collectively hold approximately 27% of the outstanding Spartan Shares (on a fully diluted basis), have entered into support agreements with Pinecrest pursuant to which each has agreed to vote in favour of the Transaction.  Directors and officers of Pinecrest, who collectively hold approximately 24% of the outstanding Pinecrest Shares (on a fully diluted basis), have entered into support agreements with Spartan pursuant to which each has agreed to vote in favour of the Transaction.

Each of Spartan and Pinecrest has agreed to not solicit or initiate any discussions regarding any other business combination or sale of material assets of the other and has granted the other the right to match competing, unsolicited proposals.  The Arrangement Agreement provides for a mutual $12.5 million non-completion fee payable by Spartan or Pinecrest, as the case may be, in certain circumstances if the Transaction is not completed.

Complete details of the terms of the Transaction are set out in the Arrangement Agreement, which will be filed by each of Spartan and Pinecrest and will be available for viewing under each of Spartan's and Pinecrest's profiles at www.sedar.com.

Financial Advisors and Fairness Opinions:

Dundee Securities Ltd. ("Dundee") is the lead financial advisor to Pinecrest with Scotiabank also acting as a financial advisor to Pinecrest.  Dundee has provided the Board of Directors of Pinecrest with a verbal opinion that, subject to its review of the final form of document effecting the Transaction, the consideration offered by Pinecrest pursuant to the Arrangement, is fair, from a financial point of view, to Pinecrest.

TD Securities Inc. ("TD") is acting as financial advisor to Spartan and TD has provided the Board of Directors of Spartan with its verbal opinion that, as of the date hereof and subject to the review of final documentation, that the received by Spartan shareholders pursuant to the Transaction is fair, from a financial point of view, to Spartan shareholders.

Clarus Securities Inc. and GMP Securities L.P. are acting as strategic advisors to Spartan.  Canaccord Genuity Corp. is acting as strategic advisor to Pinecrest.

Conference Call Details

Conference call in regards to the Transaction will occur at 11:00 a.m. EST.  A press release will be issued with conference call details.

About Pinecrest and Spartan

Pinecrest is engaged in the acquisition and exploration for and development and production of oil and natural gas in Western Canada.  Pinecrest has a significant position in the emerging, light oil Slave Point carbonate resource play focussed in the greater Red Earth area of north-central Alberta.  The common shares of Pinecrest are listed on the TSXV under the symbol "PRY".

Spartan Oil Corp. is engaged in the business of acquiring crude oil and natural gas properties and exploring for, developing and producing oil and natural gas in western Canada.  Spartan is uniquely positioned with a significant position in two of the leading oil resource plays in western Canada, being the Cardium light oil play in central Alberta and the Bakken light oil resource play in southeast Saskatchewan.  The common shares of Spartan are listed on the TSX under the symbol "STO".

READER ADVISORIES

Dividends

The payment and the amount of dividends declared in any month will be subject to the discretion of the board of directors and will depend on the board of director's assessment of the Combined Company's outlook for growth, capital expenditure requirements, funds from operations, potential acquisition opportunities, debt position and other conditions that the board of directors may consider relevant at such future time. The amount of future cash dividends, if any, may also vary depending on a variety of factors, including fluctuations in commodity prices and differentials, production levels, capital expenditure requirements, debt service requirements, operating costs, royalty burdens and foreign exchange rates.

Forward-Looking Statements

This press release contains forward-looking statements. More particularly, this press release includes, without limitation, forward-looking statements concerning the timing and completion of the Arrangement, the characteristics of the Spartan assets and the Pinecrest assets, the timing and amount of future dividend payments, the Combined Company's future hedging activities, the Combined Company's capital expenditure program, the Combined Company's drilling plans, the expected ability of the Combined Company to execute on its exploration and development program and the Combined Company's anticipated production (both in terms of quantity and raw attributes) funds flow from operations, operating netbacks, exit net debt and other similar matters.

The forward-looking statements contained in this document are based on certain key expectations and assumptions made by Pinecrest and Spartan, including: (i) with respect to capital expenditures, generally, and at particular locations, the availability of adequate and secure sources of funding for the Combined Company's proposed capital expenditure program and the availability of appropriate opportunities to deploy capital; (ii) with respect to drilling plans, the availability of drilling rigs, expectations and assumptions concerning the success of future drilling and development activities and prevailing commodity prices; (iii) with respect to the Combined Company's ability to execute on its exploration and development program, the performance of the Combined Company's personnel, the availability of capital and prevailing commodity prices; and (iv) with respect to anticipated production, the ability to drill and operate wells on an economic basis, the performance of new and existing wells and accounting risks typically associated with oil and gas exploration and production; (v) oil prices; (vi) currency exchange rates; (vii) royalty rates; (viii) operating costs; and (ix) transportation costs. Although Pinecrest and Spartan believe that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because neither Pinecrest nor Spartan can give any assurance that they will prove to be correct. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, the failure to obtain necessary regulatory, shareholder and court approvals for the Transaction and risks associated with the oil and gas industry in general (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 estimates; the uncertainty of estimates and projections relating to production, costs and expenses; health, safety and environmental risks; commodity price and exchange rate fluctuations; and uncertainties resulting from potential delays or changes in plans with respect to exploration or development projects or capital expenditures).

Any references in this news release to initial production (IP) rates are useful in confirming the presence of hydrocarbons, however, such rates are not determinative of the rates at which such wells will continue production and decline thereafter are not necessarily indicative of long term performance or ultimately recovery. While encouraging, readers are cautioned not to place reliance on such rates in calculating the aggregate production for Pinecrest, Spartan or the Combined Company.

Any references in this news release to undiscounted or discounted net present values of future net revenue do not represent the fair market value of the reserves.

The forward-looking statements contained in this document are made as of the date hereof and neither Pinecrest nor Spartan undertakes any obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws. Please refer to Pinecrest's 2012 Annual Information Form for additional risk factors relating to Pinecrest and Spartan's 2012 Annual Information Form for additional risk factors relating to Spartan, both of which are available for viewing on www.sedar.com.

Conversion

The term barrels of oil equivalent ("boe") may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet of natural gas to one boe (6 mcf/bbl.) is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. All boe conversions in this report are derived from converting gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil. Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.

This news release shall not constitute an offer to sell or the solicitation of an offer to buy any securities nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful. The securities issued pursuant to the plan of arrangement and financing described herein have not been and will not be registered under the United States Securities Act of 1933 and may not be offered or sold in the United States except in transactions exempt from such registration.

Neither the 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.

SOURCE Pinecrest Energy Inc.