Upper Lake Oil and Gas Ltd. and Monterey Exploration Ltd. combine to create northeast British Columbia gas focused junior exploration company



    CALGARY, July 3 /CNW/ - Upper Lake Oil and Gas Ltd. (TSX: UP) ("Upper
Lake") and Monterey Exploration Ltd. ("Monterey"), a private oil and gas
company, are pleased to announce that they have entered into an agreement (the
"Arrangement Agreement") under which, subject to certain conditions, Monterey
will acquire all of the issued and outstanding shares (the "Upper Lake
Shares") of Upper Lake (the "Transaction").
    The proposed Transaction is intended to create a northeast British
Columbia ("NEBC") focused, natural gas weighted producer with resource style
assets including interests in the emerging Montney resource play in NEBC. Upon
closing of the Transaction the combined company will have:

    
    -   An experienced management team, which will comprise the current
        management of Monterey
    -   Estimated production of approximately 2,400 boe/d, of which 80% is
        weighted to natural gas
    -   8.3 MMBoe of Proved plus Probable reserves as of December 31, 2007 as
        reviewed by GLJ Petroleum Consultants Ltd. ("GLJ")
    -   Reserve Life Index in excess of 9.5 years
    -   Undeveloped land base of 90,000 net acres almost entirely located in
        NEBC
    -   Strategic, high working interest land position in the heart of the
        Montney resource play
    -   Excellent asset overlap (majority of Upper Lake's producing assets
        are located in close proximity to Monterey's interest in the
        Ferrybank Belly River Gas Unit in Central Alberta and Upper Lake's
        undeveloped Montney land position at Tupper complements Monterey's
        existing activities in the Montney in NEBC)
    -   Prospect inventory of approximately $150 million, which has the
        potential to provide several years of future drilling opportunities
        at Monterey's current pace of activity
    -   Additional mass and free cash flow which can be applied to its
        drilling prospects
    

    Under the terms of the Arrangement Agreement, shareholders of Upper Lake
("Upper Lake Shareholders") will receive 0.28 of a common share of Monterey (a
"Monterey Share") for each Upper Lake Share held. Monterey Shares may also be
issued to certain optionholders of Upper Lake in accordance with the
Arrangement Agreement. Based on Monterey's year-end 2007 net asset value of
$3.32 per share (calculated with response to Monterey's independently prepared
year-end reserves report and assuming 25,054,162 shares outstanding), the
total purchase price is approximately $32 million, comprised of approximately
$26 million of equity value and the assumption of approximately $6.0 million
of net debt. Upper Lake's current production is estimated at 800 boe/d, it
holds approximately 20,875 net acres of undeveloped land internally valued at
$5 million and had 1.3 MMBoe of Proved plus Probable reserves at December 31,
2007, as prepared by GLJ.
    The Transaction is expected to be completed by way of a Plan of
Arrangement and is subject to normal stock exchange, court and regulatory
approvals and the requisite approval of the securityholders of Upper Lake.
Upper Lake expects that an information circular will be mailed to the Upper
Lake Shareholders in late July with an Upper Lake shareholder meeting to occur
in late August. It is a condition under the Arrangement Agreement that
Monterey receive conditional approval to list the Monterey Shares for trading
on the TSX.
    The Board of Directors of each of Upper Lake and Monterey have
unanimously approved the Transaction and the Board of Directors of Upper Lake
has determined that the Transaction is fair from a financial point of view to
the Upper Lake Shareholders. Directors and officers of Upper Lake, who own
approximately 35 percent of the outstanding Upper Lake Shares, have agreed to
vote their shares in favor of the Transaction. Upper Lake has agreed that it
will not solicit or initiate discussions regarding any other business
combination or sale of material assets. The Arrangement Agreement provides for
a $2 million non-completion fee, payable in certain circumstances, by Monterey
or Upper Lake, if the Transaction is not completed.

    MANAGEMENT TEAM AND BOARD OF DIRECTORS

    Upon completion of the Transaction, the combined entity will be led by
the existing management team of Monterey. As part of the Transaction, Don
Copeland (Executive Chairman of Upper Lake) is expected to join the Board of
Directors of Monterey. The management team and Board of Directors of Monterey
has considerable experience in managing and directing public oil and gas
entities and is set out as follows:

    MANAGEMENT TEAM

    Patrick Manuel - President, Chief Executive Officer and Director
    Mr. Manuel is a Director and the President and Chief Executive Officer of
    Monterey. He is a Professional Engineer with over 18 years of experience.

    David Fisher - Vice President Finance and Chief Financial Officer
    Mr. Fisher is the Vice President, Finance and Chief Financial Officer of
    Monterey. He is a Chartered Accountant and has almost 30 years of
    experience.

    Gordon Crooks - Vice President Exploration and Development
    Mr. Crooks is the Vice President, Exploration and Development of
    Monterey. He is a Professional Geologist and has 30 years of experience.

    Bill Meeuwissen - Vice President Production and Operations
    Mr. Meeuwissen is the Vice President, Production and Operations of
    Monterey. He is a Professional Engineer and has 28 years of experience.

    Amar Pandila - Vice President, Corporate Development
    Mr. Pandila is the Vice President, Corporate Development of Monterey. He
    is a Geophysicist and has 21 years of experience.

    BOARD OF DIRECTORS

    Murray Nunns - Chairman
    Mr. Nunns is currently the President and Chief Operating Officer of Penn
    West Energy Trust.

    Bill Bradley - Director
    Mr. Bradley is an independent businessman with extensive experience in
    the oil and gas industry.

    John Brussa - Director
    Mr. Brussa is a senior partner in the Calgary-based energy law firm of
    Burnet, Duckworth & Palmer LLP specializing in the area of taxation.

    John Eby - Director
    Mr. Eby is an independent businessman with an extensive background in
    financial markets.

    Chris Webster - Director
    Mr. Webster is Chief Financial Officer of Pengrowth, a publicly traded
    Energy Trust.

    Don Copeland - Director
    Mr. Copeland is currently the Executive Chairman of Upper Lake. He has in
    excess of 25 years of engineering and senior management experience in the
    oil and gas industry.

    BENEFITS OF THE TRANSACTION

    Monterey is a private, natural gas weighted producer that commenced
operations in January 2006 and has grown production to approximately
1,600 boe/d through an equal contribution of acquisitions and organic drill
bit growth. The majority of Monterey's current production (approximately 85%)
is located in NEBC and in that respect, is not affected by the proposed
Alberta New Royalty Framework ("NRF"). Monterey has developed a prospect
inventory of approximately $150 million, which has the potential to provide
several years of drilling opportunities at its current pace of activity.
Monterey has assembled a strategic, high working interest land position in the
heart of the Montney resource play in NEBC along with other resource style
tight gas plays in NEBC, which Monterey believes are amenable to horizontal
drilling and multi-stage fracture stimulation techniques. Upper Lake's
additional undeveloped Montney acreage at Tupper further enhances the position
within the Montney fairway.
    The Transaction is expected to create an entity with additional mass, a
solid balance sheet and free cash flow to re-deploy into and accelerate the
extensive drilling inventory in NEBC.
    Upper Lake's President & Chief Executive Officer, Kelly Ogle noted,
"Upper Lake has successfully grown production from an initial starter kit;
however, we realized we needed to be part of a much bigger entity to garner
market recognition. Monterey has demonstrated per share growth in production,
cash flow and reserves both through acquisition and drilling. Monterey's low
decline, long life asset base was very attractive to Upper Lake and our cash
flow base can be re-deployed into Monterey's resource style plays in NEBC."
    "This all-paper deal allows the Upper Lake Shareholders to continue to
participate in the Upper Lake upside potential along with the significant
potential we see in the Monterey asset base. We look forward to the combined
company's future given its asset base and growth profile" said Upper Lake
Chairman Don Copeland.

    
    PRO FORMA OF THE COMBINED COMPANY

    ------------------------------------------------------------------------
    Estimated production as of July 1 (boe/d)                         2,400
    ------------------------------------------------------------------------
    Run Rate Cash Flow(1)                                     $35.3 million
    ------------------------------------------------------------------------
    Net Debt(2)                                               $26.8 million
    ------------------------------------------------------------------------
    Net Debt to Run Rate Cash Flow                                0.8 times
    ------------------------------------------------------------------------
    Diluted Shares Outstanding                                 35.1 million
    ------------------------------------------------------------------------
    Run Rate Cash Flow Per Share (Diluted)                            $1.01
    ------------------------------------------------------------------------
    Proved plus Probable Reserves (MMBoe)(3)                            8.3
    ------------------------------------------------------------------------
    Proved plus Probable Reserve Life Index                       9.5 years
    ------------------------------------------------------------------------
    Undeveloped Land (net acres)                                     90,000
    ------------------------------------------------------------------------

    Notes:
    (1)    Run rate cash flow is based on US$120/bbl WTI and an AECO-C price
           of C$10.00 per Mcf and uses estimated production at July 1 of
           2,400 boe/d, a 21.5% royalty rate, $10.00/boe operating costs and
           transportation of $1.50/boe.
    (2)    Estimated net debt at June 1, 2008 for both Monterey and Upper
           Lake including transaction costs.
    (3)    December 31, 2007 reserves per GLJ for both Monterey and Upper
           Lake.
    

    OVERVIEW OF THE COMBINED COMPANY ASSETS

    Production at closing of the Transaction is expected to be approximately
2,400 boe/d (85% weighted to natural gas). It is expected that approximately
55% of the pro forma production will be located in NEBC and the vast majority
of the future capital spending will be directed towards growth projects in
NEBC. There are four main project areas in NEBC and two primary project areas
in Alberta. The following is an overview of the combined entity's current
production and properties:

    
    Laprise/Dahl, NEBC
    ------------------
           This area produces approximately 700 boe/d or 30% of the combined
           entity's current production at an average working interest of 60%
           of which 60% is company-operated production. The principal
           producing zones are the Bluesky and Baldonnel formations and the
           company has significant working interest ownership in five
           production facilities.

    Buick Creek/Squirrel, NEBC
    --------------------------
           This area produces approximately 350 boe/d or 15% of the combined
           entity's total production. Monterey has a significant working
           interest in two main production facilities and operates the
           majority of the area production. Go forward activity is expected
           to mainly target Gething and Dunlevy prospects delineated from
           proprietary seismic utilizing horizontal drilling and multi stage
           fracture technology.

    Brassey, NEBC resource play
    ---------------------------
           The Brassey area currently produces approximately 200 boe/d or 10%
           of the combined entity's production from the Cadomin resource play
           trend. It is anticipated that the combined entity's future
           projects in the Brassey area will target horizontal drilling
           development of the Cadomin formation applying multi-stage fracture
           technology.

    Montney, NEBC resource play (Groundbirch/Dawson/Tupper)
    -------------------------------------------------------
           The combined entity will have several sections of high working
           interest land in the main prospective Montney fairway. The
           prospects are defined by seismic, offset production and/or tested
           gas. It is anticipated that the combined entity's future projects
           in the Montney fairway will target horizontal drilling in the
           Montney formation applying multi-stage fracture technology. The
           company owns 50 boe/d of net Montney production which is tied in
           but currently not producing due to facility constraints.

    Ferrybank, Alberta
    ------------------
           Production in the Ferrybank area of West Central Alberta is from
           the Lower Cretaceous Ellerslie and Glauconitic sands, and from the
           Ferrybank Basal Belly River Gas Unit. Current production is
           850 boe/d or 35% of the combined entity with over 55% of this
           production residing on "freehold" lands which are unaffected by
           Alberta's NRF.

    Smoky, Alberta
    --------------
           The main activity focus in this area is exploration and
           development of gas from the Cardium formation. Several development
           and step out locations on thrusted Cardium sheets have been
           identified from seismic. Current production is approximately
           80 boe/d.
    

    FINANCIAL ADVISORS

    Cormark Securities Inc. is acting as exclusive financial advisor to
Monterey with respect to the Transaction.
    Acumen Capital Partners has provided the Board of Directors of Upper Lake
with its opinion that, as of the date hereof, the consideration to be received
by the Upper Lake Shareholders pursuant to the Transaction is fair, from a
financial point of view, to the Upper Lake shareholders.

    Advisory Regarding Forward-Looking Statements

    The information provided above includes references to discovered and
undiscovered natural gas resources. There is no certainty that any portion of
the resources will be discovered. If discovered, there is no certainty that it
will be commercially viable to produce any portion of the resource.
    This press release contains forward-looking statements and
forward-looking information within the meaning of applicable securities laws.
The use of any of the words "expect", "anticipate", "continue", "estimate",
"objective", "ongoing", "may", "will", "project", "should", "believe",
"plans", "intends" and similar expressions are intended to identify
forward-looking information or statements. More particularly and without
limitation, this press release contains forward looking statements and
information concerning the combined and each of the companies' petroleum and
natural gas production; reserves; undeveloped land holdings; reserve life
index; business strategy; future development and growth opportunities;
prospects; asset base; anticipated benefits from the Transaction, including
improved operating efficiencies, field optimizations and cost reductions;
future cash flows; value and debt levels; capital programs; treatment under
tax laws; and oil and natural gas prices. The forward-looking statements and
information are based on certain key expectations and assumptions made by
Monterey and Upper Lake, including expectations and assumptions concerning
prevailing commodity prices and exchange rates, applicable royalty rates and
tax laws; future well production rates and reserve volumes; the timing of
receipt of regulatory and securityholder approvals, the performance of
existing wells; the success obtained in drilling new wells; and the
sufficiency of budgeted capital expenditures in carrying out planned
activities; and the availability and cost of labour and services. Although
Monterey and Upper Lake believe that the expectations and assumptions on which
such forward-looking statements and information are based are reasonable,
undue reliance should not be placed on the forward looking statements and
information because Monterey and Upper Lake can give no assurance that they
will prove to be correct. Since forward-looking statements and information
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 risks associated with the oil and gas
industry in general such as 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 reserves,
production, costs and expenses; health, safety and environmental risks;
commodity price and exchange rate fluctuations; marketing and transportation;
loss of markets; environmental risks; competition; incorrect assessment of the
value of acquisitions; failure to realize the anticipated benefits of
acquisitions; ability to access sufficient capital from internal and external
sources; failure to obtain required regulatory and other approvals; and
changes in legislation, including but not limited to tax laws, royalties and
environmental regulations. There are risks also inherent in the nature of the
proposed Transaction, including failure to realize anticipated synergies or
cost savings; risks regarding the integration of the two entities; incorrect
assessments of the values of the other entity; and failure to obtain the
required securityholder, court, regulatory and other third party approvals.
Forward-looking information respecting production rate assumptions at the time
of closing of the Transaction is based upon current production from the oil
and gas properties of Pebble and Good neighbor, respectively,, anticipated
exploration and development drilling activities for the period to closing of
the Transaction, historical success rates associated with exploration and
development drilling in the various areas in which both companies are active,
management's prior experiences with the tie- in of successful wells in the
areas in which the companies are active, the availability of transportation
and processing infrastructure, management's evaluation of the individual wells
to be drilled, historical production rates and other data associated with
prior wells drilled in the areas in which the companies are active and
industry conditions.
    There are risks also inherent in the nature of the proposed Transaction,
including failure to realize anticipated synergies or cost savings; risks
regarding the integration of the two entities; incorrect assessments of the
values of the other entity; and failure to obtain the required securityholder,
court, regulatory and other third party approvals.
    This press release also contains forward-looking statements and
information concerning the anticipated completion of the proposed Transaction
and the anticipated timing for completion of the Transaction. Monterey and
Upper Lake have provided these anticipated times in reliance on certain
assumptions that they believe are reasonable at this time, including
assumptions as to the time required to prepare meeting materials for mailing,
the timing of receipt of the necessary regulatory, court and stock exchange
approvals and the time necessary to satisfy the conditions to the closing of
the Transaction. These dates may change for a number of reasons, including
unforeseen delays in preparing meeting materials, inability to secure
necessary regulatory or court approvals in the time assumed or the need for
additional time to satisfy the conditions to the completion of the
Transaction. Accordingly, readers should not place undue reliance on the
forward-looking statements and information contained in this press release
concerning these times. Readers are cautioned that the foregoing list of
factors is not exhaustive. The forward-looking statements and information
contained in this press release are made as of the date hereof and Monterey
and Upper Lake undertake no 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.
    Disclosure provided herein in respect of barrels of oil equivalent (boe)
may be misleading, particularly if used in isolation. A boe conversion ratio
of 6 Mcf:1 Bbl is based on an energy equivalency conversion method primarily
applicable at the burner tip and does not represent a lhead.





For further information:

For further information: UPPER LAKE OIL AND GAS LTD., Don Copeland
Executive Chairman, (403) 237-9141; Kelly J. Ogle, President and Chief
Executive Officer, (403) 237-9141; MONTEREY EXPLORATION LTD., Patrick Manuel,
President and Chief Executive Officer, (403) 691-7725; David Fisher, Vice
President, Finance & Chief Financial Officer, (403) 691-7737

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UPPER LAKE OIL AND GAS LTD.

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