DBRS Places Trilogy Energy Corp. Under Review with Positive Implications Following Agreement to Merge with Paramount Resources Ltd.

DBRS Limited (DBRS) has today placed the Issuer Rating and the rating of the Senior Unsecured Notes (the Notes), both rated B (low), of Trilogy Energy Corporation (Trilogy or the Company) Under Review with Positive Implications. The rating action follows the announcement by Trilogy on July 6, 2017, that it has agreed to merge with Paramount Resources Ltd. (Paramount). Under the merger, Paramount will acquire all of the common shares and non-voting shares of Trilogy not already owned by Paramount on the basis of one Paramount Class A common share for every 3.75 Trilogy shares. Paramount currently owns approximately 15% of the common and non-voting shares of Trilogy. Clayton H. Riddell is the principal shareholder and Chairman of both Paramount and Trilogy and upon completion of the merger, he will beneficially own and control (directly and indirectly) approximately 44% of the outstanding shares of Paramount.

The merger is to be effected by way of an agreement under the Business Corporations Act (Alberta) and is subject to shareholder and court approvals, including the minority shareholders of each of Trilogy and Paramount. Additionally, on July 6, 2017, Paramount announced that it had entered into an agreement with certain subsidiaries of Apache Corporation to acquire Apache Canada Ltd. (Apache Canada) for $459.5 million in cash plus working capital and other monetary adjustments. The merger of Paramount with Trilogy is conditional upon Paramount completing the acquisition of Apache Canada. The merger also will not trigger any change of control payments and the Company’s Notes will remain outstanding following the completion of the merger. The merger is expected to be completed in September 2017.

DBRS notes that the merged entity’s (including Apache Canada) business risk and credit risk profiles relative to Trilogy on a stand-alone basis should improve materially. The merged entity’s size increases more than threefold with pro forma sales volumes of 83,492 barrel of oil equivalents (boe)/day (versus Trilogy on a stand-alone basis of 25,133 boe/day for the first quarter of 2017) and gross proved reserves, according to an updated reserve report as of June 1, 2017, expand to 344.8 million boes versus 93.2 million boes for Trilogy on a stand-alone base. The merged entity is also expected to encompass a more diversified portfolio of producing properties in Western Canada and the pro forma reserve life improves to 11.3 years from 10.2 years. The focus of the merged entity is to develop liquids rich opportunities in the Montney, Duvernay and Deep Basin resource plays in Western Alberta. On the other hand, the sales mix of the merged entity is even more weighted towards lower margin natural gas volumes (66% pro forma versus 62% on a stand-alone basis) and the operating netback (based on results for the three months ended March 31, 2017) is lower as a result of the higher natural gas weighting.

The balance sheet and credit metrics of the merged entity should improve significantly relative to Trilogy as a stand-alone company. As of March 31, 2017, Paramount had no debt outstanding and $529 million of cash and cash equivalents. An additional $150 million of gross cash proceeds was realized in May with the sale of oil and gas properties in the Valhalla area of Alberta. Paramount plans to fund the Apache Canada acquisition with cash on hand and no debt will be assumed. As at the end of March 31, 2017, Trilogy had long-term debt plus a working capital deficiency (excluding assets and liabilities held for sale) of $584 million. Subsequent to the end of the quarter, the Company received gross cash proceeds of $110 million that was applied to debt reduction. Pro forma debt of the merged entity accounting for proceeds to be received from asset sales post March 31 is estimated by Paramount at approximately $320 million. The majority of the combined entity’s pro forma debt after the merger is anticipated to be the $300 million of Trilogy Notes.

Overall, DBRS is of the opinion that the merger with Paramount should result in an enhancement of Trilogy’s credit ratings. DBRS anticipates resolving the Under Review status by closing of the transaction.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Oil and Gas Industry (September 2016) and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (February 2017), which can be found on dbrs.com under Methodologies.