Connacher Oil and Gas Ltd. Announces Q3 2018 Results

Q3 2018 Highlights

Financial

• Q3 2018 and YTD 2018 revenue, net of royalties, totaled $58.8 million (Q3 2017 - $55.9 million) and $146.8 million (YTD 2017 - $156.7 million), respectively. For Q3 2018, revenue net of royalties increased primarily due to higher crude oil benchmark pricing, partially offset by lower sales volumes. For YTD 2018, revenue, net of royalties was adversely affected by unfavourable fixed price sales agreements. In Q3 2018 and YTD 2018, fixed price sales agreements yielded an unfavourable impact to revenue, net of royalties, of $3.8 million and $28.7 million, respectively
• Q3 2018 and YTD 2018 adjusted EBITDA decreased to $7.6 million (Q3 2017 - $9.7 million) and increased the deficit to $5.0 million (YTD 2017 - $18.4 million), respectively. In Q3 2018, the decrease was primarily due to the realized losses on risk management contracts and increased restructuring costs. For YTD 2018, the decrease is primarily due to higher input costs and lower revenue, net of royalties
• YTD 2018 funds used increased to $41.5 million (YTD 2017 - $19.8 million), primarily due to a lower adjusted EBITDA
• In Q3 2018 and YTD 2018, the Company generated net losses of $118.0 million (Q3 2017 - $222.8 million) and $209.3 million (YTD 2017 - $262.9 million), respectively. In 2017 and 2018, impairment losses totaled $210 million and $104 million, respectively
• Q3 2018 and YTD 2018 capital expenditures totaled $2.6 million (Q3 2017 - $1.5 million) and $9.5 million (YTD 2017 - $4.2 million), respectively, and focused primarily on well servicing required to restore and maintain production. In Q1 2018, capital expenditures included amounts related to drilling of future infill wells, which expenditures were not continued in 2018
• The Company exited Q3 2018 with a cash balance of $63.0 million (including restricted cash of $7.1 million) (Q4 2017 - $43.3 million)

Operational

• Q3 2018 and YTD 2018 production decreased to 11,498 bbl/d (Q3 2017 – 12,812 bbl/d) and 12,249 bbl/d (YTD 2017 – 12,312 bbl/d), respectively. In Q3 2018, the decrease was primarily due to scheduled maintenance and a natural decline in production
• Q3 2018 and YTD 2018 blending costs increased 27% to $16.0 million (Q3 2017 - $12.6 million) and 23% to $49.7 million (YTD 2017 - $40.3 million), respectively, primarily due to higher diluent benchmark pricing, partially offset by lower diluent volumes
• Q3 2018 and YTD 2018 transportation and handling costs increased 10% to $10.2 million (Q3 2017 - $9.3 million) and 20% to $30.7 million (YTD 2017 - $25.5 million), respectively, primarily due to higher costs associated with transportation and the reduction of plant-gate sales in 2018
• Q3 2018 and YTD 2018 production and operating expenses decreased 16% to $17.9 million (Q3 2017 - $21.4 million) and 12% to $55.3 million (YTD 2017 - $62.9 million), respectively, primarily due to lower natural gas costs

Q3 2018 Financial Highlights

Q3 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, ten Court-ordered stay extensions have been obtained, with the most recent extending the stay of proceedings until the earlier of implementation of the CCAA Plan (defined below) or January 31, 2019 (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") pursuant to a credit agreement 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 of $43.75 million. 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.

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 provided the foundation for the Company's exit from CCAA protection by securing majority first lien lender support for the commencement of a new sale and investment solicitation process ("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 the Company's stakeholders beyond the existing first lien lenders and creditors with claims that rank in priority to the first lien lenders.

On August 2, 2018, the Company announced that East River Oil and Gas Ltd. (the "Plan Sponsor") had been selected as the "Successful Bidder" pursuant to the SISP conducted in the Company's proceeding under the CCAA.

The Company and the Plan Sponsor entered into a CCAA Acquisition and Plan Sponsorship Agreement dated August 2, 2018 (the "Plan Sponsorship Agreement") pursuant to which the Plan Sponsor will acquire the Company upon and subject to the terms and conditions set out in the Plan Sponsorship Agreement under a plan of compromise and arrangement (the "CCAA Plan") under the CCAA. The Plan Sponsorship Agreement also provides that in the event that, among other things, the CCAA Plan is not approved by the Company's creditors or the Court, or if the Company and the Plan Sponsor jointly determine that it is no longer viable to implement the transactions contemplated by the CCAA Plan, the Plan Sponsor will acquire substantially all of the assets of the Company pursuant to a Purchase and Sale Agreement dated August 2, 2018 ("Sale Agreement").

The CCAA Plan provides that, subject to the terms and conditions set out therein, the Plan Sponsor will acquire a 100% equity interest in the Company for cash consideration of $113.5 million. The CCAA Plan provides for payments and distributions to the Company's creditors with proven claims from the cash consideration plus the Company's existing cash as determined and adjusted pursuant to the CCAA Plan.

As the cash consideration being paid by the Plan Sponsor under the CCAA Plan, along with the Company's adjusted existing cash, is insufficient to pay all of the claims of creditors of the Company in full, no value will accrue to the Company's shareholders as a result of the implementation of the CCAA Plan and the outstanding shares and options of the Company will be cancelled for no consideration and without any vote of the existing shareholders.

In the event the CCAA Plan does not proceed, subject to the terms and conditions set out in the Sale Agreement, the Plan Sponsor will acquire substantially all of the assets of the Company for cash consideration of $109.5 million. As the cash consideration being paid by the Plan Sponsor under the Sale Agreement, along with the Company's adjusted existing cash, is insufficient to fully pay the claims of the Company's first lien lenders and creditors with claims in priority to the security of the first lien lenders, in the event that the transaction under the Sale Agreement occurs, the Company does not expect any value will accrue to any of the Company's other creditors or the shareholders and the Company's business and assets will be transferred to the Plan Sponsor free and clear of all claims.

The completion of the transactions contemplated by the Plan Sponsorship Agreement, the CCAA Plan and the Sale Agreement are subject to a number of conditions, including the receipt of all required regulatory approvals, the approval of the Court and, in the case of the CCAA Plan, receipt of requisite creditor approval. The Plan Sponsorship Agreement, CCAA Plan and Sale Agreement also contain other terms and conditions customary for transactions of this nature.

On August 22, 2018, the Court granted orders (i) authorizing meetings of the Company's creditors to be held to consider approval of the Plan; (ii) approving and authorizing the Company's entry into the Sale Agreement and, in the event that the CCAA Plan is not implemented, authorizing the Company to perform its obligations under the Sale Agreement; and (iii) approving a supplemental claims procedure for the identification and determination of certain priority claims, non-continuing employee claims, certain post-filing claims against the Company, and post-CCAA filing claims against the Company's directors and officers.

The CCAA Plan contemplates two classes of creditors: (i) a class of the Company's first lien lenders (the "First Lien Lender Class"); and (ii) a class (the "General Creditor Class") comprised of all other affected creditors, other than holders of certain priority claims and holders of equity claims in the Company (each a "General Creditor"). The first lien lenders voted in both the First Lien Lender Class and, with respect to their deficiency claims, in the General Creditor Class.

On October 3, 2018, the CCAA Plan was approved by the required majorities of the First Lien Lender Class and General Creditor Class.

The resolution (the "Plan Resolution") approving the CCAA Plan pursuant to the CCAA was approved by 100% of the First Lien Lender Class and 100% of the General Creditor Class who were present and voted in person or by proxy on the Plan Resolution at the creditors' meetings.

On October 4, 2018, the Court granted an order (the "Sanction Order") approving and sanctioning the CCAA Plan. In the Sanction Order, the Court also extended the CCAA Stay Period to the earlier of (i) the filing of the Monitor's Certificate (as defined in the Sanction Order) and (ii) January 31, 2019.

The Company continues to work towards satisfying conditions precedent to the CCAA Plan and consummating the transaction with East River, which is currently expected to close on or before December 15, 2018, subject to extension.

The material terms of the Plan Sponsorship Agreement and CCAA Plan and the Sale Agreement, including the consideration thereunder, are contained in the Plan Sponsorship Agreement and CCAA Plan and the Sale Agreement, copies of these documents and the information circular circulated in connection with the meetings of the First Lien Lender Class and General Creditor Class held on October 3, 2018 and related documents are available on the Monitor's website at www.ey.com/ca/connacheroilandgas and under the Company's profile on www.sedar.com.

As at September 30, 2018, in connection with the CCAA proceeding, the Company identified the following obligations subject to potential compromise:

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's principal asset is a 100 per cent interest in the Company's Great Divide oil sands leases near Fort McMurray, Alberta. The Company operates two steam-assisted gravity drainage facilities located on these leases.

Forward Looking Information

This press release contains forward looking information including, but not limited to the transactions contemplated by the Plan Sponsorship Agreement, the implementation of the CCAA Plan, the transaction contemplated by the Sale Agreement, the transactions contemplated by the Credit Bid Transaction, the Company's CCAA proceeding; 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 implementation of the Plan Sponsorship Agreement and the CCAA Plan, alternatively the completion of the transactions contemplated by the Sale Agreement in the event the CCAA Plan is not implemented, or further alternatively the completion of the transactions contemplated by the Credit Bid Transaction in the event neither the Plan Sponsorship Agreement or the Sale Agreement are implemented. 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: that the Plan Sponsor and/or the Company may not obtain required regulatory approvals or satisfaction of other conditions required to successfully implement the Plan Sponsorship Agreement and the CCAA Plan or the Sale Agreement; that the Company may not be able to prevent third parties from obtaining court orders or approvals that are contrary to the Company's interests, risks relating to the future co-operation of the creditors of the Company, as well as the risks associated with conducting business in 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 Ltd.



Contact
Merle Johnson, Chief Executive Officer; Jeff Beeston, Chief Financial Officer; Connacher Oil and Gas Ltd., Phone: (403) 538-6201, Fax: (403) 538-6225, Suite 1040, 640 - 5th Avenue SW, Calgary, Alberta T2P 3G4, inquiries@connacheroil.com, www.connacheroil.com