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CanElson Drilling makes strategic acquisition to expand its natural gas bi-fuel initiative

Thursday, March 29, 2012
  • Canaccord Genuity is acting as exclusive advisor to CanGas with respect to the Acquisition.
  • CanElson's total 2012 capital program is now expected to be approximately $42.5 million.

CanElson Drilling Inc. (TSX:CDI) announces that it has entered into an amalgamation agreement to acquire all of the issued and outstanding securities of CanGas Solutions Ltd., which currently provides natural gas transport services in Alberta and Saskatchewan. These services are used to capture and monetize raw natural gas that is being flared at oil wells not tied into gathering systems and to transport processed natural gas for use as a fuel to displace diesel or propane.

Pursuant to the Agreement CanGas Shareholders will receive as consideration approximately 2.05 million CanElson common shares. The officers, directors and certain principal shareholders of CanGas holding approximately 40% of the outstanding CanGas securities will have the CanElson shares they receive subject to a share resale restriction ("Restricted Shares"). The Restricted Shares will have a resale restriction of 33.33% for 6 months, 33.33% for 12 months and the remainder for 18 months.

As part of the Acquisition, CanElson will acquire six natural gas transport trailers, three portable custom engineered natural gas compression systems, associated state of the art natural gas loading and unloading equipment, and a seasoned management and operational team.

The strategic acquisition of CanGas will firstly allow CanElson to accelerate its plans to enable the bi-fueling of mobile drilling equipment with both diesel and natural gas. Recent joint CanElson-CanGas tests have shown that up to 60% to 70% of diesel fuel normally consumed in an engine under load can be displaced with cleaner burning natural gas and up to 100% of the diesel fuel can be displaced in a boiler application for winter heating. Bi-fuel technology will not only reduce the environmental impact of exhaust emissions, but also reduce fuel costs as the lower priced natural gas is replacing diesel with an equivalent price of approximately $30 per thousand cubic feet. Other industries with remote or mobile diesel equipment may also benefit from bi-fuel technology, and current low natural gas prices will enhance and extend its application.

A second benefit of the Acquisition is that CanGas is currently transporting raw natural gas from a remote well site and delivering it to a natural gas processing plant. This service may help other operators reduce their flared gas volumes while simultaneously allowing increased oil production that would have otherwise been restricted by flaring regulations.

The third material benefit of acquiring CanGas is that the technologies developed by each company are complimentary to the initiative previously announced by CanElson to conserve flare gas and transport it directly to a bi-fuel industrial application, such as an oilfield drilling or completion operation. CanGas' expertise and equipment in raw gas compression, loading, and road transportation has a direct application with CanElson's patent pending on fueling mobile equipment using raw natural gas. This form of flaring abatement is counter-cyclical to most gas conservation technologies, because the economic incentive to conserve the flare gas in a bi-fuel application is enhanced by lower, not higher, natural gas prices.

It is anticipated that the Acquisition will close on or about May 10, 2012. Completion of the Acquisition is subject to certain conditions including the receipt of approval by CanGas Shareholders and approval of the TSX. The board of directors of CanGas has unanimously recommended that the CanGas Shareholders approve the Acquisition. CanGas has agreed that it will not solicit or initiate discussions regarding any other business combination or sale of material assets. The Agreement provides for a non-completion fee of $0.3 million payable in certain circumstances if the Acquisition is not completed. Certain CanGas Shareholders holding approximately 36% of the currently outstanding CanGas Shares have indicated their intention to vote in favour of the Acquisition. Upon completion of the Acquisition, CanElson will have approximately 75,510,331 shares outstanding and approximately 4,935,400 options outstanding.

Canaccord Genuity is acting as exclusive advisor to CanGas with respect to the Acquisition.

2012 Capital Program Update

In addition, CanElson is pleased to announce that it is continuing its organic growth with one additional long term contracted new rig build added to its existing 2012 capital program. CanElson's total 2012 capital program is now expected to be approximately $42.5 million which is comprised of: (1) $29.5 million for the construction of three ultra heavy, small footprint telescopic drilling rigs and other growth capital investment; and (2) approximately $14 million for spares, shop upgrades and maintenance capital. The expected 2012 rig deployment schedule is as follows:

Rig #29: Delivered February 2012 which is contracted long term and currently operating in west Texas;
Rig #30: April 2012 which is contracted long term and currently in transport to west Texas;
Rig #31: June 2012 to west Texas under long term contract; and
Rig #32: Long lead items have been ordered and, pending a signed contract, complete rig construction is possible by August 2012.

This will bring the CanElson fleet in Canada, the USA, and Mexico to 36 (net 34) drilling rigs and 2 (net 1) service rigs; a significant increase from a start with one drilling rig in December 2008. The 2012 capital program will be financed out of cash flow and existing debt facilities with ample financial capability for additional growth and maintaining dividend payments.

First Quarter Operational Update

Canadian Utilization and United States utilization is expected to average 72% and 83%, respectively, for the first quarter of 2012. Spring break-up in Canada started approximately one week earlier relative to historical timing, however, if conditions remain dry, Canadian operations should commence earlier than 2011.

President and CEO Randy Hawkings says: "The strategic acquisition of CanGas provides us an opportunity to accelerate our natural gas fuel initiatives and strengthens our expertise in the area of rich gas transportation. This acquisition combined with our continued rapid organic rig growth demonstrates management's commitment to growth of our core drilling business as well as through other complementary business opportunities."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. More

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