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Press release from Marketwire

Petrobank Announces Agreement With PetroBakken To Create Two Fully Independent Companies

Monday, October 29, 2012

Petrobank Announces Agreement With PetroBakken To Create Two Fully Independent Companies20:45 EDT Monday, October 29, 2012CALGARY, ALBERTA--(Marketwire - Oct. 29, 2012) - Petrobank Energy and Resources Ltd. (TSX:PBG) is pleased to announce that we have entered into an agreement with PetroBakken Energy Ltd. (TSX:PBN), our 57% owned subsidiary, to complete a corporate reorganization that will see Petrobank shareholders effectively receive Petrobank's proportionate interest in our PetroBakken share holdings while maintaining their interest in the remaining Petrobank assets (the "Reorganization"). Petrobank and PetroBakken have signed an arrangement agreement detailing the terms and conditions of the Reorganization. The Board of Directors of each Company have approved the Reorganization, which is anticipated to become effective on December 31, 2012 (the "Effective Date").Pursuant to the Reorganization, a new Alberta corporation will be formed ("New Petrobank") which will, through a series of transactions, directly or indirectly acquire all of Petrobank's assets and liabilities, including our heavy oil assets, the THAI® and related patents and cash (anticipated to be over $100 million) (the "Heavy Oil Business"), but excluding our investment in PetroBakken (the "PetroBakken Shares"). Existing Petrobank shareholders will receive one share of New Petrobank for every share of Petrobank held on the Effective Date.Following this distribution of Petrobank's Heavy Oil Business to New Petrobank, Petrobank and PetroBakken will, through a series of transactions, amalgamate, with the resulting company to continue under the name "PetroBakken Energy Ltd." ("New PetroBakken"). Existing PetroBakken shareholders will receive one share of New PetroBakken for every share of PetroBakken held on the Effective Date and Petrobank shareholders will receive, in aggregate, a number of New PetroBakken shares equal to the number of PetroBakken Shares held by Petrobank on the Effective Date. The number of New PetroBakken shares to be received for each Petrobank share held will be equal to the PetroBakken/Petrobank exchange ratio ("the Exchange Ratio") on the Effective Date, which will be calculated by dividing the number of PetroBakken shares owned by Petrobank by the number of Petrobank shares outstanding. As of the date of this press release, Petrobank owns 106.3 million PetroBakken shares and has 96.3 million basic shares outstanding and 100.4 million fully diluted shares outstanding, which would result in an Exchange Ratio ranging between 1.10 and 1.06. The Exchange Ratio on the Effective Date will be affected by any changes to the number of Petrobank shares outstanding and the number of PetroBakken shares owned by Petrobank, including any receipt of PetroBakken shares through Petrobank's participation in PetroBakken's dividend reinvestment plan, Petrobank shares being repurchased and PetroBakken shares being sold under our existing share repurchase and share sale program, and Petrobank shares being issued upon the exercise of stock based compensation.As a result of the Reorganization, New PetroBakken will be owned directly by existing PetroBakken shareholders and existing Petrobank shareholders in the same proportion as if the Reorganization did not occur. Petrobank shareholders will also own one New Petrobank share for each Petrobank share previously held. This transaction is designed to enhance long-term value for Petrobank and PetroBakken shareholders. The Reorganization is consistent with our long-held corporate goal of enhancing shareholder value by creating strong, focused independent companies. Anticipated benefits of the Reorganization include:Petrobank shareholders will receive direct ownership in the shares of New PetroBakken plus freely tradable shares in New Petrobank which will own the Heavy Oil Business; The Reorganization will eliminate the recent negative market valuation of the Heavy Oil Business; New Petrobank will have a simplified structure with an anticipated cash balance of over $100 million, sufficient to fund operations for more than two years at current and expected expenditure rates; Existing Petrobank shareholders will receive future dividends directly from New PetroBakken following the Reorganization; The Reorganization is not expected to be cash taxable to any of the corporate entities; The Reorganization is not expected to be cash taxable to Canadian Petrobank shareholders unless their adjusted cost base for their Petrobank shares is less than the fair market value of New Petrobank; and The expected date of the Reorganization of December 31, 2012 may allow U.S. Petrobank shareholders to benefit from a lower tax rate on the transaction as the receipt of the New Petrobank shares are expected to be treated as "qualified dividends", eligible for lower tax rates in 2012 compared to the ordinary income tax rates that are expected in 2013.The Reorganization will not result in any changes to the existing Board and senior management of PetroBakken. PetroBakken is expected to continue to pursue a strategy of shareholder value creation through growth and income. The Reorganization will not affect the PetroBakken dividend policy and shareholders are expected to continue to receive $0.08 per share paid on a monthly basis. The first dividend payable on New PetroBakken common shares is expected in mid-February for shareholders of record on January 31, 2013. New Petrobank is expected to receive the December PetroBakken dividend, payable in mid-January in cash.The Reorganization will not result in any significant changes to the existing Board and senior management of Petrobank. Following the Reorganization, New Petrobank will continue to own the Heavy Oil Business including cash anticipated to be in excess of $100 million. New Petrobank will be a well-positioned junior heavy oil company with significant capital, an attractive asset base, a patented heavy oil extraction technology, and a plan to grow production and reserve value.The Reorganization is subject to the approval of the shareholders of each of Petrobank and PetroBakken. It is anticipated that a joint-management information circular containing additional information with respect to the Reorganization will be mailed to each Petrobank and PetroBakken shareholder in mid-November and meetings of the shareholders of each Company will be held in mid-December, 2012. The Board of Directors of each Company, upon considering the recommendations of their respective independent committees, have recommended that their shareholders approve the Reorganization. Pending approvals from the shareholders of each Company, approval of applicable courts, receipt of appropriate regulatory approvals and satisfaction of other customary closing conditions, the transaction is scheduled to become effective on December 31, 2012. TD Securities Inc. acted as sole financial advisor to the independent committee of the Board of Directors of Petrobank. TD Securities Inc. provided an opinion to Petrobank's Board of Directors that the Reorganization is fair from a financial point of view to Petrobank's shareholders.The Reorganization is expected to be non-taxable to Petrobank and PetroBakken as well as Canadian resident shareholders of Petrobank. Canadian resident shareholders of Petrobank will split their existing adjusted cost base ("ACB") between New Petrobank and New PetroBakken. The fair market value of the New Petrobank shares received will form the ACB of New Petrobank. The ACB of Petrobank less the ACB of New Petrobank will form the ACB of New PetroBakken. If the ACB of Petrobank is less than the ACB of New Petrobank, a capital gain will be recognized amounting to this negative ACB difference. Existing shareholders of PetroBakken will not have any ACB adjustments, and will not incur any tax liability from the Reorganization.For U.S. shareholders of Petrobank, this transaction will be treated as a taxable dividend according to U.S. tax laws. It is expected that the dividend will be based on the fair market value of the New Petrobank shares received and will be considered a "qualified dividend" for U.S. tax purposes, subject to the reduced tax rates applicable to long-term capital gains for individuals, provided shareholders meet the holding-period requirements. Tax information will be published on the websites of both Petrobank and PetroBakken in the near future; however shareholders are encouraged to seek the advice of their own tax professionals.2013 BUSINESS PLAN FOR "NEW PETROBANK" AND OPERATIONS UPDATEThe business plan of New Petrobank is focused on:Pursuing the commercialization of THAI® at Kerrobert; Commencing cold production at Dawson to condition the reservoir for our THAI® demonstration project; Exploiting cold production opportunities on existing lands; Planning for future THAI® projects - currently our existing lands could support as many as three new THAI® projects along the Kerrobert trend; Adding more prospective resources to our land inventory; and Enhancing our intellectual property portfolio and pursuing future technology licensing opportunities through Archon.We expect New Petrobank to enter 2013 with extensive financial resources, a focused portfolio of heavy oil assets and a multi-year business plan to capture the significant value potential of the THAI® technologies and drive long term shareholder value.During Q3 2012, production averaged 305 barrels of oil per day (bopd), an increase from 236 bopd in Q2 2012. We have focused on increasing air injection and continue to target much higher injection and production rates in the near future.At Dawson, we have commenced cold oil production at the first of the two horizontal THAI® production wells. We expect to initiate cold production at the second well before the end of 2012. These wells are expected to produce for a period of time to pre-condition the reservoir for start-up of the THAI® demonstration project.Petrobank has reactivated eight wells in the Kerrobert trend lands for cold production. All of these wells are in the early stages of clean-up and production. We expect to drill four stratigraphic wells in Q4 2012 to better define our resources in the Luseland area. We expect to complete these four wells for cold production in 2013 as part of our plan to opportunistically exploit the primary production potential of our assets.During 2012, we have purchased additional lands on the Kerrobert channel trend and currently own approximately 25 sections of land in Saskatchewan. We continue to evaluate the THAI(R) potential and initial planning is underway for up to three new THAI(R) projects. At Archon, we continue to enhance our existing patents and progress new processes which have applicability for THAI® and beyond. We continue to receive international interest for the THAI® process and several discussions are ongoing. Due to the complexities of dealing with international parties, we cannot comment on when or if these discussions will lead to agreements to license the THAI® patents.At the end of Q3 2012, Petrobank was well positioned financially. We had approximately $86 million of positive working capital, including $96 million of cash. To October 29, 2012, we had repurchased 3.5 million Petrobank shares and sold the equivalent number of PetroBakken shares under our renewed Normal Course Issuer Bid and PetroBakken share sale plan. Under this plan, we have netted approximately $1.1 million of proceeds to Petrobank since September 2012. As mentioned above, we expect to have over $100 million of cash in New Petrobank. The additional cash is expected to come from proceeds from the normal exercise of Petrobank's existing stock based compensation and the receipt of PetroBakken's December dividend in January 2013.IN MEMORIAMWe are sad to announce that the Chairman of Petrobank, Jerald L. Oaks, passed away September 28. Jerry had been a Director of Petrobank since September 1993 and was a key player in the formation and strategic growth of the entire Petrobank group of companies. Jerry was the perfect epitome of a good man and a gentle man. He defined the word "gentleman". He was always supportive, positive and encouraging and able to express strong views and opinions in a gentle, respectful way. We will miss his guidance, wisdom, humor and friendship. INVESTOR WEBCAST AND CONFERENCE CALLManagement of Petrobank will be holding a webcast and conference call for investors, financial analysts, media and any interested persons on Tuesday, October 30, 2012 at 9:00 a.m. Mountain Time (11:00 a.m. Eastern Time) to discuss the Reorganization, our 2013 business plan for New Petrobank and an operations update. Petrobank will introduce a new investor presentation at this time. The investor webcast and conference call details are as follows:Live call dial-in number(s): 416-340-8530 / 877-240-9772The live audio webcast link is: http://events.digitalmedia.telus.com/petrobank/103112/index.php and is also available on our website at: http://www.petrobank.com/investors/presentations-webcasts.Petrobank Energy and Resources Ltd.is a Calgary-based oil and natural gas exploration and production company with operations in western Canada. The Company currently operates high-impact projects through two business units and a technology subsidiary. Petrobank's 57% currently owned TSX-listed subsidiary, PetroBakken Energy Ltd. (TSX:PBN), is an oil and gas exploration and production company combining light oil Bakken and Cardium resource plays with conventional light oil assets. Whitesands Insitu Partnership, a partnership between Petrobank and its wholly-owned subsidiary Whitesands Insitu Inc., applies Petrobank's patented THAI® heavy oil recovery process in the field. THAI® is an evolutionary in-situ combustion technology for the recovery of bitumen and heavy oil. THAI® and CAPRI® are registered trademarks of Archon Technologies Ltd., a wholly-owned subsidiary of Petrobank Energy and Resources Ltd., for specialized methods for recovery of oil from subterranean formations through in-situ combustion techniques and methodologies with or without upgrading catalysts. Used under license by Petrobank Energy and Resources Ltd.Forward-Looking Statements. Certain information provided in this press release constitutes forward-looking statements. Specifically, this press release contains forward-looking statements relating to the terms of and timing for completion of the Reorganization, timing of mailing of shareholder materials and holding of shareholder meetings, payment of future dividends, expected tax treatment of the Reorganization and the future business of Petrobank and PetroBakken. Forward-looking statements are necessarily based upon assumptions and judgments with respect to the future including, but not limited to, the receipt of required shareholder and regulatory approvals and satisfaction of other conditions to the Reorganization, the outlook for commodity markets and capital markets, the performance of producing wells and reservoirs, well development and operating performance, general economic and business conditions, weather, the regulatory and legal environment and other risks associated with oil and gas operations. The reader is cautioned that assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be incorrect. Actual results achieved during the forecast period will vary from the information provided herein as a result of numerous known and unknown risks and uncertainties and other factors. You can find a discussion of certain of those risks and uncertainties in our Canadian securities filings. Such factors include, but are not limited to: general economic, market and business conditions; fluctuations in oil prices; the results of exploration and development drilling, recompletions and related activities; timing and rig availability, outcome of exploration contract negotiations; fluctuation in foreign currency exchange rates; the uncertainty of reserve estimates; changes in environmental and other regulations; risks associated with oil and gas operations; risks associated with the approval of the Reorganization by our shareholders, the receipt of regulatory approvals, the satisfaction of other conditions to the Reorganization, and other factors, many of which are beyond the control of Petrobank and PetroBakken. There is no representation by Petrobank or PetroBakken that actual results achieved during the forecast period will be the same in whole or in part as those forecast. Except as may be required by applicable securities laws, neither Petrobank nor PetroBakken assumes any obligation to publicly update or revise any forward-looking statements made herein or otherwise, whether as a result of new information, future events or otherwise. FOR FURTHER INFORMATION PLEASE CONTACT: Contact Information: Petrobank Energy & Resources Ltd.John D. WrightPresident and Chief Executive Officer403.750.4400Petrobank Energy & Resources Ltd.Chris J. BloomerSenior Vice President and Chief Operating Officer, Heavy Oil403.750.4400Petrobank Energy & Resources Ltd.Peter CheungVice President Finance and Chief Financial Officer403.750.4400Petrobank Energy & Resources Ltd.Suite 3000, 355 - 8th Avenue S.W.Calgary, Alberta, T2P 1G1403.750.4400403.266.5794 (FAX)ir@petrobank.comwww.petrobank.com