TriStar Information Circular

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
of
TRISTAR OIL & GAS LTD.
to be held September 30, 2009
and
NOTICE OF PETITION TO THE COURT OF QUEEN’S
BENCH OF ALBERTA
and
INFORMATION CIRCULAR AND PROXY STATEMENT
with respect to a proposed
PLAN OF ARRANGEMENT
involving
TRISTAR OIL & GAS LTD.
PETROBANK ENERGY AND RESOURCES LTD.
PETROBAKKEN ENERGY LTD.
and
THE SHAREHOLDERS OF TRISTAR OIL & GAS LTD.
August 31, 2009
TABLE OF CONTENTS
Notice of Special Meeting of Shareholders................................................................................................................ iv
Notice of Petition......................................................................................................................................................... vi
Glossary of Terms .........................................................................................................................................................1
Introduction ...................................................................................................................................................................7
Currency and Exchange Rates.......................................................................................................................................7
Abbreviations ................................................................................................................................................................7
Conversions ...................................................................................................................................................................8
Forward-looking Statements .........................................................................................................................................8
Non-GAAP Measures..................................................................................................................................................10
Notes on Reserves Data...............................................................................................................................................11
Information for United States TriStar Shareholders....................................................................................................12
Summary .....................................................................................................................................................................14
The Arrangement.........................................................................................................................................................25
Details of the Arrangement ....................................................................................................................................25
Effect of the Arrangement......................................................................................................................................25
Background to the Arrangement ............................................................................................................................26
Reasons for the Arrangement .................................................................................................................................27
Fairness Opinion ....................................................................................................................................................28
Recommendation of the Board of Directors...........................................................................................................28
Procedure for the Arrangement to Become Effective .................................................................................................29
Procedural Steps.....................................................................................................................................................29
Court Approvals .....................................................................................................................................................29
Regulatory Approvals ............................................................................................................................................30
Timing ....................................................................................................................................................................30
Procedure for Exchange of TriStar Shares ..................................................................................................................30
General ...................................................................................................................................................................30
Return of TriStar Shares.........................................................................................................................................32
Mail Services Interruption......................................................................................................................................32
Cancellation of Rights............................................................................................................................................32
Treatment of Fractional Shares ..............................................................................................................................32
Joint Tax Election ..................................................................................................................................................33
Arrangement Agreement .............................................................................................................................................33
Conditions Precedent to the Arrangement..............................................................................................................33
Non-Solicitation by TriStar....................................................................................................................................36
Agreement as to Damages......................................................................................................................................38
Amendment and Termination.................................................................................................................................39
TriStar Lock-Up Agreements ......................................................................................................................................40
TriStar Options and TriStar Incentive Shares..............................................................................................................40
Expenses of the Arrangement......................................................................................................................................41
Stock Exchange Listings .............................................................................................................................................41
Rights of Dissent .........................................................................................................................................................41
Securities Law Matters ................................................................................................................................................43
Resale of Securities ................................................................................................................................................43
Judicial Developments ...........................................................................................................................................44
Certain Canadian Federal Income Tax Considerations ...............................................................................................44
Certain United States Federal Income Tax Considerations.........................................................................................51
Interests of Certain Persons in the Arrangement .........................................................................................................57
Interests of Informed Persons in Material Transactions ..............................................................................................57
Interests of Experts ......................................................................................................................................................58
Information Concerning TriStar ..................................................................................................................................58
Information Concerning PetroBakken.........................................................................................................................58
Selected PetroBakken Pro Forma Financial Information ............................................................................................59
Selected PetroBakken Operational Information ..........................................................................................................59
Selected PetroBakken Reserves Information ..............................................................................................................59
Other Matters to be Considered at the Meeting...........................................................................................................60
Approval of PetroBakken Share Based Compensation Plans ................................................................................60
General Proxy Matters.................................................................................................................................................61
Solicitation of Proxies ............................................................................................................................................61
Record Date............................................................................................................................................................61
Appointment and Revocation of Proxies................................................................................................................61
Exercise of Discretion by Proxy Holders ...............................................................................................................62
Advice to Beneficial Holders of TriStar Shares .....................................................................................................62
Voting Shares and Principal Holders of Voting Shares .........................................................................................62
Reliance .......................................................................................................................................................................63
Approval of Directors..................................................................................................................................................63
Consent of Deloitte & Touche LLP.............................................................................................................................64
Consent of KPMG LLP ...............................................................................................................................................65
Appendix "A" – Arrangement Resolution
Appendix "B" – Interim Order
Appendix "C" – Arrangement Agreement
Appendix "D" – Fairness Opinion
Appendix "E" – Information Concerning PetroBakken
Appendix "F" – Information Concerning TriStar
Appendix "G" – Pro Forma Financial Statements
Appendix "H" – Text of Section 191 of the ABCA
August 31, 2009
Dear TriStar Shareholders:
You are invited to attend a special meeting (the "Meeting") of holders (the "TriStar Shareholders") of common
shares ("TriStar Shares") of TriStar Oil & Gas Ltd. ("TriStar") to be held in the Grand Lecture Theatre Room at the
Metropolitan Conference Centre, 333 – 4th Avenue S.W., Calgary, Alberta on Wednesday, September 30, 2009 at
10:00 a.m. (Calgary time).
At the Meeting, you will be asked, among other things, to consider and approve a proposed plan of arrangement
(the "Arrangement") involving TriStar, PetroBakken Energy Ltd. ("PetroBakken"), Petrobank Energy and
Resources Ltd. and the TriStar Shareholders. Pursuant to the Arrangement, the TriStar Shareholders will transfer
each of their TriStar Shares to PetroBakken in exchange for, at the election or deemed election of the holder and
subject to pro-rationing, either (a) $14.75 cash, (b) 0.5350 of a class A share of PetroBakken ("PetroBakken Class A
Share") or (c) a combination thereof, subject to an aggregate maximum cash consideration of $583,437,332 being
payable by PetroBakken to holders electing to receive cash and an aggregate maximum of 61,762,500 PetroBakken
Class A Shares being issuable by PetroBakken to holders electing to receive PetroBakken Class A Shares.
TriStar Shareholders who do not deliver to Olympia Trust Company a duly completed Letter of Transmittal and
Election Form before 4:30 p.m. on September 25, 2009 (or, if the Meeting is adjourned, such time on the third
business day prior to such adjourned Meeting) or who do not otherwise comply with the requirements set forth in
the Letter of Transmittal and Election Form will be deemed to have elected to receive a combination of cash and
PetroBakken Class A Shares for their TriStar Shares equal to $3.75 cash and 0.3989 of a PetroBakken Class A
Share, subject to pro-rationing.
The resolution approving the Arrangement must be approved by 66 2/3% of the votes cast by TriStar Shareholders,
present in person or by proxy, at the Meeting.
Completion of the Arrangement is subject to various conditions, including the receipt of applicable regulatory,
TriStar Shareholder and court approvals. If the Arrangement is approved by the TriStar Shareholders and all other
conditions to the implementation of the Arrangement are satisfied or waived, TriStar anticipates that the
Arrangement will become effective on or about October 1, 2009.
Petrobank will transfer its Canadian Business Unit to PetroBakken in exchange for PetroBakken Class A Shares and
class B shares of PetroBakken (collectively, "Petrobakken Shares"), and if the Arrangement is completed
PetroBakken will acquire all of the shares of TriStar. PetroBakken will be a new publicly listed company, with
64% of the PetroBakken Shares owned by Petrobank and the remaining 36% owned by former TriStar
Shareholders. The combined assets are highly complementary and will provide TriStar shareholders with
significant, focused exposure to high netback light oil assets. PetroBakken will be a premier, Bakken focused
southeast Saskatchewan light oil producer with additional exposure to the Horn River and Montney gas resource
plays in northeast British Columbia. TriStar believes that the Arrangement presents an attractive opportunity for the
TriStar Shareholders to realize the value of their TriStar Shares by receiving PetroBakken Class A Shares, which
will provide increased opportunity to participate in the significant upside of the development of the Bakken
formation within a larger consolidated entity with the potential for technical and operating efficiencies. TriStar
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believes this transaction represents the natural evolution of TriStar and the strategy that has been employed by
management since inception.
In addition:
(a)
the Arrangement reflects attractive deal metrics to the TriStar Shareholders, recognizing the value of TriStar’s
existing and potential reserves, production and cash flow;
(b)
through the receipt of PetroBakken Class A Shares, TriStar Shareholders will exchange their investment in
TriStar for an investment in a larger consolidated entity which will be a premier player in the southeast
Saskatchewan Bakken play, with a greater proportion of its production coming from the Bakken formation
than any other material producer, and with a combined 280,000 acres of net undeveloped land and 1,300+
identified drilling locations in the Bakken fairway;
(c)
each of TriStar and Petrobank have been industry leaders in applying new, leading edge technologies to
develop the Bakken resource play and it is anticipated that combining these technical teams in PetroBakken
will allow it to utilize best practices to enhance the development of the Bakken and maximize recovery
factors;
(d)
it is expected that PetroBakken's increased scale, particularly in the Bakken, will provide superior operating
efficiencies with respect to complementary gathering systems, oil processing facilities, marketing
arrangements and gas plant synergies;
(e)
the combined entity is expected to have an improved cost of capital as a result of its size and focus on the
development of high netback, light oil assets, particularly in the Bakken resource play;
(f)
PetroBakken will also have the opportunity to apply its combined technical knowledge to the development of
significant natural gas resource plays in the Horn River and Montney formations in northeast British
Columbia;
(g)
through ownership of PetroBakken Class A Shares, TriStar Shareholders will participate in a dividend
yielding entity with an anticipated initial annual dividend of $0.96 per PetroBakken Class A Share, payable
monthly;
(h)
TriStar Shareholders who do not want to hold PetroBakken Class A Shares have the opportunity to exchange
their TriStar Shares for cash at a price of $14.75 per share which, subject to pro-rationing, represents a 29%
premium to the 10 day volume weighted average trading price of the TriStar Shares prior to the
announcement of the Arrangement; and
(i)
the Arrangement provides certain Canadian resident TriStar Shareholders with an opportunity, if they so
elect, to obtain a tax-deferred rollover of TriStar Shares into PetroBakken Class A Shares.
TriStar has retained Macquarie Capital Markets Canada Ltd. ("Macquarie") and BMO Nesbitt Burns Inc. ("BMO")
as financial advisors to TriStar and the TriStar board of directors. Macquarie and BMO have each provided the
board of directors of TriStar with its opinion that the consideration to be received under the Arrangement by the
TriStar Shareholders is fair, from a financial point of view, to the TriStar Shareholders. The board of directors of
TriStar, based upon their own investigations, including their consideration of the fairness opinions of
Macquarie and BMO, has unanimously determined that the Arrangement is in the best interests of TriStar
and is fair to the TriStar Shareholders and recommends that TriStar Shareholders vote in favour of the
Arrangement.
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All of the directors and officers of TriStar have entered into voting support agreements with Petrobank and
PetroBakken under which they have agreed to vote their TriStar Shares, inclusive of TriStar Shares issued upon the
exercise of any options or incentive shares, in favour of the Arrangement. The directors and officers of TriStar
hold, directly or indirectly, an aggregate of 1,609,450 TriStar Shares, options to acquire 1,366,366 TriStar Shares
and incentive shares redeemable for 975,767 TriStar Shares, representing approximately 2.48% of the fully-diluted
number of TriStar Shares.
The Information Circular contains a detailed description of the Arrangement, as well as detailed information
regarding TriStar and PetroBakken. Please give this material your careful consideration and, if you require
assistance, consult your financial, tax or other professional advisors.
To be represented at the Meeting, you must either attend the Meeting in person or complete and sign the enclosed
form of proxy and forward it so as to reach or be deposited with Olympia Trust Company, 2300, 125 9th Avenue
S.E., Calgary, Alberta, T2P 0P6, not later than forty-eight (48) hours (excluding Saturdays, Sundays and holidays)
prior to the time fixed for the Meeting or any adjournment thereof. An envelope addressed to Olympia Trust
Company is enclosed for your convenience.
If you are a non-registered holder of TriStar Shares and have received these materials from your broker or
another intermediary, please complete and return the proxy or other authorization form provided to you by
your broker or other intermediary in accordance with the instructions provided with it. Failure to do so may
result in your TriStar Shares not being eligible to be voted at the Meeting.
Your vote is very important. Whether or not you plan to attend the Meeting, TriStar urges you to vote promptly to
ensure your shares are represented at the Meeting or any adjournment thereof.
Yours very truly,
(signed) "Brett Herman"
Brett Herman
President and Chief Executive Officer
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
OF TRISTAR OIL & GAS LTD.
to be held September 30, 2009
NOTICE IS HEREBY GIVEN that, pursuant to an order (the "Interim Order") of the Court of Queen’s Bench of
Alberta (the "Court") dated August 31, 2009, a special meeting (the "Meeting") of the holders ("TriStar
Shareholders") of common shares ("TriStar Shares") of TriStar Oil & Gas Ltd. ("TriStar") is to be held in the Grand
Lecture Theatre Room at the Metropolitan Conference Centre, 333 – 4th Avenue S.W., Calgary, Alberta on
Wednesday, September 30, 2009 at 10:00 a.m. (Calgary time) for the following purposes:
(a)
to consider pursuant to the Interim Order and, if thought advisable, to pass, with or without variation, a
special resolution, the full text of which is set forth in Appendix "A" to the accompanying information
circular and proxy statement of TriStar dated August 31, 2009 (the "Information Circular"), to approve a
plan of arrangement under section 193 of the Business Corporations Act (Alberta), all as more particularly
described in the accompanying Information Circular;
(b)
to consider, and if thought advisable to pass, with or without variation, an ordinary resolution, the full text
of which is set forth in the Information Circular, to approve a stock option plan, deferred common share
plan and incentive share plan for PetroBakken Energy Ltd. following the completion of the Arrangement, as
more particularly described in the Information Circular;
(c)
to transact such further and other business as may properly be brought before the Meeting or any
adjournment thereof.
Specific details of the matters proposed to be put before the Meeting are set forth in the accompanying Information
Circular.
The record date for determination of TriStar Shareholders entitled to receive notice of and to vote at the Meeting is
August 31, 2009 (the "Record Date"). Only TriStar Shareholders of record as at the close of business on the Record
Date and holders of TriStar Shares issued by TriStar after the Record Date and prior to the Meeting will be entitled
to receive notice of and to vote at the Meeting, provided that, to the extent a TriStar Shareholder transfers the
ownership of any of his TriStar Shares after the Record Date and the transferee of those shares establishes that he
owns the shares and demands, not later than ten (10) days before the Meeting, to be included in the list of holders of
TriStar Shares eligible to vote at the Meeting, such transferee will be entitled to vote those shares at the Meeting.
If you are a registered holder of TriStar Shares and are unable to attend the Meeting or any adjournment
thereof in person, please complete, sign and mail to or deposit the enclosed form of proxy with Olympia
Trust Company, 2300, 125 9th Avenue S.E., Calgary, Alberta, T2P 0P6, so that it is received not later than
forty-eight (48) hours (excluding Saturdays, Sundays and holidays) prior to the time of the Meeting or any
adjournment thereof.
If you are an unregistered holder of TriStar Shares and receive these materials through your broker or
through another intermediary, please complete and return the form of proxy provided to you by your broker
or other intermediary in accordance with the instructions provided therein.
Registered TriStar Shareholders have the right to dissent with respect to the Arrangement and to be paid the fair
value of their TriStar Shares in accordance with the provisions of section 191 of the Business Corporations Act
(Alberta) and the Interim Order. A TriStar Shareholder’s right to dissent is more particularly described in the
accompanying Information Circular. Failure to strictly comply with the requirements set forth in section 191 of
the Business Corporations Act (Alberta), as modified by the Interim Order, may result in the loss of any right
of dissent.
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Dated at the City of Calgary, in the Province of Alberta, this 31st day of August, 2009.
BY ORDER OF THE BOARD OF DIRECTORS OF TRISTAR OIL & GAS
LTD.
(signed) "Brett Herman"
Brett Herman
President and Chief Executive Officer
TriStar Oil & Gas Ltd.
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IN THE COURT OF QUEEN’S BENCH OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
IN THE MATTER OF SECTION 193 OF THE BUSINESS CORPORATIONS
ACT, R.S.A. 2000, c. B-9
AND IN THE MATTER OF A PROPOSED ARRANGEMENT INVOLVING
TRISTAR OIL & GAS LTD., PETROBANK ENERGY AND RESOURCES
LTD., PETROBAKKEN ENERGY LTD. AND THE HOLDERS OF
COMMON SHARES OF TRISTAR OIL & GAS LTD.
NOTICE OF PETITION
NOTICE IS HEREBY GIVEN that a petition (the "Petition") has been filed with the Court of Queen’s Bench of
Alberta, Judicial District of Calgary (the "Court") on behalf of TriStar Oil & Gas Ltd. ("TriStar") with respect to a
proposed arrangement (the "Arrangement") under section 193 of the Business Corporations Act, R.S.A. 2000,
c. B-9, as amended (the "ABCA"), involving TriStar, Petrobank Energy and Resources Ltd., PetroBakken Energy
Ltd. ("PetroBakken") and the holders (the "TriStar Shareholders") of common shares ("TriStar Shares") of TriStar,
which Arrangement is described in greater detail in the Information Circular and Proxy Statement of TriStar dated
August 31, 2009 accompanying this Notice of Petition. At the hearing of the Petition, TriStar intends to seek:
(a)
a declaration that the terms and conditions of the Arrangement, and the procedures relating thereto, are fair
to the persons affected;
(b)
an order declaring that registered TriStar Shareholders shall have the right to dissent in respect of the
Arrangement pursuant to the provisions of Section 191 of the ABCA;
(c)
an order approving the Arrangement pursuant to the provisions of Section 193 of the ABCA;
(d)
a declaration that the Arrangement will, upon the filing of the Articles of Arrangement pursuant to the
provisions of Section 193 of the ABCA, become effective in accordance with its terms and will be binding
on and after the Effective Date as defined in the Arrangement; and
(e)
such other and further orders, declarations and directions as the Court may deem just.
The Court has been advised that its order approving the Arrangement, if granted, will constitute the basis for an
exemption from the registration requirements of the United States Securities Act of 1933, as amended, pursuant to
Section 3(a)(10) thereof, with respect to the offer and sale of the class A shares of PetroBakken issuable to TriStar
Shareholders pursuant to the Arrangement.
AND NOTICE IS FURTHER GIVEN that the said Petition was directed to be heard at the Court of Queen’s
Bench of Alberta, Calgary Courts Centre, 601 - 5 Street S.W., Calgary, AB T2P 5P7, on the 30th day of
September, 2009 at 1:30 p.m. (Calgary time) or as soon thereafter as counsel may be heard. Any TriStar
Shareholder or any other interested party desiring to support or oppose the Petition, may appear at the time of
hearing in person or by counsel for that purpose. Any TriStar Shareholder or any other interested party
desiring to appear at the hearing in person or by counsel is required to file with the Court of Queen’s Bench
of Alberta, Judicial District of Calgary, and serve upon TriStar on or before noon (Calgary time) on
September 25, 2009, a notice of his or her intention to appear, including his or her address for service in the
Province of Alberta and indicating whether such TriStar Shareholder or other interested party intends to
support or oppose the application or make submissions, together with a summary of the position such
TriStar Shareholder or other interested party intends to advocate and any evidence or materials which are to
be presented to the Court. Service on TriStar is to be effected by delivery to the solicitors for TriStar at the
address below. If any TriStar Shareholder or any other interested party does not attend, either in person or by
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counsel, at that time, the Court may approve the Arrangement as presented, or may approve it subject to such terms
and conditions as the Court shall deem fit, without any further notice.
AND NOTICE IS FURTHER GIVEN that no further notice of the Petition will be given by TriStar and that in the
event the hearing of the Petition is adjourned only those persons who have appeared before the Court for the
application at the hearing shall be served with notice of the adjourned date.
AND NOTICE IS FURTHER GIVEN that the Court, by Order dated August 31, 2009, has given directions as to
the calling of a meeting of TriStar Shareholders for the purpose of such holders voting upon a resolution to approve
the Arrangement and directed that registered TriStar Shareholders shall have the right to dissent on their own behalf
from the resolution approving the Arrangement in accordance with the provisions of Section 191 of the ABCA, as
modified by the Order, and be paid the fair value of their TriStar Shares in respect of which right of dissent is
exercised.
AND NOTICE IS FURTHER GIVEN that a copy of the said Petition and other documents in the proceedings
will be furnished to any TriStar Shareholder or other interested party requesting the same by the undermentioned
solicitors for TriStar upon written request delivered to such solicitors as follows:
Heenan Blaikie LLP
Barristers & Solicitors
12th Floor, Fifth Avenue Place
425 – 1st Street, S.W.
Calgary, Alberta T2P 3L8
Attention: Cynthia Amsterdam
DATED at the City of Calgary, in the Province of Alberta, this 31st day of August, 2009.
BY ORDER OF THE BOARD OF DIRECTORS
OF TRISTAR OIL & GAS LTD.
(signed) "Brett Herman"
Brett Herman
President and Chief Executive Officer
TriStar Oil & Gas Ltd.
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GLOSSARY OF TERMS
The following is a glossary of certain terms used in this Information Circular.
"ABCA" means the Business Corporations Act (Alberta), R.S.A. 2000, c. B-9, as amended, including the
regulations promulgated thereunder;
"Applicable Laws" means all applicable corporate laws, rules of applicable stock exchanges and applicable
securities laws, including the rules, regulations, notices, instruments, blanket orders and policies of the securities
regulatory authorities in Canada;
"Arrangement" means the proposed arrangement, under the provisions of section 193 of the ABCA, on the terms
and conditions set forth in the Plan of Arrangement;
"Arrangement Agreement" means the arrangement agreement dated August 4, 2009 between TriStar, Petrobank
and PetroBakken pursuant to which the parties thereto have proposed to implement the Arrangement, as amended
effective August 31, 2009, a copy of which is attached as Appendix "C" to this Information Circular;
"Arrangement Resolution" means the special resolution in respect of the Arrangement to be voted upon by TriStar
Shareholders at the Meeting, in substantially the form attached as Appendix "A" to this Information Circular;
"Articles of Arrangement" means the articles of arrangement in respect of the Arrangement required under
subsection 193(10) of the ABCA to be filed with the Registrar after the Final Order has been made;
"BMO" means BMO Nesbitt Burns Inc.;
"Board of Directors" means the board of directors of TriStar;
"Business Day" means with respect to any action to be taken, any day, other than Saturday, Sunday or a statutory
holiday in the place where such action is to be taken;
"Cash Consideration" means the amount of cash that each TriStar Shareholder electing to receive cash is entitled
to receive pursuant to the Arrangement, being $14.75 for each TriStar Share;
"Certificate" means the certificate or other confirmation of filing to be issued by the Registrar pursuant to
subsection 193(11) of the ABCA giving effect to the Arrangement;
"Commissioner" means the Commissioner of the Competition Bureau appointed under the Competition Act;
"Competition Act" means the Competition Act, R.S. 1985, c. C-34;
"Court" means the Court of Queen’s Bench of Alberta;
"CRA" means the Canada Revenue Agency;
"Depositary" means Olympia Trust Company, at its offices referred to in the Letter of Transmittal and Election
Form;
"Dissent Rights" means the right of a registered TriStar Shareholder pursuant to Section 191 of the ABCA and the
Interim Order to dissent to the Arrangement Resolution and to be paid the fair value of the TriStar Shares in respect
of which the holder dissents, all in accordance with Section 191 of the ABCA, the Interim Order and the Plan of
Arrangement;
"Dissenting TriStar Shareholders" means registered TriStar Shareholders who validly exercise their Dissent
Rights;
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"Effective Date" means the date the Arrangement is effective under the ABCA;
"Effective Time" means 12:01 a.m. (Calgary time) on the Effective Date;
"Election Deadline" means 4:30 p.m. (Calgary time) on September 25, 2009 or, if the Meeting is adjourned, 4:30
p.m. on the third Business Day prior to such adjourned Meeting;
"Eligible Shareholder" has the meaning ascribed to it in the Letter of Transmittal and Election Form;
"Fairness Opinions" means the opinion of Macquarie dated August 4, 2009 and the opinion of BMO dated August
4, 2009, copies of which are attached as Appendix "D" to this Information Circular;
"Final Order" means the order of the Court approving the Arrangement pursuant to Subsection 193(9) of the
ABCA, as such order may be affirmed, amended or modified by any court of competent jurisdiction;
"Financial Advisors" means Macquarie, BMO, CIBC World Markets Inc., GMP Securities L.P., National Bank
Financial Inc., TD Securities Inc., Haywood Securities Inc. and UBS Securities Canada Inc.;
"GAAP" means Canadian generally accepted accounting principles;
"GLJ" means GLJ Petroleum Consultants Ltd.;
"Governmental Authority" means any federal, provincial, municipal or other political subdivision, government,
department, commission, board, bureau, agency or instrumentality;
"Information Circular" means this information circular and proxy statement dated August 31, 2009, together with
all appendices hereto, delivered by TriStar in connection with the Meeting;
"Interim Order" means the Interim Order of the Court dated August 31, 2009 under subsection 193(4) of the
ABCA containing declarations and directions with respect to the Arrangement and the Meeting and issued pursuant
to the petition of TriStar therefor, a copy of which order is attached as Appendix "B" to this Information Circular;
"Joint Tax Election" means the joint tax election under section 85 of the Tax Act described under the heading
"Certain Canadian Federal Income Tax Considerations";
"Letter of Transmittal and Election Form" means the Letter of Transmittal and Election Form enclosed with this
Information Circular pursuant to which a TriStar Shareholder is required to deliver certificates representing TriStar
Shares to receive, on completion of the Arrangement, PetroBakken Class A Shares, cash or a combination thereof;
"Macquarie" means Macquarie Capital Markets Canada Ltd.;
"Material Adverse Change" or "Material Adverse Effect" means, with respect to PetroBakken and Petrobank,
any matter or action that has an effect or change that is, or would reasonably be expected to be, material and adverse
to the business, operations, assets, capitalization, financial condition or prospects of such Parties and their
subsidiaries, in respect of the Petrobank Assets, PetroBakken and the Petrobank Reorganization taken as a whole,
and with respect to TriStar any matter or action that has an effect or change that is, or would reasonably be expected
to be, material and adverse to the business, operations, assets, capitalization, financial condition or prospects of
TriStar and its subsidiaries, taken as a whole, whether before or after giving effect to the transactions contemplated
by the Arrangement Agreement, other than any matter, action, effect or change relating to or resulting from: (i)
general economic, financial, currency exchange, securities or commodity prices in Canada or elsewhere, (ii)
conditions affecting the oil and gas exploration, exploitation, development and production industry as a whole, and
not specifically relating to any Party and/or its subsidiaries, including changes in the Tax Act and other Applicable
Laws relating to tax, (iii) any decline in crude oil or natural gas prices on a current or forward basis, (iv) any matter
which was publicly disclosed or communicated in writing to the other Party as of the date of the Arrangement
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Agreement, or (v) any changes arising from matters permitted or contemplated by the Arrangement Agreement or
consented to or approved in writing by the other Party;
"Maximum Cash Consideration" means the maximum aggregate amount of cash payable by PetroBakken to
TriStar Shareholders electing or deemed to be electing to receive cash in exchange for their TriStar Shares, being
$583,437,332.38;
"Maximum Share Consideration" means the maximum number of PetroBakken Class A Shares issuable by
PetroBakken to TriStar Shareholders electing or deemed to be electing to receive PetroBakken Class A Shares in
exchange for their TriStar Shares, being 61,762,500;
"Meeting" means the special meeting of TriStar Shareholders to be held on September 30, 2009 and any
adjournment(s) thereof to consider and to vote on the Arrangement Resolution and any other matters that may come
before the Meeting;
"NI 51-101" means National Instrument 51-101 – "Standards of Disclosure for Oil and Gas Activities";
"Non-Resident" means (i) a Person who is not a resident of Canada for the purposes of the Tax Act or (ii) a
partnership that is not a Canadian partnership for the purposes of the Tax Act;
"Notice of Meeting" means the Notice of Special Meeting which accompanies this Information Circular;
"Notice of Petition" means the Notice of Petition by TriStar to the Court for the Final Order which accompanies
this Information Circular;
"Parties" means PetroBakken, Petrobank and TriStar; and "Party" means any one of them, or where implied by the
context, means PetroBakken and Petrobank or TriStar as the case may be;
"Person" means any individual, association, body corporate, trustee, executor, administrator, legal representative,
government, regulatory authority or other entity;
"PetroBakken" means PetroBakken Energy Ltd., a corporation incorporated pursuant to the ABCA;
"PetroBakken Class A Shares" means the class A common shares in the capital of PetroBakken;
"PetroBakken Class B Shares" means the class B common shares in the capital of PetroBakken;
"PetroBakken DCS Plan" means the deferred common share plan of PetroBakken to be considered at the Meeting,
as described under the heading "Other Matters to be Considered at the Meeting – Approval of PetroBakken Share
Based Compensation Plans";
"PetroBakken Debt" means total indebtedness, including obligations under capital leases, long term debt, bank
debt and working capital (each as defined in accordance with Canadian generally accepted accounting principles),
which shall be deemed to include the amount of $25 million allocated to a land acquisition as disclosed to TriStar
prior to the date of the Arrangement Agreement, and to be completed by Petrobank or PetroBakken prior to the
Effective Time and shall exclude transaction costs associated with the Arrangement;
"PetroBakken Incentive Plan" means the incentive share plan of PetroBakken to be considered at the Meeting, as
described under the heading "Other Matters to be Considered at the Meeting – Approval of PetroBakken Share
Based Compensation Plans";
"PetroBakken Option Plan" means the stock option plan of PetroBakken to be considered at the Meeting, as
described under the heading "Other Matters to be Considered at the Meeting – Approval of PetroBakken Share
Based Compensation Plans";
-3-
"PetroBakken Partnership" means a partnership formed for the purposes of the Petrobank Reorganization, which
will be an indirect wholly-owned subsidiary of PetroBakken, and which will own the Petrobank Assets on the
Effective Date;
"PetroBakken Production Partnership" means a partnership formed for the purposes of the Petrobank
Reorganization, which will be a direct and indirect wholly-owned subsidiary of PetroBakken, and which will own
99.99% of the Petrobank Partnership on the Effective Date;
"PetroBakken Shares" means, collectively, the PetroBakken Class A Shares and the PetroBakken Class B Shares;
"Petrobank" means Petrobank Energy and Resources Ltd., a corporation incorporated pursuant to the ABCA;
"Petrobank Assets" means Petrobank’s and all of its subsidiaries’ Canadian conventional petroleum and natural
gas assets and all tangibles, intangibles and facilities related thereto, including all of the assets presently owned by
or being held for the benefit of Petrobank Production Partnership and Petrobank Oil and Gas Ventures, LP and
defined in Petrobank’s public filings as its "Canadian Business Unit" as evaluated in the Petrobank Sproule Report
and such additional assets and liabilities as Petrobank and TriStar shall agree, acting reasonably, to be transferred,
directly or indirectly, by Petrobank to PetroBakken prior to the Effective Time. For further clarity the Petrobank
Assets include all of the petroleum and natural gas assets and all tangibles, intangibles and facilities related thereto,
that are held by or for the benefit of Petrobank and its subsidiaries other than such interests that form part of
Petrobank’s "Heavy Oil Business Unit" and "Latin American Business Unit" as such business units are defined in
Petrobank’s public filings;
"Petrobank Reorganization" means the conveyance of the Petrobank Assets (including related obligations) from
Petrobank and its subsidiaries to PetroBakken through a series of transactions and events, and the assumption of
liabilities and entering into a new banking facility on customary and reasonable commercial terms, which shall
result in the PetroBakken Debt, assuming current forward-strip commodity prices, being equal to an amount not
exceeding in the aggregate $415 million, excluding financial instruments and associated liability for Taxes, before
costs associated with the Arrangement, immediately prior to the Effective Time unless prior written consent of
TriStar, acting reasonably, is obtained, to be undertaken by Petrobank before the Effective Date;
"Petrobank Sproule Report" means the independent engineering evaluation of crude oil and natural gas reserves
attributable to the Petrobank Assets prepared by Sproule, dated March 11, 2009, with an effective date of December
31, 2008;
"Plan" or "Plan of Arrangement" means the plan of arrangement attached as Schedule "A" to Appendix "C" to this
Information Circular, as amended or supplemented from time to time in accordance with the terms thereof;
"Record Date" means the close of business on August 31, 2009;
"Registrar" means the Registrar of Corporations duly appointed under the ABCA;
"Regulation S" means Regulation S under the 1933 Act;
"SEC" means the United States Securities and Exchange Commission;
"Share Consideration" means the number of PetroBakken Class A Shares that each TriStar Shareholder electing to
receive PetroBakken Class A Shares is entitled to receive pursuant to the Arrangement, being 0.5350 of a
PetroBakken Class A Share for each TriStar Share;
"Special Expense Reimbursement" means, if TriStar is making a payment to Petrobank or PetroBakken, all
reasonable third party costs and expenses incurred by Petrobank prior to Petrobank becoming aware of the
occurrence of any of the events listed in subsections 6.1(a)(i) through 6.1(a)(vi) of the Arrangement Agreement,
inclusive, in connection with the Arrangement which would not have otherwise been incurred by Petrobank (or
-4-
PetroBakken) but for Petrobank (or PetroBakken) pursuing completion of the Arrangement, to an aggregate
maximum of $2,500,000; and, if Petrobank is making a payment to TriStar, all reasonable third party costs and
expenses incurred by TriStar prior to TriStar becoming aware of the occurrence of the event described in subsection
6.1(b) of the Arrangement Agreement in connection with the Arrangement which would not have otherwise been
incurred by TriStar but for Petrobank proposing the transactions contemplated by the Arrangement Agreement, to
an aggregate maximum of $2,500,000;
"Sproule" means Sproule Associates Limited;
"Superior Proposal" has the meaning set forth herein under the heading "Arrangement Agreement – NonSolicitation by TriStar";
"Tax Act" means the Income Tax Act (Canada), R.S.C. 1985, c. 1. (5th Supp), as amended, including the regulations
promulgated thereunder;
"Tax Election Date" means the date that is 90 days following the Effective Date;
"Taxes" means mean all taxes, however denominated, including any interest, penalties or other additions that may
become payable in respect thereof, imposed by any federal, provincial, territorial, state, local or foreign government
or any agency or political subdivision of any such government, which taxes shall include, without limiting the
generality of the foregoing, all income or profits taxes (including, but not limited to, federal income taxes and
provincial income taxes), payroll and employee withholding taxes, unemployment insurance, social insurance taxes,
sales and use taxes, goods and services taxes, commodity taxes, ad valorem taxes, excise taxes, franchise taxes,
gross receipts taxes, business license taxes, occupation taxes, real and personal property taxes, stamp taxes,
environmental taxes, transfer taxes, workers compensation and other governmental charges, and other obligations of
the same or of a similar nature to any of the foregoing, which PetroBakken, Petrobank or TriStar (or any of their
respective subsidiaries), as the case may be, is required to pay, withhold, remit or collect;
"TriStar" means TriStar Oil & Gas Ltd., a corporation incorporated pursuant to the ABCA;
"TriStar Acquired Assets" means the assets acquired by TriStar effective April 1, 2009 as described under the
heading "Description of the Business – Recent Developments – Asset Acquisition and Subscription Receipt
Financing" in Appendix "F" – "Information Concerning TriStar";
"TriStar Acquired Partnership" means the partnership acquired by TriStar effective February 1, 2009 as
described under the heading "Description of the Business – Recent Developments – Partnership Acquisition" in
Appendix "F" – "Information Concerning TriStar";
"TriStar Acquisition Proposal" means any inquiry or the making of any proposal or offer to TriStar or its
shareholders from any Person, whether or not subject to due diligence or other conditions and whether oral or in
writing, which constitutes, or may reasonably be expected to lead to (in either case whether in one transaction or a
series of transactions): (i) an acquisition from TriStar or its shareholders of securities of TriStar (other than on
exercise of currently outstanding TriStar Options) that, when taken together with the securities of TriStar held by
the proposed acquirer, would constitute more than 20% of the voting equity securities of TriStar; (ii) any acquisition
of all or a material portion of the assets of TriStar or any of its subsidiaries; (iii) an amalgamation, arrangement,
merger, or consolidation involving TriStar or any of its subsidiaries; or (iv) any take-over bid, issuer bid, exchange
offer, recapitalization, liquidation, dissolution, reorganization into a royalty trust or income fund or similar
transaction involving TriStar or its subsidiaries or any other transaction, the consummation of which would or could
reasonably be expected to impede, interfere with, prevent or delay the transactions contemplated by the
Arrangement Agreement or the Arrangement or which would or could reasonably be expected to materially reduce
the benefits to PetroBakken under the Arrangement Agreement;
"TriStar AIF" means the annual information form of TriStar dated March 9, 2009 for the year ended December 31,
2009;
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"TriStar GLJ Report" means the independent engineering evaluations of certain crude oil, natural gas and natural
gas liquids reserves attributable to the TriStar Acquired Assets prepared by GLJ, with an effective date of
December 31, 2008 and mechanically updated to March 31, 2009 to reflect production from January 1, 2009 to the
acquisition effective date of April 1, 2009;
"TriStar Incentive Shares" means outstanding incentive shares redeemable for TriStar Shares;
"TriStar Lock-up Agreements" means agreements between Petrobank, PetroBakken and the TriStar Lock-Up
Securityholders pursuant to which the TriStar Lock-Up Securityholders have agreed to vote the TriStar Shares
beneficially owned or controlled by the TriStar Lock-Up Securityholders, including TriStar Shares acquired on the
exercise or redemption of TriStar Options or TriStar Incentive Shares, in favour of the Arrangement Resolution and
to otherwise support the Arrangement and other related matters to be considered at the TriStar Meeting;
"TriStar Lock-up Securityholders" means those holders of TriStar Shares, TriStar Options and TriStar Incentive
Shares that have entered into TriStar Lock-Up Agreements with PetroBakken;
"TriStar Options" means outstanding options to purchase TriStar Shares;
"TriStar Shareholders" means the holders from time to time of TriStar Shares;
"TriStar Shares" means common shares of TriStar;
"TriStar Sproule Acquisition Report" means the independent engineering evaluations of certain crude oil, natural
gas and natural gas liquids reserves attributable to the TriStar Acquired Partnership prepared by Sproule, with an
effective date of January 31, 2009;
"TriStar Sproule Report" means the independent engineering evaluations of TriStar’s crude oil, natural gas and
natural gas liquids reserves prepared by Sproule, with an effective date of December 31, 2008;
"TSX" means the Toronto Stock Exchange;
"United States" or "U.S." means the United States, as defined in Rule 902(l) under Regulation S;
"1933 Act" means the United States Securities Act of 1933, as amended; and
"1934 Act" means the United States Securities Exchange Act of 1934, as amended.
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INTRODUCTION
This Information Circular is furnished in connection with the solicitation of proxies by and on behalf of the
management of TriStar for use at the Meeting and any adjournments thereof. No Person has been
authorized to give any information or make any representation in connection with the Arrangement or any
other matters to be considered at the Meeting other than those contained in this Information Circular and, if
given or made, any such information or representation must not be relied upon as having been authorized.
All summaries of, and references to, the Arrangement in this Information Circular are qualified in their entirety by
reference to the complete text of the Plan of Arrangement, a copy of which is attached as Exhibit A to the
Arrangement Agreement which is attached as Appendix "C" to this Information Circular. You are urged to
carefully read the full text of the Plan of Arrangement.
All capitalized terms used in this Information Circular but not otherwise defined herein have the meanings set forth
under "Glossary of Terms". Information contained in this Information Circular is given as of August 31, 2009
unless otherwise specifically stated.
CURRENCY AND EXCHANGE RATES
All dollar amounts set forth in this Information Circular are in Canadian dollars, except where otherwise indicated.
The following table sets forth (i) the rates of exchange for United States dollars, expressed in Canadian dollars in
effect at the end of each of the periods indicated; (ii) the average of exchange rates in effect during such period; and
(iii) the high and low exchange rates during each such period, in each case based on the Bank of Canada noon rate.
Rate at end of period
Average rate during period
High
Low
Year ended December 31
2007
2006
0.9881
1.1653
1.0748
1.1341
1.1878
1.1794
0.9066
1.0948
2008
1.2246
1.0660
1.3008
0.9711
The noon rate on August 31, 2009 was U.S. $1.00 = Cdn.$1.0967.
ABBREVIATIONS
Oil and Natural Gas Liquids
Natural Gas
bbl
bbls
Mbbls
MMbbls
bbls/d
BOPD
NGL
Mcf
MMcf
Mcf/d
MMcf/d
Bcf
GJ
barrel
barrels
thousand barrels
million barrels
barrels per day
barrels of oil per day
natural gas liquids
-7-
thousand cubic feet
million cubic feet
thousand cubic feet per day
million cubic feet per day
billion cubic feet
gigajoule
2005
1.1659
1.2116
1.2734
1.1427
Other
AECO
API
°API
BOE
BOE/d
C$
m3
MBOE
MMBOE
MM
U.S.$
WTI
$000s
the natural gas storage facility located at Suffield, Alberta
American Petroleum Institute
an indication of the specific gravity of crude oil measured on the API gravity scale
barrel of oil equivalent of natural gas and crude oil on the basis of 1 Boe for 6 Mcf of
natural gas
barrel of oil equivalent per day
Canadian dollars
cubic metres
1,000 barrels of oil equivalent
million barrels of oil equivalent
million
United States dollars
West Texas Intermediate, the reference price paid in United States dollars at Cushing,
Oklahoma for crude oil of standard grade
thousands of dollars
CONVERSIONS
To Convert From
Mcf
Cubic metres
bbls
Cubic metres
Feet
Metres
Miles
Kilometres
Acres
Hectares
To
Cubic metres
Cubic feet
Cubic metres
bbls oil
Metres
Feet
Kilometres
Miles
Hectares
Acres
Multiply By
28.174
35.494
0.159
6.290
0.305
3.281
1.609
0.621
0.405
2.471
FORWARD-LOOKING STATEMENTS
This Information Circular and the documents incorporated by reference herein contain or may contain certain
statements or disclosures concerning TriStar, Petrobank, or PetroBakken that constitute forward-looking
information under applicable securities laws. All statements and disclosures, other than those of historical fact,
about possible events, conditions, results of operations, activities, events, outcomes, results or developments based
on assumptions about future economic conditions and courses of action that TriStar, Petrobank or PetroBakken, as
applicable, anticipates or expects may or will occur in the future (in whole or in part) should be considered forwardlooking information. In some cases, forward-looking information can be identified by terms such as "anticipate",
"continue", "estimate", "expect", "may", "will", "project", "should" or "believe". In addition, statements relating to
"reserves" are deemed to be forward looking information as they involve the implied assessment, based on certain
estimates and assumptions, that the reserves described exist in the quantities estimated and can be profitably
produced in the future. In particular, this Information Circular, and the documents incorporated by reference,
contain or may contain forward-looking information pertaining to the following:
•
the performance characteristics of oil and natural gas properties;
•
oil and natural gas production levels and the sources of their growth;
•
the size of the oil and natural gas reserves, recovery rates and anticipated future cash flows from such reserves;
-8-
•
projections of market prices and costs;
•
supply and demand for oil and natural gas;
•
plans for and results of exploration and development activities;
•
expectations regarding the outcome of claims against TriStar or Petrobank;
•
expectations regarding the ability to raise capital and to add to reserves through acquisitions, exploration and
development;
•
treatment under governmental regulatory regimes and tax laws;
•
drilling plans;
•
reserve life;
•
capital expenditure programs;
•
the timing and completion of the proposed Petrobank Reorganization and the future structure of PetroBakken
and its subsidiaries, including the proposed appointment of new directors and officers of PetroBakken;
•
anticipated future dividend payments by PetroBakken; and
•
the timing and completion of the proposed Arrangement and the benefits thereof.
TriStar, Petrobank and PetroBakken, as applicable, rely on certain key expectations and assumptions in making the
forecasts, projections, predictions or estimations set out in forward-looking information. These factors and
assumptions are based on information available at the time that the forward-looking information is provided. These
include, but are not limited to, expectations and assumptions concerning:
•
the success of operations and exploration and development activities;
•
prevailing commodity prices and exchange rates;
•
the availability of capital to fund planned expenditures;
•
prevailing regulatory, royalty, tax and environmental laws and regulations;
•
the ability to market oil and natural gas successfully;
•
the ability to secure necessary personnel, equipment and services; and
•
the receipt of required securityholder, regulatory and court approvals in respect of the Arrangement.
Undue reliance should not be placed on forward-looking information because a number of risks and factors
may cause actual results to differ materially from those set out in such forward-looking information. These
include:
•
volatility in market prices for oil and natural gas;
•
risks and liabilities inherent in oil and natural gas operations;
-9-
•
uncertainties associated with estimating oil and natural gas reserves;
•
competition for, among other things, capital, acquisitions of reserves, undeveloped lands and skilled personnel;
•
incorrect assessments of the value of acquisitions and exploration and development programs;
•
geological, technical, drilling and processing problems;
•
actions by governmental authorities, including increases in taxes;
•
the availability of capital on acceptable terms;
•
fluctuations in foreign exchange or interest rates and stock market volatility;
•
difficulties in integrating the operations of TriStar and PetroBank's Canadian Business Unit;
•
failure to realize the anticipated benefits of acquisitions;
•
failure to receive regulatory and securityholder approvals or to otherwise satisfy conditions precedent to the
completion of the Arrangement; and
•
the other factors specifically identified as risk factors in this Information Circular and the documents
incorporated by reference herein.
Statements relating to "reserves" or "resources" are deemed to be forward looking statements as they involve the
implied assessment, based on certain estimates and assumptions, that the resources and reserves described can be
profitably produced in the future. Readers are cautioned that the foregoing list of factors should not be construed as
exhaustive. The forward-looking statements included in this Information Circular and in certain documents
incorporated by reference herein are expressly qualified by this cautionary statement and are made as of the
date of this Information Circular. TriStar, PetroBakken and Petrobank undertake no obligation to publicly
update or revise any forward-looking statements, except as required by applicable securities laws.
NON-GAAP MEASURES
Discussion and analysis of operating and financial results for TriStar and/or Petrobank included or incorporated by
reference herein may include reference to funds flow from operations, netbacks and netbacks per BOE. As
indicators of such entity’s financial performance, these measures are not an alternative to, or more relevant than,
cash flow from operating activities as determined in accordance with GAAP. Funds flow from operations, netbacks
and netbacks per BOE are supplementary, non-GAAP measurements only and may not be comparable to similar
measures reported by other entities. Management believes that in addition to net earnings, funds flow from
operations and netback are useful supplemental measures as they provide an indication of the results generated by
TriStar’s and/or Petrobank’s principal business activities before the consideration of how those activities are
financed or how the results are taxed. Investors are cautioned, however, that these measures should not be construed
as alternatives to net earnings determined in accordance with GAAP, as an indication of TriStar’s or Petrobank’s
performance.
TriStar’s and Petrobank’s method of calculating funds flow from operations may differ from other companies, and
accordingly it may not be comparable to measures used by other companies. The statements of cash flows in the
financial statements present the reconciliation between net earnings and funds flow from operations. TriStar and
Petrobank determine funds flow from operations as cash flow from operating activities before changes in non-cash
working capital. Funds flow from operations per share is calculated using the weighted average basic and diluted
shares used in calculated in earnings per share.
-10-
NOTES ON RESERVES DATA
The determination of oil and gas reserves involves the preparation of estimates that have an inherent degree of
associated uncertainty. Categories of proved, probable and possible reserves have been established to reflect the
level of these uncertainties and to provide an indication of the probability of recovery.
The estimation and classification of reserves requires the application of professional judgment combined with
geological and engineering knowledge to assess whether or not specific reserves classification criteria have been
satisfied. Knowledge of concepts including uncertainty and risk, probability and statistics, and deterministic and
probabilistic estimation methods is required to properly use and apply reserves definitions.
"Reserves" are estimated remaining quantities of oil and natural gas and related substances anticipated to be
recoverable from known accumulations, from a given date forward, based on (a) analysis of drilling, geological,
geophysical, and engineering data; (b) the use of established technology; and (c) specified economic conditions,
which are generally accepted as being reasonable and shall be disclosed. Reserves are classified according to the
degree of certainty associated with the estimates.
"Proved" reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. It is
likely that the actual remaining quantities recovered will exceed the estimated proved reserves.
"Developed Producing" reserves are those reserves that are expected to be recovered from completion intervals
open at the time of the estimate. These reserves may be currently producing or, if shut-in, they must have previously
been on production, and the date of resumption of production must be known with reasonable certainty.
"Developed Non-Producing" reserves are those reserves that either have not been on production, or have
previously been on production, but are shut-in, and the date of resumption of production is unknown.
"Undeveloped" reserves are those reserves expected to be recovered from known accumulations where a significant
expenditure (e.g., when compared to the cost of drilling a well) is required to render them capable of production.
They must fully meet the requirements of the reserves classification (proved, probable, possible) to which they are
assigned.
In multi-well pools, it may be appropriate to allocate total pool reserves between the developed and undeveloped
categories or to sub-divide the developed reserves for the pool between developed producing and developed nonproducing. This allocation should be based on the estimator's assessment as to the reserves that will be recovered
from specific wells, facilities and completion intervals in the pool and their respective development and production
status.
"Probable" reserves are those additional reserves that are less certain to be recovered than proved reserves. It is
equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated
proved + probable reserves.
"gross" means: (a) in relation to an issuer's interest in production or reserves, its "company gross reserves", which
are its working interest (operating or non-operating) share before deduction of royalties and without including any
royalty interests of the issuer; (b) in relation to wells, the total number of wells in which an issuer has an interest;
and (c) in relation to properties, the total area of properties in which an issuer has an interest.
"net" means: (a) in relation to an issuer's interest in production or reserves its working interest (operating or nonoperating) share after deduction of royalty obligations, plus its royalty interests in production or reserves; (b) in
relation to an issuer's interest in wells, the number of wells obtained by aggregating the issuer's working interest in
each of its gross wells; and (c) in relation to an issuer's interest in a property, the total area in which the issuer has
an interest multiplied by the working interest owned by the issuer.
-11-
INFORMATION FOR UNITED STATES TRISTAR SHAREHOLDERS
The offer and sale of the PetroBakken Class A Shares issuable to TriStar Shareholders in exchange for TriStar
Shares pursuant to the Arrangement have not been and will not be registered under the 1933 Act, and such
securities will issued to TriStar Shareholders in reliance upon the exemption from the registration requirements of
the 1933 Act provided by Section 3(a)(10) thereof. The solicitation of proxies for the Meeting is not subject to the
requirements of section 14(a) of the 1934 Act. Accordingly, this Information Circular has been prepared solely in
accordance with disclosure requirements in Canada, and the solicitations and transactions contemplated in this
Information Circular are made in the United States for securities of a Canadian issuer in accordance with Canadian
corporate and securities laws. TriStar Shareholders in the United States should be aware that such requirements are
different from those of the United States applicable to registration statements under the 1933 Act and proxy
statements under the 1934 Act. All financial statements and other financial information included or incorporated by
reference in this Information Circular have been prepared in Canadian dollars and in accordance with Canadian
GAAP, and are subject to Canadian auditing and auditor independence standards, which differ from United States
generally accepted accounting principles and United States auditing and auditor independence standards in certain
material respects. Consequently, such financial statements and other financial information are not comparable in all
respects to financial statements prepared in accordance with United States generally accepted accounting principles
and that are subject to United States auditing and auditor independence standards. Likewise, pro forma information
concerning the assets and operations of PetroBakken has been prepared in accordance with Canadian standards and
is not comparable in all respects to similar information for United States companies.
Oil and gas companies that account for oil and gas activities using the "full cost" method are required to apply a
"ceiling test" when preparing their financial statements. A company must compare the net capitalized costs of its
oil and natural gas properties against a "ceiling value". If the net capitalized costs exceed the ceiling value, the
company must record a non-cash write-down equal to the difference. Under United States generally accepted
accounting principles, the calculation of the "ceiling value" must be made using the future net revenues from proved
reserves using oil and natural gas prices in effect at the end of the applicable period discounted at ten percent.
Under GAAP, the ceiling value is initially based on undiscounted future net revenues from proved reserves using
forecast prices. Therefore, the maximum ceiling value attributable to oil and natural gas assets is generally lower
under United States generally accepted accounting principles than under Canadian GAAP. Accordingly, in a low
commodity price environment where expected future commodity prices exceed current commodity prices, or when
material acquisitions are initially recorded using Canadian ceiling values, there is more risk of ceiling test writedown under United States generally accepted accounting principles. Ceiling test write-downs would not reduce
reported cash flow.
Data on oil and gas reserves included or incorporated by reference in this Information Circular has been prepared in
accordance with Canadian disclosure standards, which are not comparable in all respects to United States disclosure
standards. For example, the SEC permits oil and gas companies, in their filings with the SEC, to disclose only
proved reserves (as defined in SEC rules). Canadian securities laws permit oil and gas companies, in their filings
with Canadian securities regulators, to disclose proved reserves (defined differently from SEC rules) and probable
reserves. Probable reserves are of higher risk and are generally believed to be less likely to be recovered than
proved reserves. Moreover, the disclosure of estimated future net revenue from reserves has been calculated in
accordance with Canadian practices using forecast prices and costs, whereas the SEC requires that the prices and
costs be held constant at prices in effect on the date of the reserve report. In addition, under Canadian practice,
reserves and production are reported using gross volumes, which are volumes prior to deduction of royalties and
similar payments. The practice in the United States is to report reserves and production using net volumes, after
deduction of applicable royalties and similar payments. As a consequence, the production volumes and reserve
estimates in this Information Circular and the documents incorporated herein may not be comparable to those of
United States companies subject to SEC reporting and disclosure requirements.
The enforcement by investors of civil liabilities under the United States securities laws may be affected adversely
by the fact that TriStar and Petrobank are incorporated under the laws of Alberta, that their officers and directors are
-12-
residents of countries other than the United States, that the experts named in this Information Circular are residents
of countries other than the United States, and that all or a substantial portion of the assets of TriStar, Petrobank,
PetroBakken and such persons are, or will be, located outside the United States.
The PetroBakken Class A Shares issuable pursuant to the Arrangement will be freely transferable under
U.S. federal securities laws, except by persons who will be "affiliates" of Petrobakken after the Arrangement or
were affiliates of Petrobakken within 90 days prior to the completion of the Arrangement. See "Securities Laws
Matters – Resale of Securities". TriStar Shareholders should be aware that the Arrangement and the ownership of
PetroBakken Class A Shares may have material tax consequences in the United States, including, without
limitation, the possibility that the Arrangement is a taxable transaction, in whole or in part, for United States federal
income tax purposes. See "Certain United States Federal Income Tax Considerations".
THE PETROBAKKEN CLASS A SHARES TO BE ISSUED PURSUANT TO THE ARRANGEMENT
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES REGULATORY AUTHORITY OF ANY STATE OF
THE UNITED STATES, NOR HAS THE UNITED STATES SECURITIES AND EXCHANGE
COMMISSION OR ANY SUCH AUTHORITY PASSED ON THE ADEQUACY OR ACCURACY OF
THIS INFORMATION CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENCE.
-13-
SUMMARY
The following is a summary of certain information contained elsewhere in this Information Circular, including the
Appendices hereto, and is qualified in its entirety by reference to the more detailed information contained or
referred to elsewhere in this Information Circular or in the Appendices hereto. Terms with initial capital letters
used in this summary are defined in the "Glossary of Terms". In this summary, all dollar amounts are stated in
Canadian dollars.
The Meeting
The Meeting will be held at the Grand Lecture Theatre Room at the Metropolitan Conference Centre, 333 – 4th
Avenue S.W., Calgary, Alberta on Wednesday, September 30, 2009 at 10:00 a.m. (Calgary time) for the purposes
set forth in the accompanying Notice of Meeting. The business of the Meeting will be to (i) consider and vote upon
the Arrangement and (ii) consider and vote upon a resolution to approve the PetroBakken Option Plan as is more
particularly described under the heading "Other Matters to be Considered at the Meeting – Approval of
PetroBakken Option Plan".
The Petrobank Reorganization
Prior to the Effective Date, Petrobank and PetroBakken will complete the Petrobank Reorganization, following the
completion of which, among other things, PetroBakken will own the Petrobank Assets and Petrobank will own
approximately 109,800,000 PetroBakken Shares (comprised of PetroBakken Class A Shares and PetroBakken
Class B Shares. See "The Arrangement – Petrobank Reorganization" and Appendix "E" – Information Concerning
PetroBakken".
The Arrangement
Pursuant to the Arrangement, TriStar Shareholders will exchange each TriStar Share they hold in exchange for, at
the election or deemed election of the holder and subject to pro-rationing as described below, either (a) the Cash
Consideration, (b) the Share Consideration, or (c) a combination of Cash Consideration and Share Consideration.
In the event the aggregate amount of Cash Consideration elected or deemed to be elected to be received by TriStar
Shareholders exceeds the Maximum Cash Consideration, TriStar Shareholders electing or deemed to have elected to
receive Cash Consideration (including those electing or deemed to have elected a combination of Share
Consideration and Cash Consideration) will receive a pro rata amount of cash and the remainder of their
consideration in PetroBakken Class A Shares. In the event the aggregate Share Consideration elected or deemed to
be elected to be received by TriStar Shareholders exceeds the Maximum Share Consideration, TriStar Shareholders
electing or deemed to have elected to receive Share Consideration (including those electing or deemed to have
elected a combination of Share Consideration and Cash Consideration) will receive a pro rata number of
PetroBakken Class A Shares and the remainder of their consideration in cash. TriStar Shareholders who do not
make a valid election on or before the Election Deadline by submitting a duly completed Letter of
Transmittal and Election Form prior to the Election Deadline will be deemed to have elected to receive a
combination of Cash Consideration and Share Consideration equal to $3.75 cash and 0.3989 of a
PetroBakken Class A Share for each TriStar Share, subject to pro-rationing. See "The Arrangement – Details
of the Arrangement" and "Procedure for Exchange of Shares". Also pursuant to the Plan of Arrangement,
PetroBakken will issue 286,545 PetroBakken Class A Shares to the Financial Advisors at a deemed price of $27.57
per share as partial consideration for financial advisory services provided to TriStar and Petrobank.
Effect of the Petrobank Reorganization and the Arrangement
Following the PetroBank Reorganization and the Arrangement, it is expected that there will be approximately
171,850,000 PetroBakken Shares issued and outstanding. Former TriStar Shareholders are expected to hold an
aggregate of approximately 61,762,500 PetroBakken Class A Shares (representing approximately 36% of the
outstanding PetroBakken Shares), the Financial Advisors are expected to own 286,545 PetroBakken Class A Shares
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and Petrobank is expected to own approximately 109,800,000 PetroBakken Shares (representing approximately
64% of the PetroBakken Shares). See "The Arrangement - Effect of the Arrangement".
Background to the Arrangement
The management and directors of TriStar continually review and monitor the strategic direction of TriStar to ensure
that TriStar Shareholder value is being maximized. Among other things, this involves an ongoing assessment of the
risked potential value to the TriStar Shareholders of the continued exploitation of TriStar’s internal development
opportunities versus the risked value that would accrue to the TriStar Shareholders through a business combination
with another entity or the acquisition of TriStar by another entity. In connection with such reviews, management of
TriStar has had continuing discussions with other entities operating in its southeast Saskatchewan focus area with
respect to potential consolidation opportunities.
In May, 2009, TriStar’s President & Chief Executive Officer received unsolicited expressions of interest from
Petrobank and from another oil and gas issuer with respect to an acquisition of or merger with TriStar. In order to
properly assess these expressions of interest and their relative merits, management, in consultation with TriStar's
financial advisors, considered other entities that may be interested in transacting with TriStar and contacted
additional oil and gas issuers which presented a strategic fit with TriStar's assets to solicit expressions of interest.
Confidentiality agreements were signed with three counterparties in early June, 2009 and final expressions of
interest were received from three parties on June 29, 2009.
On July 2, 2009, the Board of Directors met and management of TriStar provided an update with respect to the
expressions of interest received. At this time, management and the Board of Directors held extensive discussions
with respect to the strategic alternatives available to TriStar, including continuing to operate at the status quo,
growing TriStar through asset or corporate acquisitions or pursuing a sale or merger transaction. In addition, the
Board of Directors identified and discussed other entities that may be in a position to complete a transaction
involving an acquisition of or combination with TriStar. Representatives of Macquarie and BMO then attended the
meeting to provide the Board of Directors with a detailed summary of the terms and conditions of the expressions of
interest received by TriStar.
On July 13, 2009, the Board of Directors and management met again with representatives from Macquarie and
BMO in attendance to further discuss the strategic alternatives available to TriStar and to review the revised
expressions of interest, including with respect to structure, terms and conditions. It was determined that two of the
proposals, including the proposal from Petrobank, provided significantly more value than the third proposal and
from July 13, 2009 to July 22, 2009, management of TriStar and TriStar's financial advisors continued to negotiate
with the remaining two parties.
On July 22, 2009, representatives from Petrobank and its financial advisors made a presentation to the Board of
Directors to outline the terms of Petrobank's proposal and to answer questions with respect thereto. Following this
presentation, the Board of Directors further discussed the two proposals with TriStar's financial advisors and
outlined a strategic process for finalizing the offers. The Board of Directors met again on July 23, 2009, at which
time it was determined that the revised Petrobank offer presented financially superior consideration to the TriStar
Shareholders and it was decided that, unless the other remaining party increased the consideration being offered,
management should proceed to negotiate a letter of intent with Petrobank.
From July 23, 2009 to July 27, 2009, TriStar management negotiated a non-binding letter of intent with Petrobank
while inviting the other proposed party to increase the consideration offered pursuant to its proposal. On July 27,
2009, the Board of Directors met to review the letter of intent, which included non-binding terms and conditions
with respect to the proposed transaction as well as a binding provision giving Petrobank exclusive rights to
negotiate a definitive agreement. The Board of Directors also considered the fact that the other remaining party had
not increased the consideration being offered. The Board of Directors approved the letter of intent on with
Petrobank on July 27, 2009 and, from July 27, 2009 to August 4, 2009, discussions and negotiations continued
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between representatives of TriStar and Petrobank with respect to due diligence matters, terms and conditions of the
transaction and the terms of the Arrangement Agreement.
On August 4, 2009, the Board of Directors met to consider the Arrangement Agreement. Management
representatives provided the Board of Directors with a summary of due diligence matters and other terms and
conditions of the Arrangement Agreement and representatives of Macquarie and BMO each provided financial
advice with respect to the proposed Arrangement, including their oral opinions that the consideration to be received
by the TriStar Shareholders pursuant to the proposed Arrangement was fair, from a financial point of view, to the
TriStar Shareholders. The Board of Directors reviewed the terms of the draft Arrangement Agreement, discussed
with counsel and its financial advisors a number of issues arising from the Arrangement Agreement, and fully
considered its duties and responsibilities to the TriStar Shareholders. The Board of Directors unanimously
determined that the Arrangement is in the best interests of TriStar and the TriStar Shareholders and resolved to
unanimously recommend that the TriStar Shareholders vote in favour of the Arrangement. The Board of Directors
also approved the Arrangement Agreement, subject to certain matters to be finalized by TriStar's management and
its financial and legal advisors.
The Arrangement Agreement was executed effective August 4, 2009, together with the TriStar Lock-Up
Agreements, and the transaction was publicly announced on the afternoon of August 4, 2009.
On August 31, 2009, Macquarie and BMO provided the Fairness Opinions to the Board of Directors and the Board
of Directors approved this Information Circular for distribution to the TriStar Shareholders in connection with the
Meeting and confirmed their recommendation that the Arrangement be approved by the TriStar Shareholders at the
Meeting.
Reasons for the Arrangement
Pursuant to the Arrangement, PetroBakken will acquire all of the shares of TriStar. PetroBakken will also own the
Petrobank Assets acquired pursuant to the Petrobank Reorganization. PetroBakken will be a new publicly listed
company, with approximately 64% of the PetroBakken Shares owned by Petrobank and approximately 36% owned
by former TriStar Shareholders. The combined assets are highly complementary and will provide TriStar
Shareholders with significant, focused exposure to high netback light oil assets. PetroBakken will be a premier,
Bakken focused southeast Saskatchewan light oil producer with additional exposure to the Horn River and Montney
gas resource plays in northeast British Columbia. TriStar believes that the Arrangement presents an attractive
opportunity for the TriStar Shareholders to realize the value of their TriStar Shares by receiving PetroBakken Class
A Shares, which will provide increased opportunity to participate in the significant upside of the development of the
Bakken formation within a larger consolidated entity with the potential for technical and operating efficiencies.
In addition:
(a)
the Arrangement reflects attractive deal metrics to the TriStar Shareholders, recognizing the value of
TriStar’s existing and potential reserves, production and cash flow;
(b)
through the receipt of PetroBakken Class A Shares, TriStar Shareholders will exchange their investment
in TriStar for an investment in a larger consolidated entity which will be a premier player in the Bakken,
with a greater proportion of its production coming from the Bakken formation than any other material
producer, and with a combined 280,000 acres of net undeveloped land and 1,300+ identified drilling
locations in the Bakken fairway;
(c)
each of TriStar and Petrobank have been industry leaders in applying new, leading edge technologies to
develop the Bakken resource play and it is anticipated that combining these technical teams in
PetroBakken will allow it to utilize best practices to enhance the development of the Bakken and
maximize recovery factors;
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(d)
it is expected that PetroBakken's increased scale, particularly in the Bakken, will provide superior
operating efficiencies with respect to complementary gathering systems, oil processing facilities,
marketing arrangements and gas plant synergies;
(e)
the combined entity is expected to have an improved cost of capital as a result of its size and focus on the
development of high netback, light oil assets, particularly in the Bakken resource play;
(f)
PetroBakken will also have the opportunity to apply its combined technical knowledge to the
development of significant natural gas resource plays in the Horn River and Montney formations in
northeast British Columbia;
(g)
through ownership of PetroBakken Class A Shares, TriStar Shareholders will participate in a dividend
yielding entity with an anticipated initial annual dividend of $0.96 per PetroBakken Class A Share,
payable monthly;
(h)
TriStar Shareholders who do not want to hold PetroBakken Class A Shares have the opportunity to
exchange their TriStar Shares for cash at a price of $14.75 per share which, subject to pro-rationing,
represents a 29% premium to the 10 day volume weighted average trading price of the TriStar Shares
prior to the announcement of the Arrangement; and
(i)
the Arrangement provides certain Canadian resident TriStar Shareholders with an opportunity, if they so
elect, to obtain a tax-deferred rollover of TriStar Shares into PetroBakken Class A Shares.
Fairness Opinions
TriStar retained Macquarie and BMO, on behalf of the Board of Directors, to address the fairness to TriStar
Shareholders, from a financial point of view, of the consideration to be received by the TriStar Shareholders
pursuant to the Arrangement. In connection with this mandate, Macquarie and BMO have delivered the Fairness
Opinions to the Board of Directors. The Fairness Opinions each state that, in BMO's and Macquarie's opinion,
respectively, as of August 4, 2009, the consideration to be received by the TriStar Shareholders pursuant to the
Arrangement is fair, from a financial point of view, to the TriStar Shareholders. The Fairness Opinions, complete
copies of which are attached to this Information Circular at Appendix "D", are subject to the assumptions and
limitations contained therein and should be read in their entirety. The Fairness Opinions address only the fairness to
TriStar Shareholders, from a financial point of view, of the consideration to be received by TriStar Shareholders
under the Arrangement, and are for the information of the Board of Directors in connection with its consideration of
the Arrangement and any recommendation to TriStar Shareholders with respect to the Arrangement that the Board
of Directors may make. The Fairness Opinions do not constitute a recommendation to any TriStar Shareholder as to
how such TriStar Shareholder should vote at the Meeting.
Recommendation of the Board of Directors
The Board of Directors, based upon its own investigations, including its consideration of the Fairness
Opinions, has unanimously determined that the Arrangement is in the best interests of TriStar and is fair to
the TriStar Shareholders and recommends that the TriStar Shareholders vote in favour of the Arrangement
Resolution.
Conditions to the Arrangement
The respective obligations of TriStar and Petrobank to complete the transactions contemplated by the Arrangement
are subject to a number of conditions that must be satisfied in order for the Arrangement to become effective. A
copy of the Arrangement Agreement is attached to this Information Circular as Appendix "C". Upon all of the
conditions being fulfilled or waived, the Arrangement Agreement requires TriStar to file a copy of the Final Order
and the Articles of Arrangement with the Registrar in order to give effect to the Arrangement. A summary of the
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conditions is provided in the main body of this Information Circular under the heading "Arrangement Agreement –
Conditions Precedent to the Arrangement".
Procedure for the Arrangement to Become Effective
The Arrangement is proposed to be carried out pursuant to Section 193 of the ABCA. The following procedural
steps must be taken in order for the Arrangement to become effective:
(a)
the Arrangement must be approved by the TriStar Shareholders in the manner set forth in the
Interim Order;
(b)
the Court must grant the Final Order approving the Arrangement;
(c)
all conditions precedent to the Arrangement, as set forth in the Arrangement Agreement, must be
satisfied or waived by the appropriate party; and
(d)
the Final Order and the Articles of Arrangement in the form prescribed by the ABCA must be filed
with the Registrar.
TriStar Shareholder Approval
Pursuant to the Interim Order, the majority required to pass the Arrangement Resolution shall be not less than
66 2/3% of the votes cast by the TriStar Shareholders, in person or by proxy, at the Meeting in respect of the
Arrangement Resolution.
Notwithstanding the foregoing, the Arrangement Resolution authorizes the Board of Directors, without further
notice to or approval of the TriStar Shareholders, subject to the terms of the Arrangement, to amend the
Arrangement Agreement, to decide not to proceed with the Arrangement and to revoke such Arrangement
Resolution at any time prior to the Arrangement becoming effective pursuant to the provisions of the ABCA. See
Appendix "A" to this Information Circular for the full text of the Arrangement Resolution.
Court Approval
Implementation of the Arrangement requires the satisfaction of several conditions and the approval of the Court.
See "Procedure for the Arrangement Becoming Effective – Court Approvals". An application for the Final Order
approving the Arrangement is expected to be made on September 30, 2009 at 1:30 p.m. (Calgary time) at the Court
of Queen’s Bench of Alberta, Calgary Courts Centre, 601 - 5 Street SW, Calgary, Alberta, T2P 5P7.
Regulatory Approvals
The Arrangement Agreement provides that receipt of all regulatory approvals including, without limitation,
conditional approval of the TSX for the listing of the PetroBakken Class A Shares to be issued under the
Arrangement, is a condition precedent to the Arrangement becoming effective. The Arrangement is a "notifiable
transaction" for the purposes of Part IX of the Competition Act (Canada). TriStar and Petrobank have jointly
requested that the Commissioner issue an advance-ruling certificate under Section 102 of the Competition Act
(Canada) or, alternatively, a "no action" letter in respect of the Arrangement.
Timing
Subject to all conditions precedent to the Arrangement as set forth in the Arrangement Agreement being satisfied or
waived by the appropriate party, the Arrangement will become effective upon the filing with the Registrar of a copy
of the Articles of Arrangement. If the Meeting is held and the Arrangement Resolution is approved as required by
the Interim Order, TriStar will apply to the Court for the Final Order approving the Arrangement. If the Final Order
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is obtained on September 30, 2009 in form and substance satisfactory to TriStar and Petrobank and all other
conditions specified in the Arrangement Agreement are satisfied or waived, TriStar and Petrobank expect the
Effective Date will be October 1, 2009.
The Effective Date could be delayed, however, for a number of reasons, including an objection before the Court in
the hearing of the application for the Final Order. The Arrangement Agreement provides that, in the event a
material adverse event or other circumstance has occurred that materially limits Petrobank’s or PetroBakken’s
ability to access the domestic market for syndicated credit facilities or the financial banking or loan syndication
markets or capital markets generally, the Effective Date may be delayed to a date no later than February 1, 2010.
Procedure for Exchange of TriStar Shares
From and after the Effective Time, certificates formerly representing TriStar Shares shall represent only the right to
receive PetroBakken Class A Shares and/or cash pursuant to the Arrangement. In order to receive certificates for
PetroBakken Class A Shares and cheques for cash owing under the Arrangement, TriStar Shareholders must
complete and return the enclosed Letter of Transmittal and Election Form, together with the certificate(s)
representing their TriStar Shares, as applicable, to the Depositary at one of the offices specified in the Letter of
Transmittal and Election Form. In order to elect to receive only the Cash Consideration or only the Share
Consideration, a TriStar Shareholder must deliver a duly completed Letter of Transmittal and Election Form to the
Depositary on or prior to the Election Deadline. Failing to do so will result in the TriStar Shareholder being
deemed to have elected to receive a fixed combination of Share Consideration and Cash Consideration equal to
$3.75 and 0.3989 of a PetroBakken Shares for each of such holder’s TriStar Shares, subject to pro-rationing.
TriStar Shareholders whose TriStar Shares are registered in the name of a broker, dealer, bank, trust
company or other nominee must contact their nominee to deposit their TriStar Shares. See "Procedure for
Exchange of TriStar Shares".
Treatment of Fractional Shares
No fractional PetroBakken Class A Shares will be issued to TriStar Shareholders pursuant to the Arrangement. In
the event that a TriStar Shareholder would otherwise be entitled to a fractional PetroBakken Class A Share pursuant
to the Arrangement, the number of PetroBakken Class A Shares issued to such TriStar Shareholder will be rounded
up to the next greater whole number of PetroBakken Class A Shares if the fractional entitlement is equal to or
greater than 0.5 and shall, without any additional compensation, be rounded down to the next lesser whole number
of PetroBakken Class A Shares if the fractional entitlement is less than 0.5. In calculating such fractional interests,
all TriStar Shares registered in the name of such TriStar Shareholder shall be aggregated.
TriStar Lock-up Agreements
All of the directors and officers of TriStar have entered into the TriStar Lock-Up Agreements with Petrobank and
PetroBakken pursuant to which they have agreed to support the Arrangement and, subject to certain exceptions,
vote the TriStar Shares which they beneficially own, including any TriStar Shares acquired on the exercise of
TriStar Options or redemption of TriStar Incentive Shares, in favour of the Arrangement. The TriStar Lock-up
Agreements will terminate if the Arrangement Agreement is terminated in accordance with its terms or the
Arrangement Agreement is amended, modified or supplemented to reduce the consideration to be received by the
TriStar Lock-up Securityholders. TriStar Lock-up Securityholders hold, directly or indirectly, an aggregate of
1,609,450 TriStar Shares, 1,366,366 TriStar Options and 975,767 TriStar Incentive Shares, representing
approximately 2.48% of the fully-diluted number of TriStar Shares.
TriStar Options and TriStar Incentive Shares
In connection with the Arrangement, the vesting of all TriStar Options and TriStar Incentive Shares shall accelerate
and all such TriStar Options not previously vested shall become exercisable immediately prior the Effective Date
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and all outstanding TriStar Incentive Shares shall be redeemed for TriStar Shares immediately prior to the Effective
Date.
It is a condition to the completion of the Arrangement in favour of Petrobank and PetroBakken that Petrobank and
PetroBakken shall be reasonably satisfied that all TriStar Options and TriStar Incentive Shares shall, at or prior to
the Effective Time, have been exercised or cancelled and shall cease to represent an obligation of TriStar. As of the
date hereof, holders of TriStar Options have entered into agreements with TriStar whereby (a) holders of 2,356,635
TriStar Options (representing 58.52% of the outstanding TriStar Options) have agreed that, immediately prior to the
Effective Time, such holder’s TriStar Options will be surrendered for a cash payment per TriStar Option equal to
$14.75 less the exercise price of such TriStar Option, and (b) holders of 1,670,359 TriStar Options (representing
41.48% of the outstanding TriStar Options) have agreed to either exercise such TriStar Options for TriStar Shares
prior to the Effective Time or surrender such TriStar Options to TriStar for nominal consideration immediately prior
to the Effective Time. Holders of 2,476,852 TriStar Incentive Shares (representing 100% of the outstanding TriStar
Incentive Shares) have entered into agreements pursuant to which they have agreed that such Incentive Shares will
be redeemed for TriStar Shares immediately prior to the Effective Time. See "TriStar Options and TriStar Incentive
Shares".
Dissent Rights
Pursuant to the Interim Order, registered TriStar Shareholders have the right to dissent with respect to the
Arrangement Resolution by complying with Section 191 of the ABCA, as modified by the Interim Order and the
Plan of Arrangement. Registered TriStar Shareholders wishing to exercise such dissent rights must send a written
objection to the Arrangement Resolution to TriStar, c/o Heenan Blaikie LLP, 12th Floor, 425 – 1st Street S.W.,
Calgary, Alberta, T2P 3L8, attention Cynthia Amsterdam, by 4:00 p.m. (Calgary time) on the Business Day
immediately preceding the date of the Meeting. Provided the Arrangement becomes effective, each Dissenting
TriStar Shareholder will be entitled to be paid the fair value of the TriStar Shares in respect of which the holder
dissents, determined as of the close of business on the last Business Day before the Meeting.
The statutory provisions covering the right to dissent are technical and complex. Failure to strictly comply with the
requirements set forth in Section 191 of the ABCA, as such section may be modified by the Interim Order, may
result in the loss of any right to dissent. Persons who are beneficial owners of TriStar Shares registered in the
name of a broker, custodian, nominee or other intermediary who wish to dissent should be aware that only
the registered holder is entitled to dissent. Accordingly, a beneficial owner of TriStar Shares desiring to exercise
the right to dissent must make arrangements for such securities to be registered in such holder’s name prior to the
time the written objection to the Arrangement Resolution is required to be received or, alternatively, make
arrangements for the registered holder to dissent on such holder’s behalf. Pursuant to the Interim Order and the
ABCA, a TriStar Shareholder may not exercise the right to dissent in respect of only a portion of such holder’s
TriStar Shares.
Under the Arrangement Agreement, it is a condition to the Arrangement that holders of not greater than 5% of the
outstanding TriStar Shares shall have exercised Dissent Rights that have not been withdrawn as at the Effective
Date. See the more detailed description of the Dissent Rights provided in the main body of this Information
Circular under the heading "Dissent Rights". Also, see Appendix "B" for a copy of the Interim Order and Appendix
"H" for the provisions of Section 191 of the ABCA.
Resale of Securities
PetroBakken Class A Shares to be issued to TriStar Shareholders and to the Financial Advisors pursuant to the
Arrangement will be issued in reliance on exemptions from prospectus and registration requirements of applicable
securities laws of the various applicable provinces in Canada. PetroBakken Class A Shares will generally be "freely
tradeable" (and not subject to any "restricted period" or "hold period") under applicable Canadian securities laws if
the following conditions are met: (i) the trade is not a control distribution (as defined in applicable securities
legislation); (ii) no unusual effort is made to prepare the market or to create a demand for the securities that are the
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subject of the trade; (iii) no extraordinary commission or consideration is paid to a person or company in respect of
the trade; and (iv) if the selling securityholder is an insider or an officer of the issuer of the securities, the selling
securityholder has no reasonable grounds to believe that the issuer is in default of securities legislation.
The offer and sale of the PetroBakken Class A Shares issuable in exchange for TriStar Shares pursuant to the
Arrangement to TriStar Shareholders have not been and will not be registered under the 1933 Act, and such
securities will be issued in reliance upon the exemption from the registration requirements of the 1933 Act provided
by Section 3(a)(10) thereof. Such PetroBakken Class A Shares will be freely transferable under U.S. federal
securities laws, except by persons who are "affiliates" of Petrobakken after the Arrangement or were affiliates of
Petrobakken within 90 days prior to the completion of the Arrangement. Persons who may be deemed to be
"affiliates" of an issuer include individuals or entities that control, are controlled by, or are under common control
with, the issuer, whether through the ownership of voting securities, by contract or otherwise, and generally include
executive officers and directors of the issuer as well as principal shareholders of the issuer. TriStar Shareholders
are urged to consult their legal advisers to determine the extent of all applicable resale provisions. See "Securities
Law Matters – Resale of Securities".
Stock Exchange Listings
The outstanding TriStar Shares are listed and posted for trading on the TSX. On August 3, 2009, the last trading day
prior to the date of the announcement of the proposed Arrangement, the closing price of the TriStar Shares on the
TSX was $11.46. On August 31, 2009, the last trading day prior to the date of mailing of this Information Circular,
the closing price of the TriStar Shares on the TSX was $14.70.
PetroBakken has made application for the conditional listing on the TSX of the PetroBakken Class A Shares to be
issued in connection with the Arrangement. Listing will be subject to PetroBakken fulfilling all of the requirements
of the TSX, which requirements are expected to be met on the Effective Date or as soon as reasonably practicable
thereafter. Conditional listing approval has not yet been obtained and there can be no assurance that the
PetroBakken Class A Shares will be listed on the TSX or any other stock exchange. If the Arrangement is
completed, Petrobank will apply to have the TriStar Shares delisted from the TSX.
Canadian Federal Income Tax Considerations
The comments herein generally apply only to those TriStar Shareholders who hold their TriStar Shares and will
hold their PetroBakken Class A Shares as capital property for purposes of the Tax Act.
The Canadian federal income tax consequences of the transactions comprising the Arrangement will generally
result in a TriStar Shareholder realizing a capital gain (or a capital loss) to the extent that the aggregate of (i) the
Cash Consideration, if any, received on the exchange pursuant to the Arrangement; and (ii) the fair market value of
the Share Consideration, if any, received pursuant to the Arrangement exceeds (or is less than) the total of the
adjusted cost base of their TriStar Shares and any reasonable costs of disposition. A TriStar Shareholder who
receives consideration that includes PetroBakken Class A Shares pursuant to the Arrangement may be entitled to
make an election under Section 85 of the Tax Act to defer all or a portion of the capital gain that would otherwise
be realized by making a Joint Tax Election.
A Shareholder who, at all relevant times, is a Non-Resident should generally not be subject to any Canadian federal
income tax on capital gains realized in respect of a disposition of the TriStar Shares unless such property is "taxable
Canadian property" of the Non-Resident for purposes of the Tax Act, and an income tax convention between
Canada and the Non-Resident’s jurisdiction of residence does not exempt the capital gain from Canadian federal
income tax.
The Information Circular contains a summary of the principal Canadian federal income tax considerations relevant
to Canadian residents and Non-Residents and which relate to the Arrangement, and the above comments are
qualified in their entirety by reference to such summary. TriStar Shareholders are strongly urged to read carefully
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the general summary of certain tax considerations noted below and to consult their own tax advisors for advice with
respect to their own particular circumstances. See "Canadian Federal Income Tax Considerations".
Certain U.S. Federal Income Tax Considerations
Treatment of the exchange of TriStar Shares for PetroBakken Class A Shares and/or cash as described in this
Circular (the "Exchange") as part of a tax-deferred exchange within the meaning of Section 351 of the U.S. Code (a
"Section 351 Transaction") is subject to numerous requirements. Whether the Exchange qualifies as part of a
Section 351 Transaction depends, among other factors, on whether the Arrangement and PetroBakken
Reorganization are treated as a single integrated transaction under United States federal income tax principles as
well as the satisfaction of certain other requirements. Whether these requirements will be satisfied is uncertain as of
the date of the Circular and may depend to some extent upon events subsequent to the date of this Circular,
including events subsequent to the Effective Date, which events cannot be predicted with accuracy. If the
Exchange qualifies as part of a Section 351 Transaction with respect to the U.S. Holders (as defined below), such
U.S. Holders generally will recognize gain (but not loss) in an amount equal to the lesser of (a) the excess, if any, of
(i) the sum of (x) the fair market value of the PetroBakken Class A Shares and (y) the amount of cash received
(without reduction for any Canadian income tax withheld), over (ii) the tax basis of such U.S. Holder in the TriStar
Shares exchanged pursuant to the Arrangement, or (b) the amount of cash received pursuant to the Arrangement
(without reduction for any Canadian income tax withheld). If the Exchange does not qualify as a Section 351
Transaction, such U.S. Holders generally will recognize gain or loss in an amount equal to the difference, if any,
between (i) the fair market value (expressed in U.S. dollars) of the PetroBakken Class A Shares received and/or the
amount of cash received (without reduction for any Canadian income tax withheld) in exchange for TriStar Shares
pursuant to the Arrangement and (ii) the adjusted tax basis of such U.S. Holder in the TriStar Shares exchanged.
The Information Circular contains a summary of the principal United States federal income tax considerations
relevant to U.S. Holders and which relate to the Arrangement, and the above comments are qualified in their
entirety by reference to such summary. TriStar Shareholders are strongly urged to read carefully the general
summary of certain tax considerations noted below and to consult their own tax advisors for advice with respect to
their own particular circumstances. See "Certain United States Income Tax Considerations".
Other Tax Considerations
This Information Circular does not address any tax considerations of the Arrangement other than Canadian and
United States federal income tax considerations generally applicable to TriStar Shareholders who exchange their
TriStar Shares under the Arrangement. TriStar Shareholders who are residents of jurisdictions other than Canada or
the United States should consult their tax advisors with respect to the tax implications of the Arrangement,
including any associated filing requirements, in such jurisdictions and with respect to the tax implications in such
jurisdictions of disposing of their TriStar Shares under the Arrangement and owning PetroBakken Class A Shares
after the Arrangement. TriStar Shareholders should also consult their own tax advisors regarding provincial,
territorial or state tax considerations of disposing of their TriStar Shares under the Arrangement and of holding
PetroBakken Class A Shares.
TriStar
TriStar is a growth oriented public corporation engaged in the business of acquiring crude oil and natural gas
properties and exploring for, developing and producing natural gas and crude oil in Western Canada. TriStar is a
reporting issuer in all of the provinces of Canada and the TriStar Shares are listed and posted for trading on the TSX
under the symbol "TOG".
TriStar’s head office is located at Suite 800, 425-1st Street S.W., Calgary, Alberta, T2P 3L8 and its registered office
is located at Suite 1200, 425 – 1st Street S.W., Calgary, Alberta, T2P 3L8. See Appendix "F" - "Information
Concerning TriStar".
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PetroBakken
Prior to the completion of the Arrangement, Petrobank and PetroBakken will complete the Petrobank
Reorganization pursuant to which, among other things, Petrobank will contribute the PetroBank Assets and $400
million to PetroBakken in consideration for the issuance to PetroBank of approximately 109,800,000 PetroBakken
Class Shares.
Petrobank’s head office is located at 1900, 111-5th Avenue S.W., Calgary, Alberta, T2P 3Y6 and its registered
office is located at Suite 3300, 421-7th Avenue S.W., Calgary, Alberta, T2P 4K9. See Appendix "E" – "Information
Concerning PetroBakken". Collectively, the PetroBakken Class A Shares and PetroBakken Class B Shares held by
Petrobank will represent approximately 64% of the outstanding PetroBakken Shares upon completion of the
Arrangement.
Selected Pro Forma Financial Information
The following is a summary of selected financial information for PetroBakken on a pro forma basis following the
completion of the Petrobank Reorganization and the Arrangement, for the periods indicated. The following is a
summary only and must be read in conjunction with the financial statements included or incorporated by reference
in this Information Circular and the information contained in Appendix "E" - "Information Concerning
PetroBakken", Appendix "F" - "Information Concerning TriStar" and Appendix "G" –"Pro Forma Financial
Statements".
Pro Forma
Six Months Ended
June 30, 2009
(unaudited)
($000s)
Pro Forma
Year Ended
December 31, 2008
(unaudited)
($000s)
Revenues
Oil and natural gas
Royalties
Interest income
Gain (loss) on risk management contracts
379,619
(52,222)
81
(22,067)
305,411
1,198,961
(189,861)
536
67,489
1,077,125
Production and transportation
General and administration
Depletion, depreciation and accretion
Interest
Acquisition related costs
Stock-based compensation
74,556
15,760
245,219
13,171
13,566
362,272
172,088
22,226
475,494
28,029
29,825
18,109
745,771
(56,861)
331,354
(10,569)
(10,569)
(5,673)
100,829
95,156
(46,292)
236,198
Expenses
Income (loss) before taxes
Taxes
Current income taxes
Future income taxes (recovery)
Net income (loss)
Selected Combined Operational Information
The following is a summary of selected operational information for PetroBakken on a pro forma basis following the
completion of the Petrobank Reorganization and the Arrangement, for the periods indicated. The following is a
summary only and must be read in conjunction with the documents incorporated by reference in this Information
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Circular and the information contained in Appendix "E" - "Information Concerning PetroBakken" and
Appendix "F" - "Information Concerning TriStar".
Pro Forma
Six Months Ended
June 30, 2009
Average Daily Production
Light and medium crude oil and natural gas liquids (Bbls/d)
Natural gas (Mcf/d)
Total (Boe/d)
34,566
41,400
41,466
Pro Forma
Year Ended
December 31, 2008
30,906
44,819
38,376
Pro Forma as at
December 31, 2008
Total Proved Reserves (1)
Light and medium crude oil (Mbbls)
Natural gas liquids (Mbbls)
Natural gas (MMcf)
Total (Mboe)
81,872
5,620
127,205
108,693
Total Proved Plus Probable Reserves (1)
Light and medium crude oil (Mbbls)
Natural gas liquids (Mbbls)
Natural gas (MMcf)
Total (MBoe)
126,509
8,377
191,499
166,803
Net Undeveloped Land Holdings as at December 31, 2008 (000's of acres) (2)
Notes:
1,501,420
(1) Reserves for TriStar have been (a) evaluated by Sproule in the TriStar Sproule Report effective December 31, 2008 using
December 31, 2008 forecast pricing, (b) evaluated by Sproule in the TriStar Sproule Acquisition Report effective January 31, 2009
using Sproule's January 31, 2009 forecast pricing, and (c) evaluated by GLJ in the TriStar GLJ Report effective December 31, 2008
and mechanically updated to March 31, 2009 to reflect production from January 1, 2009 to the acquisition effective date of April 1,
2009 using GLJ's January 1, 2009 forecast pricing. Reserves for the Petrobank Assets have been evaluated by Sproule in the
Petrobank Sproule Report effective December 31, 2008 using December 31, 2008 forecast pricing. Reserves presented are gross
reserves as defined in NI 51-101, using forecast price and cost assumptions.
(2) Includes undeveloped lands acquired by TriStar pursuant to the acquisitions of the TriStar Acquired Assets as at April 1, 2009 and
the TriStar Acquired Partnership as at February 1, 2009.
Other Matters to be Considered at the Meeting
At the Meeting, the TriStar Shareholders will be asked to consider and approve a resolution approving the
PetroBakken Share Based Compensation Plans Plan. See "Other Matters to be Considered at the Meeting –
Approval of PetroBakken Option Plan".
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THE ARRANGEMENT
Details of the Arrangement
The following description of the Arrangement is qualified in its entirety by reference to the full text of the
Plan of Arrangement, as set forth in Schedule "A" to the Arrangement Agreement which is attached as
Appendix "C" to this Information Circular.
TriStar, Petrobank and PetroBakken have entered into the Arrangement Agreement which provides for the
implementation of the Arrangement pursuant to section 193 of the ABCA. Pursuant to the Arrangement, TriStar
Shareholders will exchange each TriStar Share they hold in exchange for, at the election of the holder and subject to
pro-rationing as described below, either (a) the Cash Consideration, (b) the Share Consideration, or (c) a
combination of Cash Consideration and Share Consideration. In the event the aggregate amount of Cash
Consideration elected or deemed be elected to be received by TriStar Shareholders exceeds the Maximum Cash
Consideration, TriStar Shareholders electing or deemed to have elected to receive Cash Consideration (including
those electing or deemed to have elected a combination of Share Consideration and Cash Consideration) will
receive a pro rata amount of cash and the remainder of their consideration in PetroBakken Class A Shares on the
basis of 0.5350 PetroBakken Class A Shares for each TriStar Share. In the event the aggregate Share Consideration
elected or deemed to be elected to be received by TriStar Shareholders exceeds the Maximum Share Consideration,
TriStar Shareholders electing or deemed to have elected to receive Share Consideration (including those electing or
deemed to have elected a combination of Share Consideration and Cash Consideration) will receive a pro rata
number of PetroBakken Class A Shares and the remainder of their consideration in cash on the basis of $14.75 for
each TriStar Share. Also pursuant to the Plan of Arrangement, PetroBakken will issue an aggregate of 286,545
PetroBakken Class A Shares to the Financial Advisors at a deemed price of $27.57 per share as partial consideration
for financial advisory services provided to TriStar and Petrobank.
TriStar Shareholders who do not make a valid election on or before the Election Deadline by submitting a
duly completed Letter of Transmittal and Election Form prior to the Election Deadline will be deemed to
have elected to receive the combination of Cash Consideration and Share Consideration equal to $3.75 cash
and 0.3989 of a PetroBakken Class A Share for eachTriStar Share, subject to pro-rationing.
The respective obligations of TriStar, Petrobank and PetroBakken to complete the transactions contemplated by the
Arrangement are subject to a number of conditions which must be satisfied in order for the Arrangement to become
effective. Upon all of the conditions being fulfilled or waived, TriStar is required to file a copy of the Final Order
and the Articles of Arrangement with the Registrar in order to give effect to the Arrangement. See "Arrangement
Agreement – Conditions Precedent to the Arrangement".
Effect of the Arrangement
The Arrangement will result in TriStar Shareholders receiving PetroBakken Class A Shares and/or cash for the
TriStar Shares that they hold on the Effective Date. Following the Arrangement, PetroBakken will hold all of the
outstanding TriStar Shares. PetroBakken shall allot and issue to TriStar Shareholders electing or receiving
PetroBakken Class A Shares the number of PetroBakken Class A Shares issuable to such holder on the basis set out
in the Plan of Arrangement and the name of such holders shall be added to the register of holders of PetroBakken
Class A Shares.
On August 31, 2009, there were 152,579,255 TriStar Shares, 4,026,994 TriStar Options and 2,476,852 TriStar
Incentive Shares outstanding. Following the Arrangement and the PetroBank Reorganization, it is expected that
there will be approximately 171,850,000 PetroBakken Class Shares issued and outstanding. Former TriStar
Shareholders are expected to hold an aggregate of approximately 61,762,500 PetroBakken Class A Shares,
(representing approximately 36% of the outstanding PetroBakken Shares), the Financial Advisors are expected to
own 286,545 PetroBakken Class A Shares and Petrobank is expected to own approximately 109,800,000
PetroBakken Class Shares ( representing approximately 64% of the PetroBakken Shares).
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Completion of the Arrangement would result in TriStar Shareholders exchanging their investment in TriStar Shares
for cash and/or an investment in PetroBakken Class A Shares. In deciding whether to vote to approve the
Arrangement, TriStar Shareholders should carefully review and consider the information concerning PetroBakken
and the PetroBakken Class A Shares contained in this Information Circular, including the information contained in
Appendix "E" – "Information Concerning PetroBakken" and Appendix "G" – "Pro Forma Financial Information".
Background to the Arrangement
The management and directors of TriStar continually review and monitor the strategic direction of TriStar to ensure
that TriStar Shareholder value is being maximized. Among other things, this involves an ongoing assessment of the
risked potential value to the TriStar Shareholders of the continued exploitation of TriStar’s internal development
opportunities versus the risked value that would accrue to the TriStar Shareholders through a business combination
with another entity or the acquisition of TriStar by another entity. In connection with such reviews, management of
TriStar has had continuing discussions with other entities operating in its southeast Saskatchewan focus area with
respect to potential consolidation opportunities.
In May, 2009, TriStar’s President & Chief Executive Officer received unsolicited expressions of interest from
Petrobank and from another oil and gas issuer with respect to an acquisition of or merger with TriStar. In order to
properly assess these expressions of interest and their relative merits, management, in consultation with TriStar's
financial advisors, considered other entities that may be interested in transacting with TriStar and contacted
additional oil and gas issuers which presented a strategic fit with TriStar's assets to solicit expressions of interest.
Confidentiality agreements were signed with three counterparties in early June, 2009 and final expressions of
interest were received from three parties on June 29, 2009.
On July 2, 2009, the Board of Directors met and management of TriStar provided an update with respect to the
expressions of interest received. At this time, management and the Board of Directors held extensive discussions
with respect to the strategic alternatives available to TriStar, including continuing to operate at the status quo,
growing TriStar through asset or corporate acquisitions or pursuing a sale or merger transaction. In addition, the
Board of Directors identified and discussed other entities that may be in a position to complete a transaction
involving an acquisition of or combination with TriStar. Representatives of Macquarie and BMO then attended the
meeting to provide the Board of Directors with a detailed summary of the terms and conditions of the expressions of
interest received by TriStar.
On July 13, 2009, the Board of Directors and management met again with representatives from Macquarie and
BMO in attendance to further discuss the strategic alternatives available to TriStar and to review the revised
expressions of interest, including with respect to structure, terms and conditions. It was determined that two of the
proposals, including the proposal from Petrobank, provided significantly more value than the third proposal and
from July 13, 2009 to July 22, 2009, management of TriStar and TriStar's financial advisors continued to negotiate
with the remaining two parties.
On July 22, 2009, representatives from Petrobank and its financial advisors made a presentation to the Board of
Directors to outline the terms of Petrobank's proposal and to answer questions with respect thereto. Following this
presentation, the Board of Directors further discussed the two proposals with TriStar's financial advisors and
outlined a strategic process for finalizing the offers. The Board of Directors met again on July 23, 2009, at which
time it was determined that the revised Petrobank offer presented financially superior consideration to the TriStar
Shareholders and it was decided that, unless the other remaining party increased the consideration being offered,
management should proceed to negotiate a letter of intent with Petrobank.
From July 23, 2009 to July 27, 2009, TriStar management negotiated a non-binding letter of intent with Petrobank
while inviting the other proposed party to increase the consideration offered pursuant to its proposal. On July 27,
2009, the Board of Directors met to review the letter of intent, which included non-binding terms and conditions
with respect to the proposed transaction as well as a binding provision giving Petrobank exclusive rights to
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negotiate a definitive agreement. The Board of Directors also considered the fact that the other remaining party had
not increased the consideration being offered. The Board of Directors approved the letter of intent on with
Petrobank on July 27, 2009 and, from July 27, 2009 to August 4, 2009, discussions and negotiations continued
between representatives of TriStar and Petrobank with respect to due diligence matters, terms and conditions of the
transaction and the terms of the Arrangement Agreement.
On August 4, 2009, the Board of Directors met to consider the Arrangement Agreement. Management
representatives provided the Board of Directors with a summary of due diligence matters and other terms and
conditions of the Arrangement Agreement and representatives of Macquarie and BMO each provided financial
advice with respect to the proposed Arrangement, including their oral opinions that the consideration to be received
by the TriStar Shareholders pursuant to the proposed Arrangement was fair, from a financial point of view, to the
TriStar Shareholders. The Board of Directors reviewed the terms of the draft Arrangement Agreement, discussed
with counsel and its financial advisors a number of issues arising from the Arrangement Agreement, and fully
considered its duties and responsibilities to the TriStar Shareholders. The Board of Directors unanimously
determined that the Arrangement is in the best interests of TriStar and the TriStar Shareholders and resolved to
unanimously recommend that the TriStar Shareholders vote in favour of the Arrangement. The Board of Directors
also approved the Arrangement Agreement, subject to certain matters to be finalized by TriStar's management and
its financial and legal advisors.
The Arrangement Agreement was executed effective August 4, 2009, together with the TriStar Lock-Up
Agreements, and the transaction was publicly announced on the afternoon of August 4, 2009.
On August 31, 2009, Macquarie and BMO provided the Fairness Opinions to the Board of Directors and the Board
of Directors approved this Information Circular for distribution to the TriStar Shareholders in connection with the
Meeting and confirmed their recommendation that the Arrangement be approved by the TriStar Shareholders at the
Meeting.
Reasons for the Arrangement
Pursuant to the Arrangement, PetroBakken will acquire all of the shares of TriStar. PetroBakken will also own the
Petrobank Assets acquired pursuant to the Petrobank Reorganization. PetroBakken will be a new publicly listed
company, with approximately 64% of the PetroBakken Shares owned by Petrobank and approximately 36% owned
by former TriStar Shareholders. The combined assets are highly complementary and will provide TriStar
Shareholders with significant, focused exposure to high netback light oil assets. PetroBakken will be a premier,
Bakken focused southeast Saskatchewan light oil producer with additional exposure to the Horn River and Montney
gas resource plays in northeast British Columbia. TriStar believes that the Arrangement presents an attractive
opportunity for the TriStar Shareholders to realize the value of their TriStar Shares by receiving PetroBakken Class
A Shares, which will provide increased opportunity to participate in the significant upside of the development of the
Bakken formation within a larger consolidated entity with the potential for technical and operating efficiencies.
In addition:
(a)
the Arrangement reflects attractive deal metrics to the TriStar Shareholders, recognizing the value of
TriStar’s existing and potential reserves, production and cash flow;
(b)
through the receipt of PetroBakken Class A Shares, TriStar Shareholders will exchange their investment
in TriStar for an investment in a larger consolidated entity which will be a premier player in the Bakken,
with a greater proportion of its production coming from the Bakken formation than any other material
producer, and with a combined 280,000 acres of net undeveloped land and 1,300+ identified drilling
locations in the Bakken fairway;
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(c)
each of TriStar and Petrobank have been industry leaders in applying new, leading edge technologies to
develop the Bakken resource play and it is anticipated that combining these technical teams in
PetroBakken will allow it to utilize best practices to enhance the development of the Bakken and
maximize recovery factors;
(d)
it is expected that PetroBakken's increased scale, particularly in the Bakken, will provide superior
operating efficiencies with respect to complementary gathering systems, oil processing facilities,
marketing arrangements and gas plant synergies;
(e)
the combined entity is expected to have an improved cost of capital as a result of its size and focus on the
development of high netback, light oil assets, particularly in the Bakken resource play;
(f)
PetroBakken will also have the opportunity to apply its combined technical knowledge to the
development of significant natural gas resource plays in the Horn River and Montney formations in
northeast British Columbia;
(g)
through ownership of PetroBakken Class A Shares, TriStar Shareholders will participate in a dividend
yielding entity with an anticipated initial annual dividend of $0.96 per PetroBakken Class A Share,
payable monthly;
(h)
TriStar Shareholders who do not want to hold PetroBakken Class A Shares have the opportunity to
exchange their TriStar Shares for cash at a price of $14.75 per share which, subject to pro-rationing,
represents a 29% premium to the 10 day volume weighted average trading price of the TriStar Shares
prior to the announcement of the Arrangement; and
(i)
the Arrangement provides certain Canadian resident TriStar Shareholders with an opportunity, if they so
elect, to obtain a tax-deferred rollover of TriStar Shares into PetroBakken Class A Shares.
Fairness Opinion
TriStar retained Macquarie and BMO, on behalf of the Board of Directors, to address the fairness to TriStar
Shareholders, from a financial point of view, of the consideration to be received by the TriStar Shareholders
pursuant to the Arrangement. In connection with this mandate, Macquarie and BMO have delivered the Fairness
Opinions to the Board of Directors. The Fairness Opinions each state that, in BMO's and Macquarie's opinion,
respectively, as of August 4, 2009, the consideration to be received by the TriStar Shareholders pursuant to the
Arrangement is fair, from a financial point of view, to the TriStar Shareholders. The Fairness Opinions, complete
copies of which are attached to this Information Circular at Appendix "D", are subject to the assumptions and
limitations contained therein and should be read in their entirety. The Fairness Opinions address only the fairness to
TriStar Shareholders, from a financial point of view, of the consideration to be received by TriStar Shareholders
under the Arrangement, and are for the information of the Board of Directors in connection with its consideration of
the Arrangement and any recommendation to TriStar Shareholders with respect to the Arrangement that the Board
of Directors may make. The Fairness Opinions do not constitute a recommendation to any TriStar Shareholder as to
how such TriStar Shareholder should vote at the Meeting.
The members of the Board of Directors have unanimously concurred with the views of Macquarie and BMO as
expressed in the Fairness Opinion and such views were an important consideration in their decision to proceed with
the Arrangement.
Recommendation of the Board of Directors
The Board of Directors, based upon their own investigations, including their consideration of the Fairness
Opinion, has unanimously concluded that the Arrangement is in the best interests of TriStar and is fair to the
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TriStar Shareholders and recommend that the TriStar Shareholders vote in favour of the Arrangement
Resolution.
PROCEDURE FOR THE ARRANGEMENT TO BECOME EFFECTIVE
Procedural Steps
The Arrangement is proposed to be carried out pursuant to section 193 of the ABCA. The following procedural
steps must be taken for the Arrangement to become effective:
(a)
the Arrangement must be approved by the TriStar Shareholders;
(b)
the Arrangement must be approved by the Court pursuant to the Final Order;
(c)
all conditions precedent to the Arrangement, including those set forth in the Arrangement
Agreement, must be satisfied or waived by the appropriate parties; and
(d)
the Final Order, Articles of Arrangement and related documents, in the form prescribed by the
ABCA, must be filed with the Registrar and the Certificate must be issued by the Registrar.
TriStar Shareholder Approval
Pursuant to the Interim Order, the majority required to pass the Arrangement Resolution shall be not less than 66
2/3% of the votes cast by the TriStar Shareholders in person or by proxy at the Meeting in respect of the
Arrangement Resolution.
Notwithstanding the foregoing, the Arrangement Resolution authorizes the Board of Directors, without further
notice to or approval of the TriStar Shareholders, subject to the terms of the Arrangement, to amend the
Arrangement Agreement, to decide not to proceed with the Arrangement and to revoke such Arrangement
Resolution at any time prior to the Arrangement becoming effective pursuant to the provisions of the ABCA. See
Appendix "A" to this Information Circular for the full text of the Arrangement Resolution.
Court Approvals
Interim Order
On August 31, 2009, the Court granted the Interim Order facilitating the calling of the Meeting and prescribing the
conduct of the Meeting and other matters. The Interim Order is attached as Appendix "B" to this Information
Circular.
Final Order
The ABCA provides that an arrangement requires Court approval. Subject to the terms of the Arrangement
Agreement, and if the Arrangement is approved by TriStar Shareholders at the Meeting in the manner required by
the Interim Order, TriStar will make application to the Court for the Final Order.
The application for the Final Order approving the Arrangement is scheduled for September 30, 2009 at 1:30 p.m.
(Calgary time), or as soon thereafter as counsel may be heard, at the Court of Queen’s Bench of Alberta, Calgary
Courts Centre, 601 – 5th Street S.W., Calgary, AB T2P 5P7. At the hearing, any TriStar Shareholder and any other
interested party who wishes to participate or to be represented or to present evidence or argument may do so,
subject to filing with the Court and serving upon TriStar a Notice of Intention to Appear together with any evidence
or materials which such party intends to present to the Court on or before noon (Calgary time) on September 25,
2009. Service of such notice shall be effected by service upon the solicitors for TriStar: Heenan Blaikie LLP, 12th
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Floor, Fifth Avenue Place, 425 – 1st Street S.W., Calgary, Alberta, T2P 3L8, Attention: Cynthia Amsterdam. See
the Notice of Petition at the front of this Information Circular.
The offer and sale of the PetroBakken Class A Shares issuable in exchange for TriStar Shares pursuant to the
Arrangement have not been and will not be registered under the 1933 Act, and such securities will be issued in
reliance upon the exemption from the registration requirements of the 1933 Act provided by Section 3(a)(10)
thereof. The Court has been advised that if the terms and conditions of the Arrangement are approved by the Court,
the PetroBakken Class A Shares issuable in exchange for TriStar Shares pursuant to the Arrangement will not
require registration under the 1933 Act, pursuant to Section 3(a)(10) thereof.
TriStar has been advised by its counsel, Heenan Blaikie LLP, that the Court has broad discretion under the ABCA
when making orders with respect to the Arrangement and that the Court will consider, among other things, the
fairness and reasonableness of the Arrangement, both from a substantive and a procedural point of view. The Court
may approve the Arrangement either as proposed or as amended in any manner the Court may direct, subject to
compliance with such terms and conditions, if any, as the Court thinks fit. Depending upon the nature of any
required amendments, TriStar, Petrobank or PetroBakken may determine not to proceed with the Arrangement.
Regulatory Approvals
The Arrangement Agreement provides that receipt of all regulatory approvals including, without limitation,
conditional approval of the TSX for the listing of the PetroBakken Class A Shares to be issued under the
Arrangement, is a condition precedent to the Arrangement becoming effective. The Arrangement is a "notifiable
transaction" for the purposes of Part IX of the Competition Act (Canada). TriStar and Petrobank have jointly
requested that the Commissioner issue an advance-ruling certificate under Section 102 of the Competition Act
(Canada) or, alternatively, a "no action" letter in respect of the Arrangement.
Timing
If the Meeting is held as scheduled and is not adjourned and the other necessary conditions at that point in time are
satisfied or waived, TriStar will apply for the Final Order approving the Arrangement. If the Final Order is
obtained on September 30, 2009 in form and substance satisfactory to TriStar, Petrobank and PetroBakken and all
other conditions set forth in the Arrangement Agreement are satisfied or waived, TriStar expects the Effective Date
will be on or about October 1, 2009. It is not possible, however, to state with certainty when the Effective Date will
occur.
The Arrangement will become effective upon the filing of the Articles of Arrangement with the Registrar.
TriStar’s objective is to have the Effective Date occur as soon as practicable after the Meeting. The Effective Date
could be delayed, however, for a number of reasons, including an objection before the Court at the hearing of the
application for the Final Order on September 30, 2009. The Arrangement Agreement provides that, in the event a
material adverse event or other circumstance has occurred that materially limits Petrobank’s or PetroBakken’s
ability to access the domestic market for syndicated credit facilities or the financial banking or loan syndication
markets or capital markets generally, the Effective Date may be delayed to a date no later than February 1, 2010.
PROCEDURE FOR EXCHANGE OF TRISTAR SHARES
General
From and after the Effective Time, certificates formerly representing TriStar Shares shall represent only the right to
receive PetroBakken Class A Shares and/or cash pursuant to the Arrangement. In order to receive certificates for
PetroBakken Class A Shares and/or cheques for cash owing under the Arrangement, TriStar Shareholders must
complete and return the enclosed Letter of Transmittal and Election Form, together with the certificate(s)
representing their TriStar Shares to the Depositary at one of the offices specified in the Letter of Transmittal and
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Election Form. In order to elect to receive only the Cash Consideration or only the Share Consideration, a
TriStar Shareholder must deliver a duly completed Letter of Transmittal and Election Form to the
Depositary on or prior to the Election Deadline. Failing to do so will result in the TriStar Shareholder being
deemed to have elected to receive a combination of Share Consideration and Cash Consideration equal to
$3.75 and 0.3989 of a PetroBakken Class A Share for each of such holder’s TriStar Shares, subject to prorationing.
TriStar Shareholders whose TriStar Shares are registered in the name of a broker, dealer, bank, trust
company or other nominee must contact their nominee to deposit their TriStar Shares.
If any certificate which immediately prior to the Effective Time represented an interest in outstanding TriStar
Shares has been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such
certificate to have been lost, stolen or destroyed, the Depositary will cause to be issued and delivered in exchange
for such lost, stolen or destroyed certificate the consideration to which the holder is entitled pursuant to the
Arrangement (and any dividends or distributions with respect thereto) as determined in accordance with the
Arrangement. The person who is entitled to receive such consideration shall, as a condition precedent to the receipt
thereof, give a bond to each of PetroBakken and its transfer agent, which bond shall be satisfactory in form and
substance to PetroBakken, or shall otherwise indemnify PetroBakken and its transfer agent against any claim that
may be made against either of them with respect to the certificate alleged to have been lost, stolen or destroyed.
The use of the mail to transmit certificates representing TriStar Shares and the Letter of Transmittal and Election
Form is at each TriStar Shareholder’s risk. TriStar recommends that such certificates and documents be delivered
by hand to the Depositary and a receipt therefor be obtained or that registered mail with return receipt be used and
that appropriate insurance be obtained.
Except as otherwise provided by the instructions in the Letter of Transmittal and Election Form, all signatures on (i)
the Letter of Transmittal and Election Form and (ii) certificates representing TriStar Shares must be guaranteed by
an "Eligible Institution" as set forth in the Letter of Transmittal and Election Form. If a Letter of Transmittal and
Election Form is executed by a person other than the registered holder of the certificate(s) deposited therewith, the
certificate(s) must be endorsed or be accompanied by an appropriate securities transfer power of attorney duly and
properly completed by the registered holder, with the signature on the endorsement panel, or securities transfer
power of attorney guaranteed by the Eligible Institution.
All questions as to validity, form, eligibility (including timely receipt) and acceptance of any TriStar Shares
deposited pursuant to the Arrangement will be determined by PetroBakken in its sole discretion. Depositing TriStar
Shareholders agree that such determination shall be final and binding. PetroBakken reserves the absolute right to
reject any and all deposits which it determines not to be in proper form or which may be unlawful for it to accept
under the laws of any jurisdiction. PetroBakken reserves the absolute right to waive any defect or irregularity in the
deposit of any TriStar Shares. There shall be no duty or obligation on PetroBakken, the Depositary, or any other
person to give notice of any defect or irregularity in any deposit of TriStar Shares and no liability shall be incurred
by any of them for failure to give such notice.
PetroBakken and TriStar reserve the right to permit the procedure for the exchange of securities pursuant to the
Arrangement to be completed other than that as set out above. Under no circumstances will interest accrue or be
paid by PetroBakken, TriStar or the Depositary to persons depositing TriStar Shares on the PetroBakken Class A
Shares or cash payable in consideration for such shares, regardless of any delay in making such payment.
The Depositary will act as the agent of persons who have deposited TriStar Shares pursuant to the Arrangement for
the purpose of receiving PetroBakken Class A Shares and cash and transmitting such PetroBakken Class A Shares
and cash to such persons, and receipt of payment by the Depositary will be deemed to constitute receipt of payment
by persons depositing TriStar Shares. Settlement with persons who deposit TriStar Shares will be effected by the
Depositary forwarding certificates representing PetroBakken Class A Shares to be issued and or cheques for cash to
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be paid in consideration for such TriStar Shares by first class insured mail, postage prepaid. Any dividends paid
with respect to any PetroBakken Class A Shares allotted and issued pursuant to the Arrangement, but for which a
certificate has not been issued, shall be paid or delivered to the Depositary to be held by the Depositary in trust for
the registered holder thereof. All monies received by the Depositary shall be invested by it in interest-bearing trust
accounts upon such terms as the Depositary may reasonably deem appropriate. The Depositary shall pay and
deliver to any such registered holder, as soon as reasonably practicable after application therefore is made by the
registered holder to the Depositary in such form as the Depositary may reasonably require, such dividends and any
interest thereon to which such holder is entitled, net of applicable withholding and other taxes.
Unless otherwise directed in the Letter of Transmittal and Election Form, the certificates representing PetroBakken
Class A Shares to be issued in consideration for the TriStar Shares deposited under the Arrangement will be issued
in the name of and cheques for cash will be made payable to the registered holder of TriStar Shares so deposited.
Unless the person who deposits the TriStar Shares instructs the Depositary to hold the certificates and or cheques
for pick-up by checking the appropriate box in the Letter of Transmittal and Election Form, certificates and cheques
will be forwarded by first class insured mail to the address supplied in the Letter of Transmittal and Election Form.
If no address is provided, certificates will be forwarded to the address of the person as shown on the applicable
register of TriStar.
Return of TriStar Shares
Should the Plan of Arrangement not be completed, any deposited TriStar Shares will be returned to the depositing
TriStar Shareholders at TriStar’s expense upon written notice to the Depositary from TriStar by returning the
deposited TriStar Shares (and any other relevant documents) by first class insured mail in the name of and to the
address specified by the TriStar Shareholders in the Letter of Transmittal and Election Form or, if such name and
address is not so specified, in such name and to such address as shown on the register maintained by TriStar.
Mail Services Interruption
Notwithstanding the provisions of the Information Circular, Letter of Transmittal and Election Form, Arrangement
Agreement or Plan of Arrangement, certificates representing PetroBakken Class A Shares and cheques will not be
mailed if Petrobank determines that delivery thereof by mail may be delayed. Persons entitled to certificates,
cheques and other relevant documents which are not mailed for the foregoing reason may take delivery thereof at
the office of the Depositary at which the deposited certificates representing TriStar Shares in respect of which
certificates and cheques are being issued were originally deposited upon application to the Depositary until such
time as Petrobank has determined that delivery by mail will no longer be delayed. Certificates, cheques and other
relevant documents not mailed for the foregoing reason will be conclusively deemed to have been delivered on the
first day upon which they are available for delivery at the office of the Depositary at which the TriStar Shares were
deposited and payment for those TriStar Shares shall be deemed to have been immediately made upon such deposit.
Cancellation of Rights
Subject to applicable escheat laws, any certificate formerly representing TriStar Shares that is not deposited with all
other documents required by the Plan of Arrangement on or prior to the fourth anniversary of the Effective Date
shall cease to represent the right or claim of any kind or nature to receive the consideration to which a former
TriStar Shareholder is entitled under the Arrangement, and for greater certainty, the right of such former TriStar
Shareholder to receive certificates representing PetroBakken Class A Shares or cheques for cash shall be deemed to
be surrendered to PetroBakken, together with all dividends, distributions and cash payments thereon.
Treatment of Fractional Shares
No fractional PetroBakken Class A Shares will be issued to TriStar Shareholders pursuant to the Arrangement. In
the event that a TriStar Shareholder would otherwise be entitled to a fractional PetroBakken Class A Share pursuant
to the Arrangement, the number of PetroBakken Class A Shares issued to such TriStar Shareholder will be rounded
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up to the next greater whole number of PetroBakken Class A Shares if the fractional entitlement is equal to or
greater than 0.5 and shall, without any additional compensation, be rounded down to the next lesser whole number
of PetroBakken Class A Shares if the fractional entitlement is less than 0.5. In calculating such fractional interests,
all TriStar Shares registered in the name of such TriStar Shareholder shall be aggregated.
Joint Tax Election
A TriStar Shareholder who is an Eligible Shareholder may also make a Joint Tax Election by so indicating on the
Letter of Transmittal and Election Form accompanying this Information Circular. There are detailed rules set out in
the Tax Act which prescribe the amount at which a TriStar Shareholder and PetroBakken can elect in a Joint Tax
Election. For a description of how a TriStar Shareholder may make the Joint Tax Election and a summary of this
alternative, see "Certain Canadian Federal Income Tax Considerations".
ARRANGEMENT AGREEMENT
TriStar, Petrobank and PetroBakken have entered into the Arrangement Agreement, pursuant to which they have
agreed to implement the Plan of Arrangement. The Arrangement Agreement contains covenants, representations
and warranties of and from each of TriStar, Petrobank and PetroBakken and various conditions precedent, both
mutual and with respect to TriStar, Petrobank and PetroBakken.
The Arrangement Agreement is attached as Appendix "C" to this Information Circular and reference is made thereto
for the full text thereof.
Conditions Precedent to the Arrangement
Mutual Conditions
The respective obligations of TriStar, Petrobank and PetroBakken to complete the Arrangement are subject to a
number of conditions which must be satisfied on or before the Effective Date, including the following:
(a)
the Arrangement Resolution shall have been passed by the TriStar Shareholders on or about October 1,
2009, but no later than October 16, 2009, in accordance with the Interim Order and in form and substance
satisfactory to each of PetroBakken, Petrobank and TriStar, acting reasonably;
(b)
on or about September 30, 2009, but no later than October 30, 2009, subject to paragraph (g) below, the
Final Order shall have been granted in form and substance satisfactory to PetroBakken, Petrobank and
TriStar, acting reasonably;
(c)
the Articles of Arrangement to be filed with the Registrar in accordance with the Arrangement shall be in
accordance with the terms of the Plan of Arrangement and in form and substance satisfactory to each of
PetroBakken, Petrobank and TriStar, acting reasonably, and such Articles of Arrangement shall have been
filed with the Registrar on or about October 1, 2009 but no later than October 30, 2009, subject to paragraph
(g) below;
(d)
the TSX shall have approved the listing of all of the PetroBakken Class A Shares issuable to TriStar
Shareholders pursuant to the Arrangement, subject to customary conditions;
(e)
the relevant waiting period in Section 123 of the Competition Act shall have expired and: (i) an advance
ruling certificate ("ARC") pursuant to Section 102 of the Competition Act shall have been issued by the
Commissioner appointed under the Competition Act; or (ii) a "no action letter" satisfactory to each of
PetroBakken and TriStar, acting reasonably, indicating that the Commissioner has determined not to make
an application for an order under section 92 of the Competition Act shall have been received from the
Commissioner, and any terms and conditions attached to any such letter shall be acceptable to each of
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PetroBakken and TriStar, acting reasonably; and in addition, in the event that the ARC or "no action" letter
described in (i) or (ii) in the foregoing is issued, there shall be no threatened or actual application by the
Commissioner for an order under Section 92 or 100 of the Competition Act; and
(f)
(g)
no action shall have been taken under any existing applicable law or regulation, nor any statute, rule,
regulation or order which is enacted, enforced, promulgated or issued by any court, department,
commission, board, regulatory body, government or Governmental Authority or similar agency, domestic or
foreign, that:
(i)
makes illegal or otherwise directly or indirectly restrains, enjoins or prohibits the Arrangement or
any other transactions contemplated by the Arrangement Agreement; or
(ii)
results in a judgment or assessment of material damages directly or indirectly relating to the
transactions contemplated by the Arrangement Agreement;
notwithstanding the foregoing, the outside deadlines referred to in paragraphs (b) and (c) above shall be
extended to February 1, 2010 in the event that a material adverse event or other circumstance has occurred
that materially limits Petrobank’s and/or PetroBakken’s ability to access the domestic market for syndicated
credit facilities or the financial, banking, loan syndication or capital markets generally.
Conditions in Favour of TriStar
The Arrangement Agreement also provides for a number of conditions in favour of TriStar which must be satisfied
or waived by TriStar on or prior to the Effective Date in order for the Arrangement to become effective, including:
(a)
the representations and warranties made by PetroBakken and Petrobank, as applicable, in Section 4.1 of the
Arrangement Agreement shall be true and correct in all material respects (except for representations and
warranties containing qualifiers as to materiality, which shall be true and correct) as of the Effective Date as
if made on and as of such date (except for representations and warranties which refer to another specific
date, which shall be true and correct as of that date) and PetroBakken and Petrobank, as applicable, shall
have provided to TriStar certificates of officers of PetroBakken and Petrobank, as applicable, certifying as
to such matters on behalf of PetroBakken and Petrobank, as applicable, on the Effective Date;
(b)
PetroBakken, and Petrobank, as applicable, shall have complied in all material respects with its covenants
in the Arrangement Agreement and shall have provided to TriStar a certificate of senior officers of
PetroBakken and Petrobank, as applicable, certifying, on behalf of PetroBakken and Petrobank, as
applicable, as to such compliance and TriStar shall have no actual knowledge to the contrary;
(c)
PetroBakken and Petrobank shall have furnished TriStar with certified copies of the resolutions duly passed
by the boards of directors of PetroBakken and Petrobank, respectively, approving the Arrangement
Agreement and the consummation of the transactions contemplated by the Arrangement Agreement;
(d)
the Petrobank Reorganization shall have been completed;
(e)
the severance or change of control payments payable to directors, officers and employees of TriStar
pursuant to the terms of the Arrangement Agreement shall have been made (or provisions to make such
payments shall have been made to the satisfaction of TriStar) to the directors, officers and employees of
TriStar on the Effective Date;
(f)
no Material Adverse Change shall have occurred in respect of PetroBakken or the Petrobank Assets from
and after the date hereof and prior to the Effective Date, and no Material Adverse Change shall have
occurred in respect of PetroBakken or the Petrobank Assets prior to the date of the Arrangement Agreement
or shall occur from and after the date of the Arrangement Agreement and prior to the Effective Date from
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that reflected in the unaudited consolidated financial statements of Petrobank for the fiscal period ended
June 30, 2009;
(g)
no act, action, suit, proceeding, objection or opposition shall have been threatened or taken against or
affecting PetroBakken or Petrobank before or by any domestic or foreign court, tribunal or governmental
agency or other regulatory or administrative agency or commission by any elected or appointed public
official or private Person in Canada or elsewhere, whether or not having the force of law and no law,
regulation, policy, judgment, decision, order, ruling or directive (whether or not having the force of law)
shall have been proposed, enacted, promulgated, amended or applied, which in the sole judgment of
TriStar, acting reasonably, in either case has had or, if the Arrangement was consummated, would result in
a Material Adverse Change in respect of PetroBakken or the Petrobank Assets or would have a material
adverse effect on the ability of the Parties to complete the Arrangement;
(h)
neither PetroBakken nor Petrobank shall be in material breach of its obligations under the Arrangement
Agreement;
(i)
each of PetroBakken and Petrobank shall have obtained all required third party consents and approvals
required to be obtained by it in respect of the transactions contemplated by the Arrangement Agreement on
terms and conditions satisfactory to TriStar, acting reasonably; and
(j)
consent to the Arrangement shall have been received from Petrobank's senior lenders or the applicable
credit facilities shall have been paid out and the security related thereto shall have been released.
Conditions in Favour of Petrobank and PetroBakken
Finally, the Arrangement Agreement also provides for a number of conditions in favour of Petrobank and
PetroBakken which must be satisfied or waived by Petrobank and PetroBakken on or prior to the Effective Date in
order for the Arrangement to become effective, including:
(a)
the representations and warranties made by TriStar in Section 4.2 of the Arrangement Agreement shall be
true and correct in all material respects (except for representations and warranties containing qualifiers as to
materiality, which shall be true and correct) as of the Effective Date as if made on and as of such date
(except for representations and warranties which refer only to another specific date, which shall be true and
correct as of that date) and TriStar shall have provided to PetroBakken a certificate of an officer of TriStar
certifying as to such matters on behalf of TriStar on the Effective Date;
(b)
TriStar shall have complied in all material respects with its covenants in the Arrangement Agreement and
TriStar shall have provided to PetroBakken and Petrobank a certificate of a senior officer of TriStar
certifying, on behalf of TriStar, as to such compliance and PetroBakken and Petrobank shall have no actual
knowledge to the contrary;
(c)
TriStar shall have furnished PetroBakken with:
(d)
(i)
certified copies of the resolutions duly passed by the boards of directors of TriStar approving the
Arrangement Agreement and the consummation of the transactions contemplated by the
Arrangement Agreement; and
(ii)
certified copies of the resolutions of TriStar Shareholders, duly passed at the TriStar Meeting,
approving the Arrangement Resolution;
no Material Adverse Change shall have occurred in respect of TriStar from and after the date of the
Arrangement Agreement and prior to the Effective Date, and no Material Adverse Change in respect of
TriStar shall have occurred prior to the date of the Arrangement Agreement or shall occur from and after the
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date of the Arrangement Agreement and prior to the Effective Date from that reflected in the unaudited
financial statements of TriStar for the fiscal period ended June 30, 2009;
(e)
no act, action, suit, proceeding, objection or opposition shall have been threatened or taken against or
affecting TriStar before or by any domestic or foreign court, tribunal or governmental agency or other
regulatory or administrative agency or commission by any elected or appointed public official or private
Person in Canada or elsewhere, whether or not having the force of law and no law, regulation, policy,
judgment, decision, order, ruling or directive (whether or not having the force of law) shall have been
proposed, enacted, promulgated, amended or applied, which in the sole judgment of PetroBakken and
Petrobank acting reasonably, in either case has had or, if the Arrangement was consummated, would result
in a Material Adverse Change in respect of TriStar or would have a material adverse effect on the ability of
the Parties to complete the Arrangement;
(f)
TriStar shall not be in material breach of its obligations under the Arrangement Agreement;
(g)
TriStar shall have obtained all required third party consents and approvals required to be obtained by it in
respect of the transactions contemplated by the Arrangement Agreement on terms and conditions
satisfactory to Petrobank and PetroBakken, acting reasonably;
(h)
Petrobank and PetroBakken shall be reasonably satisfied that all of the outstanding TriStar Options will be
exercised or cancelled prior to the Effective Time and all outstanding TriStar Incentive Shares shall be
redeemed or cancelled prior to the Effective Time; and
(i)
holders of not more than 5% of the issued and outstanding TriStar Shares, in the aggregate, shall have
exercised rights of dissent in relation to the Arrangement.
Upon all of the conditions to the Arrangement being fulfilled or waived, TriStar intends to file a copy of the Final
Order and the Articles of Arrangement with the Registrar under the ABCA, together with such other materials as
may be required by the Registrar, in order to give effect to the Arrangement.
Notwithstanding the foregoing, the Arrangement Resolution proposed for consideration by the TriStar Shareholders
authorizes the board of directors of TriStar, without further notice to or approval of such TriStar Shareholders,
subject to the terms of the Arrangement, to amend the Arrangement, to decide not to proceed with the Arrangement
and to revoke the Arrangement Resolution at any time prior to the Arrangement becoming effective pursuant to the
provisions of the ABCA. See Appendix "A" for the text of the Arrangement Resolution.
Non-Solicitation by TriStar
In the Arrangement Agreement, TriStar has agreed to immediately cease and cause to be terminated all existing
discussions or negotiations, including through any of its directors, officers, employees, advisors, agents and other
representatives ("Representatives"), with any parties initiated before the date of the Arrangement Agreement with
respect to any TriStar Acquisition Proposal and to immediately request the return or destruction of all information
provided to any third party who has entered into a confidentiality agreement with TriStar relating to a TriStar
Acquisition Proposal and to use all reasonable commercial efforts to ensure that such requests are honoured.
TriStar has agreed that it shall not, directly or indirectly, do or authorize or permit any of its Representatives to do
any of the following:
(a)
solicit, facilitate, initiate, encourage or take any action to solicit, facilitate, initiate, entertain or encourage
any inquiries or communication regarding or the making of any proposal or offer that constitutes, may
constitute, or may reasonably be expected to lead to, a TriStar Acquisition Proposal, including, without
limitation, by way of furnishing information;
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(b)
enter into or participate in any negotiations or initiate any discussion regarding a TriStar Acquisition
Proposal, or furnish to any other person any information with respect to its securities, business, properties,
operations or conditions (financial or otherwise) in connection with, or furtherance of, a TriStar Acquisition
Proposal or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any
effort or attempt of any other person to do or seek to do any of the foregoing;
(c)
release, waive, or otherwise forbear in the enforcement of, or enter into or participate in any discussions,
negotiations or agreements to release, waive or otherwise forbear in respect of, any rights or other benefits
under any confidentiality agreements, including, without limitation, any "standstill provisions" thereunder;
or
(d)
accept, recommend, approve or enter into an agreement to implement a TriStar Acquisition Proposal;
Notwithstanding the foregoing, the Arrangement Agreement provides that TriStar and its Representatives may:
(a)
enter into or participate in any discussions or negotiations with a third party who (without any solicitation,
initiation or encouragement, directly or indirectly, after the date of the Arrangement Agreement, by TriStar
or any of its Representatives) seeks to initiate such discussions or negotiations and, subject to execution of a
confidentiality and standstill agreement substantially similar to the confidentiality agreement entered into
by TriStar and Petrobank (provided that such confidentiality agreement shall provide for disclosure thereof
(along with all information provided thereunder) to Petrobank and PetroBakken as set out below), may
furnish to such third party information concerning TriStar and its business, properties and assets, in each
case if, and only to the extent that:
(i)
the third party has first made a written bona fide TriStar Acquisition Proposal and the board of
directors of TriStar determines in good faith: (1) that funds or other consideration necessary for the
TriStar Acquisition Proposal are or are likely to be available; (2) (after receiving advice of its
financial advisor) the TriStar Acquisition Proposal would, if consummated in accordance with its
terms, result in a transaction financially superior for TriStar Shareholders than the transaction
contemplated by the Arrangement Agreement; and (3) after receiving the advice of outside counsel
as reflected in minutes of the board of directors of TriStar, that the taking of such action is
necessary for the board of directors in discharge of its fiduciary duties under Applicable Laws (a
"Superior Proposal") (and for the purposes of the Arrangement Agreement, the parties confirmed
and acknowledged that such a written Acquisition Proposal may include an Acquisition Proposal
made to TriStar’s board of directors by a third party who has entered into an agreement with TriStar
that contains standstill provisions provided that such Acquisition Proposal has not been solicited,
initiated, encouraged or knowingly facilitated by TriStar); and
(ii)
prior to furnishing such information to or entering into or participating in any such negotiations or
initiating any discussions with such third party, TriStar provides prompt notice to PetroBakken to
the effect that it is furnishing information to or entering into or participating in discussions or
negotiations with such person or entity together with a copy of the confidentiality agreement
referenced above and if not previously provided to Petrobank, copies of all information provided to
such third party concurrently with the provision of such information to such third party, and
provided further that TriStar shall notify Petrobank and PetroBakken orally and in writing of any
inquiries, offers or proposals with respect to a Superior Proposal (which written notice shall
include, without limitation, a summary of the details of such proposal (and any amendments or
supplements thereto), the identity of the person making it, if not previously provided to Petrobank,
copies of all information provided to such party and all other information reasonably requested by
Petrobank and PetroBakken ), within 24 hours of the receipt thereof, shall keep Petrobank and
PetroBakken informed of the status and details of any such inquiry, offer or proposal and answer
Petrobank’s and PetroBakken's questions with respect thereto; or
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(b)
comply with Section 2.17 of Multilateral Instrument 62-104 and similar provisions under Applicable Laws
relating to the provision of directors’ circulars and make appropriate disclosure with respect thereto to its
securityholders; and
(c)
accept, recommend, approve or enter into an agreement to implement a Superior Proposal from a third
party, but only if prior to such acceptance, recommendation, approval or implementation, its board of
directors shall have concluded in good faith, after considering all proposals to adjust the terms and
conditions of the Arrangement Agreement and after receiving the advice of outside counsel as reflected in
minutes of the board of directors of TriStar, that the taking of such action is necessary for the board of
directors in discharge of its fiduciary duties under applicable laws and TriStar complies with its obligations
set forth in Section 3.4(c) of the Arrangement Agreement and pays the amount required by Section 6.1(a) of
the Arrangement Agreement.
In the event that TriStar is in receipt of a Superior Proposal, it shall give Petrobank and PetroBakken, orally and in
writing, at least 72 hours advance notice of any decision by the Board of Directors to accept, recommend, approve
or enter into an agreement to implement a Superior Proposal, which notice shall confirm that the board of directors
of TriStar has determined that such TriStar Acquisition Proposal constitutes a Superior Proposal, shall identify the
third party making the Superior Proposal and shall provide a true and complete copy thereof and any amendments
thereto. During such 72 hour period, TriStar agrees not to accept, recommend, approve or enter into any agreement
to implement such Superior Proposal and not to release the party making the Superior Proposal from any standstill
provisions (which, for greater certainty, shall not prevent the party making the Superior Proposal from making any
TriStar Acquisition Proposal to the Board of Directors that is not solicited, initiated, encouraged or knowingly
facilitated by TriStar), and shall not withdraw, redefine, modify or change its recommendation in respect of the
Arrangement. In addition, during such 72 hour period, TriStar shall, and shall cause its financial and legal advisors
to, negotiate in good faith with Petrobank and PetroBakken and their financial and legal advisors to make such
adjustments in the terms and conditions of the Arrangement Agreement and the Arrangement as would enable
TriStar to proceed with the Arrangement as amended rather than the Superior Proposal. In the event Petrobank and
PetroBakken propose to amend the Arrangement Agreement and the Arrangement to provide that the TriStar
Shareholders shall receive a value per TriStar Share equal to or having a value greater than the value per TriStar
Share provided in the Superior Proposal and so advises the Board of Directors prior to the expiry of such 72 hour
period, the Board of Directors shall not accept, recommend, approve or enter into any agreement to implement such
Superior Proposal and shall not release the party making the Superior Proposal from any standstill provisions
(which, for greater certainty, shall not prevent the party making the Superior Proposal from making any TriStar
Acquisition Proposal to the Board of Directors that is not solicited, initiated, encouraged or knowingly facilitated by
TriStar) and shall not withdraw, redefine, modify or change its recommendation in respect of the Arrangement.
Notwithstanding the foregoing, and for greater certainty, Petrobank and PetroBakken shall have no obligation to
make or negotiate any changes to the Arrangement Agreement or the Arrangement in the event that TriStar is in
receipt of a Superior Proposal.
Agreement as to Damages
Damages Payable to Petrobank
Under the Arrangement Agreement, TriStar has agreed to pay to Petrobank (a) the amount of $77.5 million and (b)
the Special Expense Reimbursement if any of the following occur (a "Petrobank Damages Event"):
(a)
the Arrangement is not completed, otherwise than as a result of the default of PetroBakken or Petrobank
under the Arrangement Agreement or by the failure of TriStar’s Shareholders to approve the Arrangement,
and any other TriStar Acquisition Proposal is completed within 180 days from the date of termination of the
Arrangement Agreement;
(b)
the board of directors of TriStar fails to unanimously recommend or changes, withdraws or modifies any of
its recommendations or determinations referred to in subsection 3.2(n) of the Arrangement Agreement in a
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manner adverse to PetroBakken or Petrobank or otherwise fails to mail the Circular to the TriStar
Shareholders containing the recommendations or determinations referred to in subsection 3.2(n) of the
Arrangement Agreement;
(c)
there shall be a material breach or non-performance by TriStar of any of its material representations,
warranties or covenants made in the Arrangement Agreement, except where such breach is itself the result
of a material breach or non-performance by PetroBakken or Petrobank of any of their respective material
representations, warranties or covenants made in the Arrangement Agreement, provided that TriStar shall
have been given notice of and five days to cure any such breach by PetroBakken or Petrobank, if such
breach is capable of being cured, and such breach shall not have been cured,
(d)
a bona fide TriStar Acquisition Proposal (or a bona fide intention to make one) is publicly announced,
proposed, offered or made to TriStar or the TriStar Shareholders, and the board of directors of TriStar fails
to publicly reaffirm its recommendations or determinations referred to in subsection 3.2(n) of the
Arrangement Agreement within 10 days after such TriStar Acquisition Proposal is publicly announced,
proposed, offered or made;
(e)
TriStar accepts, recommends, approves or enters into an agreement to implement a Superior Proposal; or
(f)
the Board of Directors recommends that the TriStar Shareholders deposit their TriStar Shares under, vote in
favour of, or otherwise accept a TriStar Acquisition Proposal.
TriStar has agreed that if the amount referred to above becomes payable, it will be paid within three Business Days
of the date of the earliest Petrobank Damages Event to occur and on such date TriStar shall be deemed to hold such
funds in trust for Petrobank. In the event the amount is payable, it will, other than with respect to the Special
Expense Reimbursement, be considered liquidated damages for such breaches by TriStar and Petrobank will not be
entitled to seek further damages or participate in or support any legal action or suits for such breaches.
Damages Payable to TriStar
Under the Arrangement Agreement, Petrobank has agreed to pay to TriStar (a) the amount of $77.5 million and (b)
the Special Expense Reimbursement if there is a material breach or non-performance by Petrobank of any of its
material representations, warranties, or covenants contained in the Arrangement Agreement (except where such
breach is itself the result of a material breach or non-performance by TriStar of any of its material representations,
warranties or covenants contained in the Arrangement Agreement) (a "TriStar Damages Event").
Petrobank has agreed that if the amount referred to above becomes payable, it will be paid within three Business
Days of the date of the Petrobank Damages Event and on such date Petrobank shall be deemed to hold such funds in
trust for TriStar. In the event the amount is payable, it will, other than with respect to the Special Expense
Reimbursement, be considered liquidated damages for such breaches by Petrobank and TriStar will not be entitled
to seek further damages or participate in or support any legal action or suits for such breaches.
Amendment and Termination
The Arrangement Agreement may, at any time and from time to time before or after the holding of the Meeting, be
amended by written agreement of TriStar and Petrobank without, subject to applicable laws, further notice to or
authorization on the part of the TriStar Shareholders, and any such amendment may, without limitation: (i) amend
the Plan of Arrangement; (ii) change the time for performance of any of the obligations or acts of the Parties;
(iii) waive any inaccuracies or modify any representation, term or provision contained in the Arrangement
Agreement or in any document delivered pursuant thereto; or (iv) waive compliance with or modify any of the
covenants or conditions contained in the Arrangement Agreement and waive or modify performance of any of the
obligations of the Parties. Notwithstanding the foregoing, any such amendment may not reduce or materially
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adversely affect the consideration to be received by a TriStar Shareholder without approval of the TriStar
Shareholders.
The Arrangement Agreement may be terminated at any time prior to the Effective Date:
(a)
by mutual written consent of Petrobank, PetroBakken and TriStar;
(b)
by TriStar if any condition in favour of TriStar or any mutual condition to the completion of the
Arrangement has not been satisfied or waived;
(c)
by Petrobank or PetroBakken if any condition in favour of Petrobank or PetroBakken or any mutual
condition to the completion of the Arrangement has not been satisfied or waived;
(d)
by Petrobank and PetroBakken upon the occurrence of a Petrobank Damages Even and the payment
TriStar to Petrobank of the amount referred to under "Agreement as to Damages – Damages
Payable to Petrobank"; and
(e)
by TriStar upon the occurrence of a TriStar Damages Event and the payment by Petrobank to
TriStar of the amount referred to under "Agreement as to Damages – Damages Payable to TriStar".
TRISTAR LOCK-UP AGREEMENTS
All of the directors and officers of TriStar have entered into the TriStar Lock-up Agreements with Petrobank
pursuant to which they have agreed to support the Arrangement and, subject to certain exceptions, vote the TriStar
Shares which they beneficially own, including any TriStar Shares acquired on the exercise of TriStar Options or
TriStar Incentive Shares, in favour of the Arrangement. The TriStar Lock-up Agreements will terminate if the
Arrangement Agreement is terminated in accordance with its terms or the Arrangement is not completed on or
before October 30, 2009. The directors and officers of TriStar hold, directly or indirectly, an aggregate of
1,609,450 TriStar Shares, 1,366,366 TriStar Options and 975,767 TriStar Incentive Shares, representing
approximately 2.48% of the fully-diluted number of TriStar Shares.
TRISTAR OPTIONS AND TRISTAR INCENTIVE SHARES
In connection with the Arrangement, the vesting of all TriStar Options and TriStar Incentive Shares shall accelerate
and all such TriStar Options not previously vested shall become exercisable immediately prior the Effective Date
and all outstanding TriStar Incentive Shares shall be redeemed for TriStar Shares immediately prior to the Effective
Date.
It is a condition to the completion of the Arrangement in favour of Petrobank and PetroBakken that Petrobank and
PetroBakken shall be reasonably satisfied that all TriStar Options and TriStar Incentive Shares shall, at or prior to
the Effective Time, have been exercised or cancelled and shall cease to represent an obligation of TriStar. As of the
date hereof, holders of TriStar Options have entered into agreements with TriStar whereby (a) holders of 2,356,635
TriStar Options (representing 58.52% of the outstanding TriStar Options) have agreed that, immediately prior to the
Effective Time, such holder’s TriStar Options will be surrendered for a cash payment per TriStar Option equal to
$14.75 less the exercise price of such TriStar Option, and (b) holders of 1,670,359 TriStar Options (representing
41.48% of the outstanding TriStar Options) have agreed to either exercise such TriStar Options for TriStar Shares
prior to the Effective Time or surrender such TriStar Options for nominal consideration immediately prior to the
Effective Time. Holders of 2,476,852 TriStar Incentive Shares (representing 100% of the outstanding TriStar
Incentive Shares) have entered into agreements pursuant to which they have agreed that such Incentive Shares will
be redeemed for TriStar Shares immediately prior to the Effective Time.
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EXPENSES OF THE ARRANGEMENT
The estimated costs to be incurred by TriStar relating to the Arrangement including, without limitation, financial
advisory, accounting and legal fees, run-off directors and officers’ insurance and the preparation and printing of this
Information Circular are expected to be approximately $14.5 million in the aggregate. Certain of the Financial
Advisors providing services to TriStar in connection with the Arrangement will be paid fees for such services, a
portion of which will be comprised of the issuance of an aggregate of 157,177 PetroBakken Class A Shares
pursuant to the Arrangement.
STOCK EXCHANGE LISTINGS
PetroBakken has made application for the conditional listing on the TSX of the PetroBakken Class A Shares to be
issued in connection with the Arrangement. Listing will be subject to PetroBakken fulfilling all of the requirements
of the TSX, which requirements are expected to be met on the Effective Date or as soon as reasonably practicable
thereafter. Conditional listing approval has not yet been obtained and there can be no assurance that the
PetroBakken Class A Shares will be listed on the TSX or any other stock exchange. If the Arrangement is
completed, Petrobank will apply to have the TriStar Shares delisted from the TSX.
RIGHTS OF DISSENT
The following description of the right to dissent and appraisal to which registered TriStar Shareholders are entitled
is not a comprehensive statement of the procedures to be followed by a Dissenting TriStar Shareholder who seeks
payment of the fair value of such Dissenting TriStar Shareholder’s TriStar Shares and is qualified in its entirety by
reference to the full text of the Plan of Arrangement, a copy of which is attached as a Schedule "A" to
Appendix "C" of this Information Circular, the full text of the Interim Order, a copy of which is attached to this
Information Circular at Appendix "B", and the full text of Section 191 of the ABCA, which is attached to this
Information Circular as Appendix "H". A Dissenting TriStar Shareholder who intends to exercise the right to
dissent and appraisal should carefully consider and comply with the provisions of the Interim Order, Section 191 of
the ABCA and the Plan of Arrangement. Failure to strictly comply with the provisions of the Interim Order,
Section 191 of the ABCA and the Plan of Arrangement and to adhere to the procedures established therein may
result in the loss of all rights thereunder.
The Interim Order provides that registered TriStar Shareholders shall be granted the dissent rights provided for
under Section 191 of the ABCA. Section 191 of the ABCA, as modified by the interim order, provides that
registered TriStar Shareholders are entitled, in addition to any other right such holder may have, to dissent and to be
paid by PetroBakken the fair value of the TriStar Shares held by such holder in respect of which such holder
dissents, determined as of the close of business on the last Business Day before the day on which the resolution
from which such holder dissents was adopted.
Only registered TriStar Shareholders may dissent. Persons who are beneficial owners of TriStar Shares
registered in the name of a broker, custodian, nominee or other intermediary who wish to dissent should be
aware that they may only do so through the registered owner of such securities.
A registered holder, such as a broker, who holds TriStar Shares as nominee for beneficial holders, some of
whom wish to dissent, must exercise dissent rights on behalf of such beneficial owners with respect to the
TriStar Shares held for such beneficial owners. In such case, the demand for dissent should set forth the
number of TriStar Shares covered by it. A registered TriStar Shareholder may dissent only with respect to
all of the TriStar Shares held by such holder or on behalf of any one beneficial owner and registered in the
Dissenting TriStar Shareholder’s name.
A registered TriStar Shareholder wishing to exercise the right to dissent with respect to such holder’s
TriStar Shares shall not vote such TriStar Shares at the Meeting, either by the submission of a proxy or by
personally voting, in favour of the Arrangement Resolution.
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A Dissenting TriStar Shareholder must send to the President and Chief Executive Officer of TriStar a written
objection to the Arrangement Resolution, which written objection must be received by TriStar by 4:00 p.m.
(Calgary time) on the Business Day immediately preceding the date of the Meeting. The written objection must be
received by TriStar, c/o Heenan Blaikie LLP at 1200, 425 - 1st Street S.W., Calgary, Alberta, T2P 3L8, attention:
Cynthia Amsterdam.
An application may be made to the Court of Queen’s Bench of Alberta by TriStar or by a Dissenting TriStar
Shareholder after the adoption of the Arrangement Resolution to fix the fair value of the Dissenting TriStar
Shareholder’s TriStar Shares. If such an application to the Court is made by PetroBakken or a Dissenting TriStar
Shareholder, PetroBakken must, unless the Court otherwise orders, send to each Dissenting TriStar Shareholder a
written offer to pay the Dissenting TriStar Shareholder an amount considered by the PetroBakken board of directors
to be the fair value of the TriStar Shares. The offer, unless the Court otherwise orders, will be sent to each
Dissenting TriStar Shareholder at least 10 days before the date on which the application is returnable, if Petrobank
is the applicant, or within 10 days after TriStar is served with notice of the application, if a Dissenting TriStar
Shareholder is the applicant. The offer will be made on the same terms to each Dissenting TriStar Shareholder and
will be accompanied by a statement showing how the fair value was determined.
A Dissenting TriStar Shareholder may make an agreement with PetroBakken for the purchase of such holder’s
TriStar Shares in the amount of the offer made by PetroBakken (or otherwise) at any time before the Court
pronounces an order fixing the fair value of the TriStar Shares.
A Dissenting TriStar Shareholder is not required to give security for costs in respect of an application and, except in
special circumstances, will not be required to pay the costs of the application or appraisal. On the application, the
Court will make an order fixing the fair value of the TriStar Shares of all Dissenting TriStar Shareholders who are
parties to the application, giving judgment in that amount against PetroBakken and in favour of each of those
Dissenting TriStar Shareholders, and fixing the time within which PetroBakken must pay that amount payable to the
Dissenting TriStar Shareholders. The Court may in its discretion allow a reasonable rate of interest on the amount
payable to each Dissenting TriStar Shareholder calculated from the date on which the Dissenting TriStar
Shareholder ceases to have any rights as a TriStar Shareholder, until the date of payment.
On the Arrangement becoming effective, or upon the making of an agreement between PetroBakken and the
Dissenting TriStar Shareholder as to the payment to be made to the Dissenting TriStar Shareholder, or upon the
pronouncement of a Court order, whichever first occurs, the Dissenting TriStar Shareholder will cease to have any
rights as a TriStar Shareholder other than the right to be paid the fair value of such holder’s TriStar Shares in the
amount agreed to between PetroBakken and the Dissenting TriStar Shareholder or in the amount of the judgment
against Petrobank, as the case may be. Until one of these events occurs, the Dissenting TriStar Shareholder may
withdraw the Dissenting TriStar Shareholder’s dissent, or if the Arrangement has not yet become effective, TriStar
may rescind the Arrangement Resolution, and in either event the dissent and appraisal proceedings in respect of that
Dissenting TriStar Shareholder will be discontinued.
PetroBakken shall not make a payment to a Dissenting TriStar Shareholder under Section 191 of the ABCA if there
are reasonable grounds for believing that PetroBakken is or would after the payment be unable to pay its liabilities
as they become due, or that the realizable value of the assets of PetroBakken would thereby be less than the
aggregate of its liabilities. In such event, PetroBakken shall notify each Dissenting TriStar Shareholder that it is
unable lawfully to pay Dissenting TriStar Shareholders for their TriStar Shares, in which case the Dissenting TriStar
Shareholder may, by written notice to PetroBakken within 30 days after receipt of such notice, withdraw such
holder’s written objection, in which case PetroBakken shall be deemed to consent to the withdrawal and such
Dissenting TriStar Shareholder shall, in accordance with the Interim Order, be deemed to have participated in the
Arrangement as a TriStar Shareholder. If the Dissenting TriStar Shareholder does not withdraw his written
objection, such Dissenting TriStar Shareholder retains status as a claimant against PetroBakken to be paid as soon
as PetroBakken is lawfully entitled to do so or, in a liquidation, to be ranked subordinate to the rights of creditors of
PetroBakken but in priority to its shareholders.
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All TriStar Shares held by Dissenting TriStar Shareholders who exercise their right to dissent will, if the holders are
ultimately entitled to be paid the fair value thereof, be deemed to be transferred to PetroBakken and cancelled in
exchange for such fair value or will, if such Dissenting TriStar Shareholders ultimately are not so entitled to be paid
the fair value thereof, be deemed to be exchanged for PetroBakken Class A Shares on the same basis as all those
held by other TriStar Shareholders.
The above summary does not purport to provide a comprehensive statement of the procedures to be followed by a
Dissenting TriStar Shareholder who seeks payment of the fair value of its TriStar Shares. Section 191 of the ABCA
requires adherence to the procedures established therein and failure to do so may result in the loss of all rights
thereunder. Accordingly, each Dissenting TriStar Shareholder who might desire to exercise the right to dissent and
appraisal should carefully consider and comply with the provisions of that section, the full text of which is set out in
Appendix "H" to this Information Circular and consult their own legal advisor.
It is a condition to the completion of the Arrangement that holders of not greater than 5% of the outstanding TriStar
Shares shall have exercised Dissent Rights in respect of the Arrangement that have not been withdrawn as of the
Effective Date.
SECURITIES LAW MATTERS
Resale of Securities
PetroBakken Class A Shares to be issued in exchange for TriStar Shares and to the Financial Advisors pursuant to
the Arrangement will be issued in reliance on exemptions from prospectus and registration requirements of
applicable Canadian securities laws or on discretionary exemptions from such requirements to be obtained from
applicable securities regulatory authorities in Canada. PetroBakken Class A Shares acquired under the
Arrangement will generally be "freely tradeable" under applicable Canadian securities laws (and not subject to any
"restricted period" or "hold period") if the following conditions are met: (i) the trade is not a control distribution (as
defined in applicable securities legislation); (ii) no unusual effort is made to prepare the market or to create a
demand for the securities that are the subject of the trade; (iii) no extraordinary commission or consideration is paid
to a person or company in respect of the trade; and (iv) if the selling securityholder is an insider or an officer of the
issuer of the securities, the selling securityholder has no reasonable grounds to believe that the issuer is in default of
securities legislation.
The offer and sale of the PetroBakken Class A Shares issuable in exchange for TriStar Shares pursuant to the
Arrangement have not been and will not be registered under the 1933 Act, and such securities will be issued in
reliance upon the exemption from the registration requirements of the 1933 Act provided by Section 3(a)(10)
thereof. Section 3(a)(10) exempts the offer and sale of securities issued in exchange for one or more outstanding
securities from the general requirement of registration where the terms and conditions of the issuance and exchange
of such securities have been approved by any court of competent jurisdiction, after a hearing upon the fairness of
the terms and conditions of the issuance and exchange at which all persons to whom the securities will be issued
have the right to appear and receive timely notice thereof. The Court is authorized to conduct a hearing at which
the fairness of the terms and conditions of the Arrangement will be considered. The Court granted the Interim
Order on August 31, 2009 and, subject to the approval of the Arrangement by TriStar Shareholders, a hearing on the
Arrangement will be held on September 30, 2009 by the Court. See "Procedure for the Arrangement To Become
Effective – Court Approvals".
The PetroBakken Class A Shares issuable pursuant to the Arrangement will be freely transferable under U.S.
federal securities laws, except by persons who are "affiliates" of Petrobakken after the Arrangement or were
affiliates of Petrobakken within 90 days prior to the completion of the Arrangement. Persons who may be deemed
to be "affiliates" of an issuer generally include individuals or entities that control, are controlled by, or are under
common control with, the issuer, whether through the ownership of voting securities, by contract or otherwise, and
generally include executive officers and directors of the issuer as well as principal shareholders of the issuer.
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Any resale of such PetroBakken Class A Shares by such an affiliate (or, if applicable, former affiliate) may be
subject to the registration requirements of the 1933 Act, absent an exemption therefrom. Subject to certain
limitations, such affiliates may immediately resell such PetroBakken Class A Shares outside the United States
without registration under the 1933 Act pursuant to Regulation S under the 1933 Act. If available, such affiliates
(and former affiliates) may also resell such PetroBakken Class A Shares pursuant to Rule 144 under the 1933 Act.
The foregoing discussion is only a general overview of certain requirements of United States federal
securities laws applicable to the resale of PetroBakken Class A Shares received upon completion of the
Arrangement. All holders of such PetroBakken Class A Shares are urged to consult with counsel to ensure
that the resale of their PetroBakken Class A Shares complies with applicable securities legislation.
Judicial Developments
The Plan of Arrangement will be implemented pursuant to Section 193 of the ABCA which provides that, where it
is impractical for a corporation to effect an arrangement under any other provisions of the ABCA, a corporation
may apply to the Court for an order approving the arrangement proposed by such corporation. Pursuant to this
section of the ABCA, such an application will be made by TriStar, Petrobank and PetroBakken for approval of the
Arrangement. See "The Arrangement – Procedure for the Arrangement Becoming Effective – Court Approvals –
Final Order" above. Although there have been a number of judicial decisions considering this section and
applications to various arrangements, there have not been, to the knowledge of TriStar, Petrobank and PetroBakken,
any recent significant decisions which would apply in this instance. Shareholders should consult their legal
advisors with respect to the legal rights available to them in relation to the Arrangement.
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Heenan Blaikie LLP, counsel to TriStar (referred to as "counsel"), the following is a summary of
the principal Canadian federal income tax consequences under the Tax Act to TriStar Shareholders generally
applicable to the exchange of TriStar Shares under the Arrangement. This summary is restricted to TriStar
Shareholders who, for the purposes of the Tax Act and at all relevant times, hold their TriStar Shares, and will hold
their PetroBakken Class A Shares, as capital property and will not be affiliated with, and will deal at arm’s length
with, TriStar, PetroBakken and Petrobank. Generally, TriStar Shares will be considered to be capital property to the
holder thereof unless held in the course of carrying on a business of trading or dealing in securities or acquired in
one or more transactions considered to be an adventure in the nature of trade. Certain TriStar Shareholders who are
resident in Canada who may not otherwise be considered to hold their TriStar Shares as capital property may, in
certain circumstances, be entitled to cause their TriStar Shares to be deemed to be capital property by making the
irrevocable lifetime election permitted under subsection 39(4) of the Tax Act in respect of all of their "Canadian
securities" (as defined in the Tax Act). Where a TriStar Shareholder makes an election under section 85 of the Tax
Act in respect of TriStar Shares, as described below, the PetroBakken Class A Shares received under the
Arrangement may not be "Canadian Securities" for this purpose. TriStar Shareholders should consult their own
tax advisors as to whether they hold their TriStar Shares as capital property and whether such election can
or should be made.
This summary is based on the current provisions of the Tax Act that are in force as of the date hereof, all specific
proposals to amend the Tax Act which have been publicly and officially announced prior to the date hereof (the
"Proposed Amendments") and counsel’s understanding of the current published administrative and assessing
policies of CRA. No assurance can be given that the Proposed Amendments will be enacted in their current form,
or at all. Except for the Proposed Amendments, this summary does not take into account any future changes of law
or administrative practice (whether by judicial, administrative, governmental or legislative action), and is not
exhaustive of all possible Canadian federal income tax considerations applicable to any particular TriStar
Shareholder and specifically does not take into account provincial, territorial or foreign income tax considerations
which may differ from the Canadian federal income tax consequences described herein.
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This summary is not applicable to a TriStar Shareholder that is a "financial institution" as defined in the
Tax Act for the purposes of the "mark-to-market property" rules or a "specified financial institution" as
defined in the Tax Act, nor does it apply to a TriStar Shareholder an interest in which is, or whose TriStar
Shares are, a "tax shelter investment" as defined in the Tax Act or to a TriStar Shareholder to whom the
"functional currency" reporting rules in section 261 of the Tax Act apply. In addition, this summary does
not address all issues relevant to TriStar Shareholders who acquired TriStar Shares on the exercise of an
employee stock option. Such TriStar Shareholders should consult their own tax advisors.
This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or
tax advice to any particular TriStar Shareholder, and no representations with respect to the income tax
consequences to any particular TriStar Shareholder are made herein. Accordingly, TriStar Shareholders
should consult their own tax advisors for advice with respect to their own particular circumstances,
including their place of residence and the application and effect of the income and other tax laws of any
country, province, state or local tax authority. Advance income tax rulings have not been sought with
respect to the tax consequences described below.
TriStar Shareholders Resident in Canada
The following portion of the summary is applicable only to a TriStar Shareholder who, at all relevant times, for the
purposes of the Tax Act and any applicable income tax treaty, is, or is deemed to be, resident in Canada.
TriStar Shareholders Receiving Cash Only, Shares Only or a Combination of Cash and Shares
Cash Only
Where a TriStar Shareholder receives only the Cash Consideration under the Arrangement as consideration for a
TriStar Share, the TriStar Shareholder will have disposed of the TriStar Share for proceeds of disposition equal to
the aggregate amount of the cash so received. A TriStar Shareholder will realize a capital gain (or capital loss) to
the extent that the proceeds of disposition, net of any applicable reasonable costs of disposition, exceed (or are
exceeded by) the adjusted cost base of the TriStar Share immediately before the disposition. The adjusted cost base
to a TriStar Shareholder of each TriStar Share will generally be the average of the adjusted cost base of all TriStar
Shares owned by such TriStar Shareholder immediately before the Effective Time. The treatment of capital gains
and capital losses is described below under "Capital Gains and Capital Losses".
Shares Only
Subject to the application of section 85 or 85.1 of the Tax Act as discussed below, where a TriStar Shareholder
receives only PetroBakken Class A Shares under the Arrangement as consideration for a TriStar Share, the TriStar
Shareholder will have disposed of the TriStar Share for proceeds of disposition equal to the fair market value at the
Effective Time of the PetroBakken Class A Shares so received, and will be considered to have acquired the
PetroBakken Class A Shares at a cost equal to the fair market value of such shares immediately prior to the
exchange. A TriStar Shareholder will realize a capital gain (or capital loss) to the extent that the proceeds of
disposition, net of any applicable reasonable costs of disposition, exceed (or are exceeded by) the adjusted cost base
of a TriStar Share immediately before the disposition. The adjusted cost base to a TriStar Shareholder of each
TriStar Share will generally be the average of the adjusted cost base of all TriStar Shares owned by such TriStar
Shareholder immediately before the Effective Time. The treatment of capital gains and capital losses is described
below under "Capital Gains and Capital Losses".
A TriStar Shareholder who receives only the Share Consideration under the Arrangement as consideration for a
TriStar Share may, provided the requirements of section 85.1 of the Tax Act are satisfied, defer a capital gain or a
capital loss that would otherwise be realized on the exchange.
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In general and subject to the provisions of section 85.1 of the Tax Act, where a TriStar Shareholder exchanges
TriStar Shares under the Arrangement and receives only Share Consideration in exchange therefor, except where:
(a)
such TriStar Shareholder has included any portion of the capital gain or capital loss otherwise determined
from the disposition of such TriStar Share in that TriStar Shareholder’s income for purposes of the Tax Act, for the
year in which the disposition occurred;
(b)
such TriStar Shareholder and PetroBakken have filed a Joint Tax Election with respect to the exchanged
TriStar Shares; or
(c)
consideration other than PetroBakken Class A Shares is received by a TriStar Shareholder for the
exchanged TriStar Shares,
the TriStar Shareholder will, pursuant to section 85.1 of the Tax Act, be deemed to have disposed of the TriStar
Shares so exchanged for proceeds of disposition equal to the adjusted cost base thereof immediately before the
Effective Time and will be deemed to have acquired the PetroBakken Class A Shares at a cost equal to such
adjusted cost base. TriStar Shareholders should consult their own tax advisors as to the application of section
85.1 of the Tax Act to their own particular circumstances.
The provisions described above with respect to the deferral of a capital gain or a capital loss on a particular TriStar
Share will not apply to Eligible Shareholders who make a Joint Tax Election or who include in their income for the
year of disposition any portion of the capital gain or capital loss otherwise determined in respect of any TriStar
Shares. Subject to the making of a Joint Tax Election as described below, a TriStar Shareholder who chooses to
include any such amount in income will be deemed to have disposed of all TriStar Shares exchanged for
PetroBakken Class A Shares for proceeds of disposition equal to the fair market value of the PetroBakken Class A
Shares received on the exchange and to have acquired such PetroBakken Class A Shares at a cost equal to their fair
market value at the Effective Time. Under section 85.1 of the Tax Act, it is not possible for a TriStar Shareholder to
elect such treatment on a portion only of the capital gain or capital loss otherwise realized on a disposition of
TriStar Shares.
TriStar Shareholders who may desire tax-deferred rollover treatment or in respect of whom section 85.1 of
the Tax Act is not applicable, should consider making a Joint Tax Election as described below and should
consult with their own tax advisors in that regard.
Combination of Cash and Shares
Subject to the application of section 85 of the Tax Act, where a TriStar Shareholder elects to receive or, as a result
of the automatic adjustment described above has received, a combination of cash and PetroBakken Class A Shares
as consideration for a TriStar Share, such TriStar Shareholder will be regarded as disposing of the TriStar Share for
proceeds of disposition equal to the sum of any cash received on the exchange and the aggregate fair market value
at the Effective Time of the PetroBakken Class A Shares so received. A TriStar Shareholder will realize a capital
gain (or capital loss) to the extent that the proceeds of disposition, net of any applicable reasonable costs of
disposition, exceed (or are exceeded by) the adjusted cost base of the TriStar Shares immediately before the
disposition. The adjusted cost base to a TriStar Shareholder of each TriStar Share will generally be the average of
the adjusted cost base of all TriStar Shares owned by such TriStar Shareholder immediately before the Effective
Time. The treatment of capital gains and capital losses is described below under "Capital Gains and Capital
Losses". A TriStar Shareholder who is an Eligible Shareholder may make a Joint Tax Election with respect to such
disposition. Subject to the detailed rules in the Tax Act in this regard certain of which are summarized below, where
a TriStar Shareholder makes a valid Joint Tax Election, the TriStar Shareholder’s proceeds of disposition for the
TriStar Shares will be determined in accordance with the amount elected pursuant to the Joint Tax Election.
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Joint Tax Election
A TriStar Shareholder who is an Eligible Shareholder and who exchanges TriStar Shares under the Arrangement
may make a joint election with PetroBakken pursuant to subsection 85(1) of the Tax Act (or in the case of a TriStar
Shareholder which is a partnership, pursuant to subsection 85(2) of the Tax Act) and thereby obtain a full or partial
tax-deferred "rollover" for purposes of the Tax Act in respect of those TriStar Shares exchanged. The extent of
such rollover will depend on the amount specified in that election (the "Elected Amount"), the amount of Cash
Consideration received by the TriStar Shareholder and the adjusted cost base to the TriStar Shareholder of such
TriStar Shares immediately before their disposition. There are detailed rules set out in the Tax Act which prescribe
limits as to the amount at which a TriStar Shareholder and PetroBakken can elect in a Joint Tax Election. TriStar
Shareholders are urged to consult their own tax advisors with respect to the Joint Tax Election.
In general, the Elected Amount cannot be less than the amount of any cash received by the TriStar Shareholder
pursuant to the Arrangement and cannot be less than the lesser of (i) the adjusted cost base of such exchanged
TriStar Shares to such TriStar Shareholder immediately before the Effective Time and (ii) the fair market value of
such TriStar Shareholder’s TriStar Shares at the Effective Time. In addition, the Elected Amount cannot exceed the
fair market value of such TriStar Shares at the Effective Time.
Generally the TriStar Shareholder will be deemed to have been disposed of the TriStar Shares for proceeds of
disposition equal to the Elected Amount. If the deemed proceeds of disposition of the holder’s TriStar Shares, net
of any reasonable costs of disposition, are equal to the aggregate of the adjusted cost base of the holder’s TriStar
Shares, immediately before the Effective Time, no capital gain or capital loss will be realized by the TriStar
Shareholder. To the extent that the deemed proceeds of disposition of the TriStar Shares exceed the aggregate of
the adjusted cost base of the holder’s TriStar Shares, as previously determined, and any reasonable costs of
disposition, the TriStar Shareholder will realize a capital gain equal to the amount of such excess, with the
consequences described under "Capital Gains and Capital Losses" below. The cost to the TriStar Shareholder of
PetroBakken Class A Shares received on the exchange will be equal to the amount by which the deemed proceeds
of disposition of the TriStar Shares exchanged by the TriStar Shareholder exceeds the amount of any cash received
on the exchange.
TriStar Shareholders who elect to exchange each of their TriStar Shares under a Joint Tax Election will not be
permitted to rely on the provisions of section 85.1 of the Tax Act. Consequently, TriStar Shareholders should
consult their own tax advisors as to whether they should make a Joint Tax Election.
In order to make a Joint Tax Election, among other requirements, a duly and properly completed Tax Election
Filing Package (as described below) together with any required supporting schedules must be signed and forwarded
by a TriStar Shareholder to PetroBakken no later than the Tax Election Date. PetroBakken will not be required to
execute any Joint Tax Election received by PetroBakken after the tax Election Date or if any of the conditions
described above is not satisfied.
The Tax Election Filing Package consists of: (i) two (2) copies of CRA Form T-2057 or, if the holder is a
partnership as indicated on the Letter of Transmittal and Election Form, then two (2) copies of CRA Form T-2058;
and (ii) a Tax Election Filing authorization letter, if applicable. A Tax Election Filing Package may be obtained
from the Depositary after the Effective Time. A TriStar Shareholder eligible to and interested in making a
Joint Tax Election should so indicate on the Letter of Transmittal and Election Form in the space provided
and a Tax Election Filing Package will be sent to the holder.
Upon receipt of a duly and properly completed Tax Election Filing Package on or before the Tax Election Date,
together with any applicable provincial tax election forms relevant to such TriStar Shareholder, PetroBakken has
agreed to make the Joint Tax Election at the amount(s) determined by the Eligible Shareholder subject to the
limitations set out in subsections 85(1) and 85(2) of the Tax Act. PetroBakken has agreed to execute each such
Joint Tax Election and to forward such Joint Tax Election by mail, within 30 days after the receipt thereof by
PetroBakken, to the appropriate tax authorities, with a copy to the TriStar Shareholder making the election. Each
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TriStar Shareholder making a Joint Tax Election will be solely responsible for meeting the requirements for a valid
Joint Tax Election. PetroBakken will not be responsible for the valid completion or timely filing of any Joint Tax
Election and each TriStar Shareholder will be solely responsible for the payment of any late filing penalty.
Accordingly, PetroBakken will not be responsible or liable for taxes, interest, penalties, damages or expenses
resulting from the failure by anyone to validly complete any Joint Tax Election form or to properly file such form
within the time prescribed and in the form prescribed under the Tax Act or the corresponding provisions of any
applicable provincial tax legislation.
PetroBakken will accept a Tax Election Filing Package only from a TriStar Shareholder that validly elects to file a
Joint Tax Election.
To file a Tax Election Filing Package with the CRA without incurring a late filing penalty, the Tax Election Filing
Package, duly completed and executed by both the TriStar Shareholder and PetroBakken, must be received by the
CRA on or before the day that is the earliest of the days on or before which either PetroBakken or the TriStar
Shareholder is required to file an income tax return for the taxation year in which the Effective Date occurs.
PetroBakken is required to file an income tax return for the taxation year in which the disposition occurs on or
before the day that is 180 days following the end of its taxation year. PetroBakken’s taxation year is scheduled to
end on December 31 of each year, but could end earlier in specified circumstances. TriStar Shareholders are
urged to consult their own advisors as soon as possible respecting the deadlines applicable to their own
particular circumstances. However, regardless of such deadline, the tax election forms of a TriStar
Shareholder must be received by the Depositary for execution and filing by PetroBakken no later than 90
days after the Effective Date. While PetroBakken may choose, in its sole discretion, to sign and forward to the
appropriate tax authorities, a Tax Election filing package received more than 90 days following the Effective Date,
PetroBakken will have no obligation to do so. Certain TriStar Shareholders may be required to forward their Tax
Election Filing Package to PetroBakken prior to the Tax Election Date in order to avoid late filing penalties.
It is the responsibility of any TriStar Shareholder to provide to PetroBakken any relevant provincial elections forms.
PetroBakken agrees to execute any properly completed provincial election form and forward such form to the
relevant provincial tax authority. TriStar Shareholders should consult their own tax advisors to determine whether
any separate provincial election forms are required.
Any TriStar Shareholder who does not ensure that the Depositary has received two duly completed tax
election forms in respect of each applicable tax authority on or before the 90th day after the Effective Date,
will not be able to benefit from the rollover provisions of the Tax Act (and any applicable provincial income
tax law). Accordingly, all TriStar Shareholders who wish to enter into an election with PetroBakken should
give their immediate attention to this matter. The instructions for requesting a tax election package will be
set out in the Letter of Transmittal and Election Form. TriStar Shareholders are referred to Information
Circular 76-19R3 and Interpretation Bulletin IT-291R3 issued by the CRA for further information
respecting the election. The comments in this Circular with respect to such elections are provided for
general assistance only. The law in this area is complex and contains numerous technical requirements.
TriStar Shareholders who make a Joint Tax Election should consult their own tax advisors.
Where TriStar Shares are held in joint ownership and two or more of the co-owners wish to make a Joint Tax
Election, one of the co-owners designated for such purpose should file the designation and a copy of the CRA Form
T-2057 (and where applicable, the corresponding provincial form) for each co-owner along with a list of all
co-owners electing, which list should contain the address and social insurance number or tax account number of
each co-owner. Where the TriStar Shares are held as partnership property, a partner designated by the partnership
must file one copy of CRA Form T-2058 on behalf of each member of the partnership (and where applicable, the
corresponding form in duplicate with the provincial taxation authorities). Such CRA Form T-2058 (and
corresponding provincial forms, if applicable) must be accompanied by a list containing the name, address, social
insurance number or account number of each partner as well as the letter signed by each partner authorizing the
designated partner to complete and file the form.
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Capital Gains and Capital Losses
A Shareholder who disposes of TriStar Shares pursuant to the Arrangement and thereby realizes a capital gain or
capital loss will be required to include one-half of the amount of any such capital gain (a "taxable capital gain") in
income in the year in which such disposition occurs and must generally deduct one-half of the amount of any capital
loss (an "allowable capital loss") against taxable capital gains realized in the year of disposition, in accordance
with the detailed rules of the Tax Act. Allowable capital losses not deducted in the taxation year in which they are
realized may be carried back and deducted in any of the three preceding taxation years or carried forward and
deducted in any following taxation year against net taxable capital gains realized in such taxation years, to the
extent and under the circumstances as specified in the Tax Act.
In general, a capital loss otherwise arising upon the disposition of a TriStar Share held by a corporation may be
reduced by certain dividends previously received or deemed to have been received on such share or on another
share for which such share was exchanged pursuant to certain tax-deferred rollover provisions. Similar rules may
also apply in other circumstances, including where a corporation, trust or partnership is a member of a partnership
or a beneficiary of a trust that owns such shares. Shareholders to whom these rules may be relevant should consult
their own advisors.
Capital gains realized by an individual or trust, other than certain specified trusts, may give rise to alternative
minimum tax under the Tax Act. A TriStar Shareholder that throughout the relevant taxation year is a
Canadian-controlled private corporation, as defined in the Tax Act, may be liable to pay an additional refundable
tax of 6⅔% on certain investment income, including taxable capital gains.
TriStar Shareholders’ Exercise of Dissent Rights
Under the Arrangement, Dissenting Shareholders are deemed to have transferred their respective TriStar Shares to
PetroBakken and are entitled to receive a cash payment equal to the fair value of such shares. Dissenting
Shareholders will be considered to have disposed of their TriStar Shares for proceeds of disposition equal to such
cash payment (other than Court awarded interest). The Dissenting Shareholder will realize a capital gain (or capital
loss) to the extent that such proceeds of disposition exceed (or are exceeded by) the aggregate of the Dissenting
Shareholder’s adjusted cost base of the transferred shares and any applicable reasonable costs of disposition. (See
"Capital Gains and Losses" above.) A Dissenting Shareholder will also be required to include any Court awarded
interest in computing such shareholder’s taxable income. TriStar Shareholders who wish to dissent should
consult with their own income tax advisors with respect to the income tax consequences applicable to their
particular circumstances.
Consequences of Holding PetroBakken Class A Shares
Following completion of the Arrangement, any dividends received on the PetroBakken Class A Shares by an
individual will be included in computing the holder’s income as a taxable dividend from a taxable Canadian
corporation and will be subject to the normal gross-up and dividend tax credit rules contained in the Tax Act. An
enhanced gross-up and tax credit are available on any "eligible dividends" designated by PetroBakken as "eligible
dividends". A recipient shareholder that is a corporation will generally be entitled, when computing its taxable
income for the taxation year in which the dividend is received, to a deduction equal to the amount of the taxable
dividend received in that year. A shareholder of PetroBakken that is a "private corporation" as defined in the Tax
Act or any other corporation resident in Canada and controlled or deemed to be controlled by or for the benefit of an
individual (other than a trust) or a related group of individuals (other than trusts) may be liable to pay a refundable
tax under Part IV of the Tax Act of 33⅓% on dividends received or deemed to be received on PetroBakken Class A
Shares.
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Eligibility for Investment
Provided that the PetroBakken Class A Shares continue to be listed on a designated stock exchange (which
currently includes the TSX for the purposes of the Tax Act), the PetroBakken Class A Shares received by TriStar
Shareholders pursuant to the Arrangement will be qualified investments under the Tax Act for trusts governed by
registered retirement savings plans, registered education savings plans, registered retirement income funds, deferred
profit sharing plans, registered disability savings plans and tax-free savings accounts as defined in the Tax Act.
Provided that on the Effective Date, the holder of a tax-free savings account does not hold a significant interest (as
defined in the Tax Act) in PetroBakken or any person or partnership that does not deal at arm’s length with
PetroBakken within the meaning of the Tax Act, and provided that such holder deals at arm’s length with
PetroBakken within the meaning of the Tax Act, the PetroBakken Class A Shares acquired on the exchange of
TriStar Shares will not, on such date, be a prohibited investment for a trust governed by a tax-free savings account.
The Canadian federal income tax considerations set forth above are for general information only. TriStar
Shareholders are urged to consult their own tax advisors to determine the particular tax effects to them of
the Arrangement, including under provincial and foreign tax legislation.
TriStar Shareholders Not Resident in Canada
This portion of the summary applies to a TriStar Shareholder who is a Non-Resident, and at all relevant times does
not use or hold, and is not deemed to use or hold, TriStar Shares in, or in the course of, carrying on business in
Canada and is not an insurer who carries on an insurance business in Canada and elsewhere (referred to hereinafter
as "Non-Resident TriStar Shareholder"). Special rules which are not discussed in this summary may apply to a
Non-Resident TriStar Shareholder that is an insurer carrying on business in Canada and elsewhere.
Disposition of TriStar Shares to PetroBakken Pursuant to the Arrangement
Non-Resident TriStar Shareholders will be subject to taxation in respect of the disposition to PetroBakken of their
TriStar Shares only to the extent such shares constitute "taxable Canadian property" as defined in the Tax Act and
the Non-Resident TriStar Shareholder is not afforded relief under an applicable tax treaty. Generally, TriStar
Shares will not constitute "taxable Canadian property" to a Non-Resident TriStar Shareholder at a particular time
provided that (i) such shares are listed on a designated stock exchange (which currently includes the TSX) at that
time and at no time during the sixty (60) month period immediately preceding the disposition of such shares did the
Non-Resident TriStar Shareholder, Persons with whom the Non-Resident TriStar Shareholder did not deal at arm’s
length for purposes of the Tax Act, or the Non-Resident TriStar Shareholder together with all such Persons, own or
have an interest in, or right or option to acquire, 25% or more of the issued shares of any class or series of shares in
the capital stock of TriStar; and (ii) such shares are not otherwise deemed to be "taxable Canadian property". A
share may be deemed to be "taxable Canadian property" where the Non-Resident TriStar Shareholder acquired or
held the share in certain circumstances, including acquiring the share in consideration of the disposition of other
taxable Canadian property to the issuer of such share.
In the event that the TriStar Shares constitute taxable Canadian property to a particular Non-Resident TriStar
Shareholder on the disposition thereof pursuant to the Arrangement, and a capital gain realized on the disposition of
such taxable Canadian property is not exempt from tax under the Tax Act pursuant to the terms of an applicable
income tax treaty or convention, such Non-Resident TriStar Shareholder will realize a capital gain (or capital loss)
generally in the circumstances and computed in the manner described above under "TriStar Shareholders Resident
in Canada".
The cost of each PetroBakken Class A Share acquired pursuant to the Arrangement must generally be averaged with
the adjusted cost base of all other PetroBakken Class A Shares owned by the Non-Resident TriStar Shareholder to
determine the adjusted cost base to a Non-Resident TriStar Shareholder of a PetroBakken Class A Share.
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TriStar Shareholders’ Exercise of Dissent Rights
A Non-Resident TriStar Shareholder who exercises a right of dissent will generally be considered to have disposed
of TriStar Shares to PetroBakken at the Effective Time. Non-Resident TriStar Shareholders will not recognize a
capital gain or capital loss upon the exercise of dissent rights unless their TriStar Shares constitute taxable Canadian
property and are not afforded relief under an applicable tax treaty. In that circumstance, and where Non-Resident
TriStar Shareholder is paid the fair value of their TriStar Shares, the amount received (excluding any amount which
constitutes interest) will constitute the Non-Resident TriStar Shareholder’s proceeds of disposition for the purpose
of computing any capital gain or capital loss. Any interest awarded to a dissenting Non-Resident TriStar
Shareholder will generally be exempt from withholding tax under the Tax Act.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
NOTICE PURSUANT TO IRS CIRCULAR 230: NOTHING CONTAINED IN THIS SUMMARY
CONCERNING ANY U.S. FEDERAL TAX ISSUE IS INTENDED OR WRITTEN TO BE USED, AND IT
CANNOT BE USED, BY A U.S. HOLDER (AS DEFINED BELOW), FOR THE PURPOSE OF AVOIDING U.S.
FEDERAL TAX PENALTIES UNDER THE U.S. CODE (AS DEFINED BELOW). THIS SUMMARY WAS
WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS
ADDRESSED BY THIS CIRCULAR. EACH U.S. HOLDER SHOULD SEEK U.S. FEDERAL TAX ADVICE,
BASED ON SUCH U.S. HOLDER’S PARTICULAR CIRCUMSTANCES, FROM AN INDEPENDENT TAX
ADVISOR.
Scope of this Disclosure
Transactions Addressed
The following discussion summarizes the anticipated material U.S. federal income tax consequences generally
applicable to U.S. Holders (as defined below) arising from and relating to (a) the exchange of TriStar Shares for
PetroBakken Class A Shares and/or cash as described in this Circular (the "Exchange") and (b) the ownership and
disposition of PetroBakken Class A Shares received pursuant to the Exchange. This summary is not binding on the
Internal Revenue Service (the "IRS") or the U.S. courts, and no assurance can be provided that the federal income
tax consequences described herein will not be challenged by the IRS or will be sustained by a U.S. court if so
challenged. TriStar has not requested, and does not intend to request, a ruling from the IRS or opinion from its
legal counsel regarding any of the U.S. federal income tax consequences of the Exchange or of the ownership and
disposition of PetroBakken Class A Shares received pursuant to the Exchange.
This summary of the anticipated material U.S. federal income tax consequences arising from and relating to the
Exchange and the ownership and disposition of PetroBakken Class A Shares is for general information purposes
only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax consequences
that may apply to a U.S. Holder as a result of the Exchange or the ownership and disposition of PetroBakken Class
A Shares received pursuant to the Exchange. In addition, this summary does not take into account the individual
facts and circumstances of any particular U.S. Holder that may affect the U.S. federal income tax consequences to
such U.S. Holder resulting from the Exchange and the ownership and disposition of PetroBakken Class A Shares
received pursuant to the Exchange. Accordingly, this summary is not intended to be, and should not be construed
as, legal or U.S. federal income tax advice with respect to any U.S. Holder. Moreover, this summary does not
address U.S. state or local tax consequences, or the tax consequences in jurisdictions other than the U.S. U.S.
Holders should consult their own tax advisors regarding the U.S. federal, U.S. state and local, and non-U.S. tax
consequences of the Exchange and the ownership and disposition of PetroBakken Class A Shares received pursuant
to the Exchange in light of their particular circumstances.
Authorities
This summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations
(whether final, temporary, or proposed), published rulings of the IRS, published administrative positions of the IRS,
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the Convention Between Canada and the United States of America with Respect to Taxes on Income and on
Capital, signed September 26, 1980, as amended (the "Canada-U.S. Tax Convention"), and U.S. court decisions that
are applicable and, in each case, as in effect and available, as of the date of this document. Any of the authorities on
which this summary is based could be changed in a material and adverse manner at any time, and any such change
could be applied on a retroactive or prospective basis. This summary does not discuss the potential effects, whether
adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive or prospective
basis.
Tax Consequences Not Addressed
This summary does not address the U.S. state and local, U.S. federal estate and gift, U.S. federal alternative
minimum tax; or foreign tax consequences to U.S. Holders of the Exchange or the ownership and disposition of
PetroBakken Class A Shares received pursuant to the Exchange.
U.S. Holder
For purposes of this summary, a "U.S. Holder" is a beneficial owner of TriStar Shares (or, following the completion
of the Exchange, a beneficial owner of PetroBakken Class A Shares) that holds such shares as capital assets, and
that, for U.S. federal income tax purposes, is
•
an individual who is a citizen or resident of the U.S. for U.S. federal income tax purposes;
•
a corporation, or any other entity classified as a corporation for U.S. federal income tax purposes, that is
created or organized in or under the laws of the U.S. or any state in the U.S., including the District of
Columbia;
•
an estate if the income of that estate is subject to U.S. federal income tax regardless of the source of
such income; or
•
a trust if (i) the trust has validly elected to be treated as a U.S. person for U.S. federal income tax
purposes or (ii) a U.S. court is able to exercise primary supervision over the administration of the trust
and one or more U.S. persons have the authority to control all substantial decisions of the trust.
If a partnership (including any entity treated as a partnership for U.S. federal income tax purposes) beneficially
owns TriStar Shares (or, following the completion of the Exchange, PetroBakken Class A Shares), the U.S. federal
income tax treatment of a partner in a partnership generally will depend upon the status of the partner and the
activities of the partnership. Partners in a partnership that beneficially owns TriStar Shares (or, following the
completion of the Exchange, PetroBakken Class A Shares) should consult their own tax advisors as to the U.S.
federal, state and local, alternative minimum tax, estate and gift and foreign tax consequences of the Exchange and
the ownership and disposition of PetroBakken Class A Shares received pursuant to the Exchange.
Non-U.S. Holders
For purposes of this summary, a "non-U.S. Holder" is a beneficial owner of TriStar Shares (or, following the
completion of the Exchange, PetroBakken Class A Shares) other than a U.S. Holder. This summary does not
address the U.S. federal income tax consequences of the Exchange or the ownership and disposition of PetroBakken
Class A Shares received pursuant to the Exchange to non-U.S. Holders of TriStar Shares, and such non-U.S.
Holders are accordingly urged to consult their own tax advisors regarding the potential U.S. federal income tax
consequences to them of the Exchange and ownership and disposition of PetroBakken Class A Shares received
pursuant to the Exchange, and the potential application of any tax treaties.
Transactions Not Addressed
This summary does not address the U.S. federal income tax consequences of transactions effectuated prior or
subsequent to, or concurrently with, the Exchange (whether or not any such transactions are undertaken in
connection with the Exchange), including, without limitation, the following:
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•
any conversion into TriStar Shares of any TriStar notes, debentures or other debt instruments;
•
any vesting, exercise, assumption or conversion of any warrants, options and other rights to acquire
TriStar Shares; and
•
any transaction, other than the Exchange, in which TriStar Shares or PetroBakken Class A Shares are
acquired;
Persons Not Addressed
The U.S. federal income tax consequences to the following persons (including persons who are U.S. Holders) are
not addressed in this summary, and the following persons are accordingly urged to consult with their own tax
advisors regarding the U.S. federal income tax consequences to them of the Exchange and ownership and
disposition of PetroBakken Class A Shares received pursuant to the Exchange:
•
Petrobank, PetroBakken and its subsidiaries, and TriStar;
•
persons that may be subject to special U.S. federal income tax treatment such as partnerships or other
pass-through entities, financial institutions, real estate investment trusts, tax-exempt organizations,
qualified retirement plans, individual retirement accounts, regulated investment companies, insurance
companies, dealers in securities or currencies, or traders in securities that elect to apply a mark-tomarket accounting method;
•
persons that acquired TriStar Shares pursuant to an exercise of employee stock options or rights or
otherwise as compensation for services;
•
persons that hold TriStar warrants, options or TriStar notes, debentures or other debt instruments;
•
persons having a functional currency for U.S. federal income tax purposes other than the U.S. dollar;
•
persons that hold TriStar Shares as part of a position in a straddle or as part of a hedging or conversion
transaction;
•
persons who are U.S. expatriates or former long-term residents of the United States;
•
persons that own or have owned, directly or by attribution, 5% or more, by voting power or value, of
the outstanding equity interests of TriStar (or, following the completion of the Exchange, of
PetroBakken); and
•
persons for whom the TriStar Shares constitute "taxable Canadian property".
Exchange of TriStar Shares for PetroBakken Class A Shares
Treatment of the Exchange as part of a tax-deferred exchange within the meaning of Section 351 of the U.S. Code
(a "Section 351 Transaction") is subject to numerous requirements. Whether the Exchange qualifies as part of a
Section 351 Transaction depends, among other factors, on whether the Arrangement and PetroBakken
Reorganization are treated as a single integrated transaction under United States federal income tax principles as
well as the satisfaction of certain other requirements. Whether these requirements will be satisfied is uncertain as of
the date of the Circular and may depend to some extent upon events subsequent to the date of this Circular,
including events subsequent to the Effective Date, which events cannot be predicted with accuracy. No ruling from
the IRS or legal opinion concerning the U.S. federal income tax consequences of the Exchange has been obtained
and none will be requested. Thus, there can be no assurance that the Exchange will qualify as a Section 351
Transaction, or that the IRS will not challenge treatment by a U.S. Holder of the Exchange as part of a Section 351
Transaction or that, if challenged, a U.S. court would not agree with the IRS.
Tax Consequences to U.S. Holders if Exchange Qualifies as a Section 351 Transaction
If the Exchange qualifies as part of a Section 351 Transaction, then the Exchange generally will result in the
following U.S. federal income tax consequences to U.S. Holders of TriStar Shares:
•
gain (but not loss) will be recognized in an amount equal to the lesser of (a) the excess, if any, of (i) the
sum of (x) the fair market value of the PetroBakken Class A Shares received and (y) the value of any
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cash received, over (ii) the tax basis of such U.S. Holder in the TriStar Shares exchanged pursuant to
the Arrangement, or (b) the value of cash received pursuant to the Arrangement (without reduction for
any Canadian income tax withheld);
•
the aggregate tax basis of the PetroBakken Class A Shares received by a U.S. Holder in connection
with the Contribution will be equal to the aggregate tax basis of the TriStar Shares surrendered in
exchange therefor, increased by the amount of gain recognized and decreased by the fair market value
of cash received;
•
the holding period of the PetroBakken Class A Shares received by a U.S. Holder in connection with the
Contribution will include the holding period of the TriStar Shares exchanged; and
•
U.S. Holders may be required to report certain information to the IRS on their United States federal
income tax returns for the taxable year in which the Exchange occurs and will be required to retain
certain records related to the Exchange.
Consequences of Failure of the Exchange to Qualify as a Section 351 Transaction
If the Exchange fails to qualify as part of a Section 351 Transaction, then the Exchange would constitute a taxable
disposition of TriStar Shares by a U.S. Holder and generally would result in the following U.S. federal income tax
consequences:
•
a U.S. Holder of TriStar Shares would recognize gain or loss equal to the difference between (a) the fair
market value of PetroBakken Class A Shares received, determined as of the time of receipt, and/or the
value of cash received by such U.S. Holder and (b) the U.S. Holder’s adjusted tax basis in the TriStar
Shares exchanged;
•
the aggregate tax basis of PetroBakken Class A Shares received by a U.S. Holder of TriStar Shares in
the Exchange would be equal to the aggregate fair market value of PetroBakken Class A Shares,
determined as of the time of receipt; and
•
the holding period of PetroBakken Class A Shares received by a U.S. Holder in the Exchange would
begin on the day after receipt.
Any gain or loss recognized under the first bullet point above generally will be capital gain or loss if the TriStar
Shares were held as capital assets at the time of the Exchange and will be long-term capital gain or loss if the U.S.
Holder’s holding period for the TriStar Shares is more than one year at the time of the Exchange. Preferential tax
rates for long-term capital gains are applicable to a U.S. Holder that is an individual, estate or trust. There are
currently no preferential tax rates for long-term capital gains for a U.S. Holder that is a corporation. Deductions for
capital losses are subject to significant limitations.
Tax Consequences of Arrangement if TriStar classified as a PFIC Not Addressed
A U.S. Holder of TriStar Shares would be subject to special, adverse tax rules in respect of the
Arrangement if TriStar was classified as a passive foreign investment company ("PFIC") under U.S. federal income
tax rules for any taxable year during which such U.S. Holder holds or held TriStar Shares. Based on available
financial information and current business projections, TriStar believes that it has not been a PFIC in prior years
and will not constitute a PFIC during the current taxable year ending December 31, 2009. However, determining
PFIC classification is fundamentally factual in nature, generally cannot be determined until the close of the taxable
year in question, and is determined annually. The determination of whether TriStar was or will be a PFIC for any
taxable year will depend, in part, on the application of complex U.S. federal income tax rules, which are subject to
differing interpretations and will depend on the assets and income of TriStar for each taxable year. Consequently,
TriStar may not provide any absolute assurance regarding its PFIC status for any taxable year during which U.S.
Holders have held or will hold TriStar Shares. The discussion above does not address the possible impact
classification of TriStar as a PFIC would have on the U.S. tax consequences to a U.S. Holders either participating
in or dissenting from (discussed below) the Arrangement. U.S. Holders should consult their own tax advisors with
respect to the possible application of the PFIC rules, and any available elections or exceptions, to them.
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Dissenting U.S. Holders
A U.S. Holder who exercises Dissent Rights from the Exchange will recognize gain or loss on the exchange of such
holder’s TriStar Shares for cash in an amount equal to the difference between (a) the U.S. dollar value on the date of
receipt of the Canadian currency (other than amounts, if any, which are or are deemed to be interest for U.S. federal
income tax purposes, which amounts will be taxed as ordinary income) and (b) such U.S. Holder’s adjusted tax
basis in its TriStar Shares. Such gain or loss generally will be capital gain or loss if the TriStar Shares were held as
capital assets at the time of the Exchange and will be long-term capital gain or loss if the U.S. Holder’s holding
period for such shares is more than one year. Preferential tax rates for long-term capital gains are applicable to a
U.S. Holder that is an individual, estate or trust. There are currently no preferential tax rates for long-term capital
gains for a U.S. Holder that is a corporation.
Foreign Currency
The fair market value of any foreign currency received by a U.S. Holder who receives cash in the Exchange or
exercises Dissent Rights from the Exchange will generally be based on the rate of exchange on the date of receipt.
A subsequent disposition of any foreign currency received (including an exchange for U.S. currency) will generally
give rise to ordinary gain or loss.
Ownership of PetroBakken Class A Shares after the Arrangement
The following is a summary of certain material U.S. federal income tax consequences to a U.S. Holder of the
ownership and disposition of PetroBakken Class A Shares after the Arrangement.
Distributions on PetroBakken Class A Shares
A U.S. Holder that receives a distribution with respect to the PetroBakken Class A Shares will be required to
include the amount of such distribution in gross income as a dividend (without reduction for any Canadian income
tax withheld from such distribution) to the extent of the current or accumulated "earnings and profits" of
PetroBakken, as computed for U.S. federal income tax purposes. To the extent that a distribution exceeds the
current and accumulated "earnings and profits" of PetroBakken, such distribution will be treated first as a tax-free
return of capital to the extent of a U.S. Holder’s adjusted tax basis in the PetroBakken Class A Shares and thereafter
as gain from the sale or exchange of such PetroBakken Class A Shares. (See "Disposition of PetroBakken Class A
Shares" below). Dividends received on the PetroBakken Class A Shares generally will not be eligible for the
"dividends received deduction."
For taxable years beginning before January 1, 2011, a taxable dividend paid by PetroBakken generally will be taxed
at the preferential tax rates applicable to long-term capital gains if (a) PetroBakken is a "qualified foreign
corporation" (as defined below), (b) the U.S. Holder receiving such dividend is an individual, estate, or trust, and (c)
certain holding period requirements are met. PetroBakken generally will be a "qualified foreign corporation" under
Section 1(h)(11) of the Code (a "QFC") if (a) it is eligible for the benefits of the Canada-U.S. Tax Convention, or
(b) its shares are readily tradable on an established securities market in the U.S. However, even if PetroBakken
satisfies one or more of such requirements, it will not be treated as a QFC if it is a PFIC for the taxable year during
which it pays a dividend or for the preceding taxable year.
Distributions Paid in Foreign Currency
The taxable amount of a distribution received on the PetroBakken Class A Shares in foreign currency generally will
be equal to the U.S. dollar value of such distribution based on the exchange rate applicable on the date of receipt. A
U.S. Holder that does not convert foreign currency received as a distribution into U.S. dollars on the date of receipt
generally will have a tax basis in such foreign currency equal to the U.S. dollar value of such foreign currency on
the date of receipt. Such a U.S. Holder generally will recognize ordinary income or loss on any subsequent sale or
other taxable disposition of such foreign currency (including an exchange for U.S. dollars).
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Disposition of PetroBakken Class A Shares
A U.S. Holder will recognize gain or loss on the sale or other taxable disposition of PetroBakken Class A Shares in
an amount equal to the difference, if any, between (a) the amount of cash plus the fair market value of any property
received and (b) such U.S. Holder’s adjusted tax basis in the PetroBakken Class A Shares sold or otherwise
disposed of. Any such gain or loss generally will be capital gain or loss, which will be long-term capital gain or
loss if the PetroBakken Class A Shares are held for more than one year.
Preferential tax rates apply to long-term capital gains of a U.S. Holder that is an individual, estate, or trust. There
are currently no preferential tax rates for long-term capital gains of a U.S. Holder that is a corporation. Deductions
for capital losses are subject to significant limitations under the U.S. Code.
Foreign Tax Credit
A U.S. Holder that pays (whether directly or through withholding) Canadian income tax with respect to dividends
received on the PetroBakken Class A Shares generally will be entitled, at the election of such U.S. Holder, to
receive either a deduction or a credit for such Canadian income tax paid. Generally, a credit will reduce a U.S.
Holder’s U.S. federal income tax liability on a dollar-for-dollar basis, whereas a deduction will reduce a U.S.
Holder’s income subject to U.S. federal income tax. This election is made on a year-by-year basis and applies to all
foreign taxes paid (whether directly or through withholding) by a U.S. Holder during a taxable year.
Complex limitations apply to the foreign tax credit, including the general limitation that the credit cannot exceed the
proportionate share of a U.S. Holder’s U.S. federal income tax liability that such U.S. Holder’s "foreign source"
taxable income bears to such U.S. Holder’s worldwide taxable income. In applying this limitation, a U.S. Holder’s
various items of income and deduction must be classified, under complex rules, as either "foreign source" or "U.S.
source". In addition, this limitation is calculated separately with respect to "passive category income" and "general
category income". Dividends received on the PetroBakken Class A Shares generally will be treated as "foreign
source" and generally will be categorized as "passive income". Income or loss on the sale or other taxable
disposition of foreign currency will be U.S. source. Gain or loss recognized by a U.S. Holder on the sale or other
taxable disposition of PetroBakken Class A Shares generally will be treated as "U.S. source" for purposes of
applying the foreign tax credit rules unless the gain is subject to tax in Canada and is resourced as "foreign source"
under the Canada-U.S. Tax Convention and such U.S. Holder elects to treat such gain or loss as "foreign source."
The foreign tax credit rules are complex, and each U.S. Holder should consult its own tax advisor regarding the
foreign tax credit rules.
Passive Foreign Investment Company Rules
A U.S. Holder of PetroBakken Class A Shares would be subject to special, adverse tax rules in respect of the
Arrangement if PetroBakken is classified as a passive foreign investment company ("PFIC") under U.S. federal
income tax rules for any taxable year during which such U.S. Holder holds PetroBakken Class A Shares. Based on
available financial information and current business projections, PetroBakken believes that it will not be a PFIC in
its first taxable year, which includes the day after the Effective Date for the Arrangement, or for the foreseeable
future. However, as noted above, PFIC classification is determined yearly, is fundamentally factual and thus cannot
be predicted with certainty for the current taxable year or future years as of the date of this Circular. The PFIC rules
as they might apply to the ownership and disposition of PetroBakken Class A Shares received pursuant to the
Arrangement are not discussed in this Circular. U.S. Holders should consult their own tax advisors with respect to
the possible application of the PFIC rules, and any available elections, to them in connection with the ownership
and disposition of PetroBakken Class A Shares received pursuant to the Arrangement.
Backup Withholding Tax and Information Reporting Requirements
Unless the U.S. Holder is a corporation or other exempt recipient, payments to certain U.S. Holders of dividends
made on PetroBakken Class A Shares, or the proceeds of the sale or other disposition of the TriStar Shares or the
PetroBakken Class A Shares that are made within the United States or through certain United States related
financial intermediaries may be subject to information reporting and U.S. federal backup withholding tax at the
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current rate of twenty-eight percent (28%) (subject to periodic adjustment) if the U.S. Holder fails to supply a
correct taxpayer identification number or otherwise fails to comply with applicable U.S. information reporting or
certification requirements. Any amount withheld from a payment to a U.S. Holder under the backup withholding
rules is allowable as a credit against the U.S. Holder’s U.S. federal income tax, provided that the required
information is furnished to the IRS.
THE FOREGOING SUMMARY OF CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS IS
INCLUDED FOR GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE
TO ANY U.S. HOLDER.
BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH
BENEFICIAL U.S. HOLDER IS URGED TO CONSULT ITS OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES OF THE ARRANGEMENT, INCLUDING THE APPLICATION
AND EFFECT OF U.S. FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
INTERESTS OF CERTAIN PERSONS IN THE ARRANGEMENT
All of the directors and officers of TriStar have entered into the TriStar Lock-Up Agreements with Petrobank and
PetroBakken pursuant to which they have agreed to support the Arrangement and, subject to certain exceptions,
vote the TriStar Shares which they beneficially own, including any TriStar Shares acquired on the exercise of
TriStar Options or redemption of TriStar Incentive Shares, in favour of the Arrangement. TriStar Lock-up
Securityholders hold, directly or indirectly, an aggregate of 1,609,450 TriStar Shares, 1,366,366 TriStar Options
and 975,767 TriStar Incentive Shares, representing approximately 2.48% of the fully-diluted number of TriStar
Shares.
Each of the officers of TriStar has an employment agreement with TriStar. These employment agreements provide,
among other things, for a lump sum severance payment to the officer in the event that there is a change of control of
TriStar. The Arrangement would be considered a change of control of TriStar under the terms of the employment
agreements. TriStar anticipates that it will pay an aggregate of approximately $3,867,000 to the officers of TriStar
in connection with the Arrangement in respect of severance payments.
Each of the directors and officers of TriStar holds TriStar Options and TriStar Incentive Shares. In connection with
the Arrangement, the vesting of all TriStar Options and TriStar Incentive Shares shall accelerate and (a) all TriStar
Options not previously vested shall, immediately prior to the Effective Time, be either exercised surrendered to
TriStar for a cash payment representing the "in-the-money" amount, and (b) TriStar Incentive Shares not previously
vested shall be redeemed for TriStar Shares prior the Effective Date. Based on a TriStar Share price of $14.75, the
directors and officers of TriStar hold an aggregate of 516,559 "in-the-money" unvested TriStar Options having an
"in-the-money" amount of $3,853,530 and an aggregate of 791,766 unvested TriStar Incentive Shares which will be
redeemed for 791,766 TriStar Shares immediately prior to the Effective Date.
James M. Pasieka, a director of TriStar, is a partner in Heenan Blaikie LLP. Heenan Blaikie LLP has acted as legal
counsel for TriStar with respect to certain matters in connection with the Arrangement and will receive fees from
TriStar for services rendered in that capacity. Dallas Droppo, Q.C., a director of TriStar, is a partner in Blake,
Cassels & Graydon LLP. Blake, Cassels & Graydon LLP has acted as legal counsel for TriStar with respect to
certain matters in connection with the Arrangement and will receive fees from TriStar for services rendered in that
capacity.
INTERESTS OF INFORMED PERSONS IN MATERIAL TRANSACTIONS
None of the principal holders of TriStar Shares or any director or officer of TriStar, or any associate or affiliate of
any of the foregoing persons, has or had any material interest in any transaction in the last three years or any
proposed transaction that materially affected, or will materially affect, TriStar or any of its affiliates except as
disclosed above or elsewhere in this Information Circular or the information incorporated by reference into this
Information Circular.
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INTERESTS OF EXPERTS
Certain legal matters relating to the Arrangement are to be passed upon at the Closing by Heenan Blaikie LLP on
behalf of TriStar and McCarthy Tétrault LLP on behalf of Petrobank and PetroBakken. Mr. James Pasieka, a
director of TriStar and the corporate secretary of TriStar, is a partner of Heenan Blaikie LLP. Mr. Andrew Grasby,
the corporate secretary of Petrobank, is a partner of McCarthy Tétrault LLP.
As at August 31, 2009, the partners and associates of Heenan Blaikie LLP beneficially owned, directly or indirectly,
less than 1% of the outstanding TriStar Shares.
As at August 31, 2009, the partners and associates of McCarthy Tétrault LLP beneficially owned, directly or
indirectly, less than 1% of the outstanding TriStar Shares.
Reserves estimates contained in this Information Circular or incorporated by reference herein have been provided
by Sproule and GLJ. As at the date hereof, Sproule and GLJ each beneficially owned, directly or indirectly, less
than 1% of the outstanding TriStar Shares.
INFORMATION CONCERNING TRISTAR
TriStar is a growth oriented intermediate public corporation engaged in the business of acquiring crude oil and
natural gas properties and exploring for, developing and producing crude oil and natural gas in Western Canada.
TriStar is a reporting issuer in all of the provinces of Canada and the TriStar Shares are listed and posted for trading
on the TSX under the symbol "TOG".
TriStar’s head office is located at Suite 800, 425-1st Street S.W., Calgary, Alberta, T2P 3L8 and its registered office
is located at Suite 1200, 425 – 1st Street S.W., Calgary, Alberta, T2P 3L8. See Appendix "F" - "Information
Concerning TriStar".
INFORMATION CONCERNING PETROBAKKEN
Following the completion of the Arrangement, PetroBakken will be engaged in the exploration for, and the
acquisition, development and production of, oil and natural gas reserves in Western Canada. PetroBakken intends
to target significant production and reserves growth through an internally-funded capital program underpinned by
strong cash flows which will also allow us to provide an attractive dividend yield to PetroBakken Class A
Shareholders.
Upon completion of the Arrangement, PetroBakken will become a "reporting issuer" in certain Canadian
jurisdictions and will become subject to the informational reporting requirements under the securities laws of such
jurisdictions.
PetroBakken has made application for the conditional listing on the TSX of the PetroBakken Class A Shares,
including the PetroBakken Class A Shares be issued in connection with the Arrangement. Listing will be subject to
PetroBakken fulfilling all of the requirements of the TSX, which requirements are expected to be met on the
Effective Date or as soon as reasonably practicable thereafter. Conditional listing approval has not yet been
obtained and there can be no assurance that the PetroBakken Class A Shares will be listed on the TSX or any other
stock exchange.
The registered office of PetroBakken is located at Suite 3300, 421 - 7th Avenue SW, Calgary, Alberta, T2P 4K9,
Canada, and its head office is located at 1900, 111 – 5th Avenue SW, Calgary, Alberta, T2P 3Y6.
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SELECTED PETROBAKKEN PRO FORMA FINANCIAL INFORMATION
The following is a summary of selected financial information for PetroBakken on a pro forma basis following the
completion of the Petrobank Reorganization and the Arrangement, for the periods indicated. The following is a
summary only and must be read in conjunction with the financial statements incorporated by reference in this
Information Circular and the information contained in Appendix "E" - "Information Concerning PetroBakken",
Appendix "F" - "Information Concerning TriStar" and Appendix "G" –"Pro Forma Financial Statements".
Pro Forma
Six Months Ended
June 30, 2009
(unaudited)
($000s)
Pro Forma
Year Ended
December 31, 2008
(unaudited)
($000s)
Revenues
Oil and natural gas
Royalties
Interest income
Gain (loss) on risk management contracts
379,619
(52,222)
81
(22,067)
305,411
1,198,961
(189,861)
536
67,489
1,077,125
Production and transportation
General and administration
Depletion, depreciation and accretion
Interest
Acquisition related costs
Stock-based compensation
74,556
15,760
245,219
13,171
13,566
362,272
172,088
22,226
475,494
28,029
29,825
18,109
745,771
(56,861)
331,354
(10,569)
(10,569)
(5,673)
100,829
95,156
(46,292)
236,198
Expenses
Income (loss) before taxes
Taxes
Current income taxes
Future income taxes (recovery)
Net income (loss)
SELECTED PETROBAKKEN OPERATIONAL INFORMATION
The following is a summary of selected operational information for PetroBakken on a pro forma basis following the
completion of the Petrobank Reorganization and the Arrangement, for the periods indicated. The following is a
summary only and must be read in conjunction with the documents incorporated by reference in this Information
Circular and the information contained in Appendix "E" - "Information Concerning PetroBakken" and
Appendix "F" - "Information Concerning TriStar".
Pro Forma
Six Months Ended
June 30, 2009
Average Daily Production
Light and medium crude oil and natural gas liquids (Bbls/d)
Natural gas (Mcf/d)
Total (Boe/d)
Pro Forma
Year Ended
December 31, 2008
34,566
41,400
41,466
30,906
44,819
38,376
SELECTED PETROBAKKEN RESERVES INFORMATION
The following is a summary of selected reserves information for PetroBakken on a pro forma basis following the
completion of the Petrobank Reorganization and the Arrangement, for the periods indicated. The following is a
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summary only and must be read in conjunction with the documents incorporated by reference in this Information
Circular and the information contained in Appendix "E" - "Information Concerning PetroBakken" and
Appendix "F" - "Information Concerning TriStar".
Pro Forma as at
December 31, 2008
Total Proved Reserves (1)
Light and medium crude oil (Mbbls)
Natural gas liquids (Mbbls)
Natural gas (MMcf)
Total (Mboe)
81,872
5,620
127,205
108,693
Total Proved Plus Probable Reserves (1)
Light and medium crude oil (Mbbls)
Natural gas liquids (Mbbls)
Natural gas (MMcf)
Total (MBoe)
126,509
8,377
191,499
166,803
Net Undeveloped Land Holdings as at December 31, 2008 (000's of acres) (2)
1,501,420
Notes:
(1)
Reserves for TriStar have been (a) evaluated by Sproule in the TriStar Sproule Report effective December 31, 2008 using
December 31, 2008 forecast pricing, (b) evaluated by Sproule in the TriStar Sproule Acquisition Report effective January 31, 2009
using Sproule's January 31, 2009 forecast pricing, and (c) evaluated by GLJ in the TriStar GLJ Report effective December 31,
2008 and mechanically updated to March 31, 2009 to reflect production from January 1, 2009 to the acquisition effective date of
April 1, 2009 using GLJ's January 1, 2009 forecast pricing. Reserves for the Petrobank Assets have been evaluated by Sproule in
the Petrobank Sproule Report effective December 31, 2008 using December 31, 2008 forecast pricing. Reserves presented are
gross reserves as defined in NI 51-101, using forecast price and cost assumptions.
(2)
Includes undeveloped lands acquired by TriStar pursuant to the acquisitions of the TriStar Acquired Assets as at April 1, 2009 and
the TriStar Acquired Partnership as at February 1, 2009.
OTHER MATTERS TO BE CONSIDERED AT THE MEETING
Approval of PetroBakken Share Based Compensation Plans
Pursuant to the policies of the TSX, the PetroBakken Share Based Compensation Plans must be approved by the
PetroBakken Shareholders. A complete summary of each of the PetroBakken Share Based Compensation Plans is
included in Appendix "E" – "Information Concerning PetroBakken" under the heading "Share Based Compensation
Plans".
At the Meeting, the TriStar Shareholders will be asked to consider, and if deemed appropriate, pass, the following
resolution to approve the PetroBakken Share Based Compensation Plans (the "Share Based Compensation Plans
Resolution"):
"BE IT RESOLVED that the PetroBakken Share Based Compensation Plans, as described in Appendix "E"
to the Information Circular of TriStar Oil and Gas Ltd. dated August 31, 2009, be approved."
PetroBakken has been advised that the TSX will consider the Share Based Compensation Plan Resolution to be
approved by the PetroBakken Shareholders if it is approved by a simple majority of the votes attaching to the
PetroBakken Shares to be held following the completion of the Arrangement. Following the Arrangement,
Petrobank will own approximately 109,800,000 PetroBakken Shares, collectively representing approximately 64%
of the PetroBakken Shares, and former TriStar Shareholders will own approximately 61,762,500 PetroBakken Class
A Shares, representing approximately 36% of the outstanding PetroBakken Shares. As a result, the TriStar
Shareholders will be entitled to 61,762,500 votes in respect of the Share Based Compensation Plans Resolution (the
"TriStar Shareholder Votes"). The number of TriStar Shareholder Votes to be voted in favour of the Share Based
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Compensation Plans Resolution will be equal to 61,762,500 multiplied by the percentage of TriStar Shares voted in
favour of the Share Based Compensation Plans Resolution and the number of TriStar Shareholder Votes to be voted
against the Share Based Compensation Plans Resolution will be equal to 61,762,500 multiplied by the percentage of
TriStar Shares voted against the Share Based Compensation Plans Resolution. Petrobank, as owner of
approximately 109,800,000 PetroBakken Shares, will have approximately 64% of the votes in respect of the Share
Based Compensation Plans Resolution and intends to vote all of its PetroBakken Shares in favour of the Share
Based Compensation Plans Resolution.
GENERAL PROXY MATTERS
Solicitation of Proxies
This Information Circular is furnished in connection with the solicitation of proxies by the management of TriStar
to be used at the Meeting. In addition to solicitation by mail, proxies may be solicited by personal interviews,
telephone or other means of communication and by directors, officers and employees of TriStar, who will not be
specifically remunerated therefor. The cost of solicitation will be borne by TriStar.
Record Date
August 31, 2009 is the record date for the Meeting. Only registered holders of TriStar Shares at the close of
business on the record date are entitled to notice of the Meeting and to vote thereat unless, after the record date, a
registered holder transfers his TriStar Shares and the transferee, upon producing properly endorsed certificates
evidencing such shares or otherwise establishing that he owns such shares, requests not later than 10 days before the
Meeting that the transferee’s name be included in the list of TriStar Shareholders entitled to vote, in which case
such transferee shall be entitled to vote such shares at the Meeting.
Appointment and Revocation of Proxies
Registered TriStar Shareholders may vote in person at the Meeting or they may appoint another person, who does
not have to be a TriStar Shareholder, as their proxy to attend and vote in their place. The persons named in the
enclosed form of proxy are the President and Chief Executive Officer and the Chief Financial Officer of TriStar.
A SHAREHOLDER SUBMITTING A PROXY HAS THE RIGHT TO APPOINT A PERSON TO
REPRESENT HIM OR HER AT THE MEETING OTHER THAN THE PERSONS DESIGNATED IN THE
FORM OF PROXY FURNISHED BY TRISTAR. TO EXERCISE THIS RIGHT THE SHAREHOLDER
SHOULD INSERT THE NAME OF THE DESIRED REPRESENTATIVE IN THE BLANK SPACE
PROVIDED IN THE FORM OF PROXY AND STRIKE OUT THE OTHER NAMES OR SUBMIT
ANOTHER APPROPRIATE PROXY.
In order to be effective, the proxy must be mailed so as to be deposited at the office of TriStar’s transfer agent,
Olympia Trust Company, 2300, 125 – 9th Avenue S.E., Calgary, Alberta, T2G 0P6, not later than forty-eight (48)
hours (excluding Saturdays, Sundays and statutory holidays in the Province of Alberta) prior to the time set for the
Meeting. No instrument appointing a proxy shall be valid after the expiration of twelve (12) months from the date
of its execution. The instrument appointing a proxy shall be in writing under the hand of the TriStar Shareholder or
his attorney, or, if such TriStar Shareholder is a corporation, under its corporate seal, and executed by a director,
officer or attorney thereof duly authorized.
A TriStar Shareholder who has submitted a proxy may revoke it by instrument in writing executed by the TriStar
Shareholder or his attorney authorized in writing, or, if the TriStar Shareholder is a corporation, under its corporate
seal and executed by a director, officer or attorney thereof duly authorized, and deposited either at the office of
TriStar’s transfer agent, Olympia Trust Company, 2300, 125 – 9th Avenue S.E., Calgary, Alberta, T2G 0P6, at any
time prior to 4:30 p.m. (Calgary time) on the last Business Day preceding the day of the Meeting or with the
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chairman of the Meeting prior to the commencement of the Meeting on the day of the Meeting, and upon such
deposit the previous proxy is revoked.
Exercise of Discretion by Proxy Holders
All TriStar Shares represented at the Meeting by properly executed proxies will be voted. Where a choice with
respect to any matter to be acted upon has been specified in the instrument of proxy the TriStar Shares represented
by the proxy will be voted in accordance with such specification. IN THE ABSENCE OF SUCH
SPECIFICATION, SUCH SHARES WILL BE VOTED IN FAVOUR OF THE ARRANGEMENT
RESOLUTION AND IN FAVOUR OF THE RESOLUTION APPROVING THE PETROBAKKEN
OPTION PLAN. The enclosed form of proxy confers discretionary authority upon the persons named therein with
respect to amendments or variations to matters identified in the Notice of Meeting and with respect to other matters
which may properly come before the Meeting. At the time of printing of the Information Circular, management of
TriStar knows of no such amendment, variation or other matter.
Advice to Beneficial Holders of TriStar Shares
The information set forth in this section is of significant importance to many public TriStar Shareholders as
a substantial number of the public TriStar Shareholders do not hold shares in their own name.
TriStar Shareholders who do not hold their TriStar Shares in their own name (referred to in this Information
Circular as "Beneficial TriStar Shareholders") should note that only proxies deposited by TriStar Shareholders
whose names appear on the records of TriStar as the registered holders of TriStar Shares can be recognized and
acted upon at the Meeting. If TriStar Shares are listed in an account statement provided to a Beneficial TriStar
Shareholder by a broker, then in almost all cases those shares will not be registered in the Beneficial TriStar
Shareholder’s name on the records of TriStar. Such TriStar Shares will more likely be registered under the name of
the Beneficial TriStar Shareholder’s broker or an agent of that broker. In Canada, the vast majority of such TriStar
Shares are registered under the name of CDS & Co. (the registration name for The Canadian Depositary for
Securities, which acts as nominee for many Canadian brokerage firms). TriStar Shares held by brokers or their
agents or nominees can only be voted (for or against resolutions) upon the instructions of the Beneficial TriStar
Shareholder. Without specific instructions, brokers and their agents and nominees are prohibited from voting shares
for their clients. Therefore, Beneficial TriStar Shareholders should ensure that instructions respecting the
voting of their TriStar Shares are communicated to the appropriate person.
Applicable regulatory policy requires intermediaries/brokers to seek voting instructions from Beneficial TriStar
Shareholders in advance of shareholders’ meetings. Every intermediary/broker has its own mailing procedures and
provides its own return instructions to clients, which should be carefully followed by Beneficial TriStar
Shareholders in order to ensure that their TriStar Shares are voted at the Meeting. The form of proxy supplied to a
Beneficial TriStar Shareholder by its broker (or the agent of the broker) is similar to the form of proxy provided to
registered TriStar Shareholders by TriStar. However, its purpose is limited to instructing the registered TriStar
Shareholder (the broker or agent of the broker) how to vote on behalf of the Beneficial TriStar Shareholder. The
majority of brokers now delegate responsibility for obtaining instructions from clients to Broadridge Financial
Solutions, Inc. ("Broadridge"). Broadridge typically asks Beneficial TriStar Shareholders to return the proxy forms
to Broadridge. Broadridge then tabulates the results of all instructions received and provides appropriate
instructions respecting the voting of shares to be represented at the applicable Meeting. A Beneficial TriStar
Shareholder receiving a Broadridge proxy cannot use that proxy to vote TriStar Shares directly at the
Meeting. The proxy must be returned to Broadridge well in advance of the Meeting in order to have the
TriStar Shares voted.
Voting Shares and Principal Holders of Voting Shares
TriStar is authorized to issue an unlimited number of TriStar Shares. As at August 31, 2009, there were
152,579,255 TriStar Shares outstanding. Pursuant to the Interim Order, each TriStar Shareholder will be entitled to
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one vote at the Meeting for each TriStar Share held by them. The quorum at the Meeting will be two persons
present in person or by proxy and holding or representing not less than 5% of the outstanding TriStar Shares entitled
to be voted at such Meeting.
To the best of the knowledge of the directors and officers of TriStar, no person beneficially owns, directly or
indirectly, or exercises control or direction over more than 10% of the TriStar Shares.
RELIANCE
Petrobank and PetroBakken have provided the information contained in this Information Circular concerning
PetroBakken, the Petrobank Assets and the proposed business of PetroBakken, including their financial information
and financial statements, which information has been relied upon by TriStar in preparing this Information Circular.
TriStar assumes no responsibility for the accuracy or completeness of such information, nor for any omission on the
part of Petrobank and PetroBakken to disclose facts or events which may affect the accuracy of any such
information.
APPROVAL OF DIRECTORS
The contents of this Information Circular have been approved by the Board of Directors.
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CONSENT OF DELOITTE & TOUCHE LLP
We have read the Information Circular and Proxy Statement (the "Information Circular") of TriStar Oil & Gas Ltd.
("TriStar") dated August 31, 2009 with respect to the proposed plan of arrangement involving TriStar, Petrobank
Energy and Resources Ltd. ("Petrobank"), PetroBakken Energy Ltd. ("PetroBakken") and the shareholders of
TriStar. We have complied with Canadian generally accepted standards for an auditor’s involvement with offering
documents.
We consent to the use in the above mentioned Information Circular of our report to the Directors of PetroBakken on
the balance sheet of PetroBakken as at July 30, 2009. Our report is dated August 31, 2009.
We also consent to the use in the above mentioned Information Circular of our report to the Directors of Petrobank
on the balance sheets of Petrobank's Canadian Business Unit as at December 31, 2008 and 2007 and the statements
of operations, comprehensive income, retained earnings and net investment and cash flow for the years ended
December 31, 2008, 2007 and 2006. Our report is dated August 31, 2009.
(signed) "Deloitte & Touche LLP"
Chartered Accountants
Calgary, Alberta
August 31, 2009
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CONSENT OF KPMG LLP
We have read the Information Circular and Proxy Statement (the "Information Circular") of TriStar Oil & Gas Ltd.
("TriStar") dated August 31, 2009 relating to the proposed plan of arrangement involving TriStar, Petrobank Energy
and Resources Ltd., PetroBakken Energy Ltd. and the shareholders of TriStar. We have complied with Canadian
generally accepted standards for an auditor’s involvement with offering documents.
We consent to the incorporation by reference in the above-mentioned Information Circular of our report to the
shareholders of TriStar Oil & Gas Ltd. on the consolidated balance sheets of TriStar Oil & Gas Ltd. as at December
31, 2008 and 2007 and the consolidated statements of operations, comprehensive income (loss) and retained
earnings (deficit) and cash flows for the years then ended. Our report is dated March 9, 2009.
(signed) "KPMG LLP"
Chartered Accountants
Calgary, Canada
August 31, 2009
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APPENDIX "A"
ARRANGEMENT RESOLUTION
_______________
BE IT RESOLVED THAT:
1.
the arrangement (the "Arrangement") under Section 193 of the Business Corporations Act (Alberta),
substantially as set forth in the plan of arrangement ("Plan of Arrangement") attached as Schedule "A" to
Appendix "C" to the information circular of TriStar Oil & Gas Ltd. ("TriStar") dated August 31, 2009 (the
"Information Circular"), is hereby approved and authorized;
2.
the arrangement agreement (the "Arrangement Agreement") dated August 4, 2009 among TriStar,
PetroBakken Energy Ltd. and Petrobank Energy and Resources Ltd., as amended effective August 31,
2009, pursuant to which the parties thereto have proposed to implement the Arrangement, a copy of which
is attached as Appendix "C" to the Information Circular, with such amendments or variations thereto made
in accordance with the terms of the Arrangement Agreement as may be approved by the persons referred to
in paragraph 4 hereof, is hereby confirmed, ratified and approved;
3.
notwithstanding that this resolution has been duly passed and/or has received the approval of the Court of
Queen's Bench of Alberta, the board of directors of TriStar may, without further notice to or approval of the
holders of common shares of TriStar, amend or terminate the Arrangement Agreement or the Plan of
Arrangement or revoke this resolution at any time prior to the filing of Articles of Arrangement giving
effect to the Arrangement; and
4.
any director or officer of TriStar is hereby authorized, for and on behalf of TriStar, to execute and deliver
Articles of Arrangement and to execute, with or without the corporate seal, and, if, appropriate, deliver all
other documents and instruments and to do all other things as in the opinion of such director or officer may
be necessary or desirable to implement this resolution and the matters authorized hereby, such
determination to be conclusively evidenced by the execution and delivery of any such document or
instrument, and the taking of any such action.
A-1
APPENDIX "B"
INTERIM ORDER
B-1
Action No. 0901-12764
IN THE COURT OF QUEEN’S BENCH OF ALBERTA
JUDICIAL DISTRICT OF CALGARY
IN THE MATTER OF SECTION 193 OF THE BUSINESS
CORPORATIONS ACT, R.S.A. 2000, c. B-9, AS AMENDED;
AND IN THE MATTER OF A PROPOSED ARRANGEMENT INVOLVING
TRISTAR OIL & GAS LTD., PETROBANK ENERGY AND RESOURCES LTD., PETROBAKKEN
ENERGY LTD. AND THE SHAREHOLDERS OF
TRISTAR OIL & GAS LTD.
INTERIM ORDER
BEFORE THE HONOURABLE
)
JUSTICE K.M. EIDSVIK
)
IN CHAMBERS
)
AT THE COURT HOUSE, AT CALGARY,
ALBERTA, ON THE 31ST DAY OF AUGUST
2009
UPON the Petition (the "Petition") of TriStar Oil & Gas Ltd. (“TriStar”);
AND UPON reading the Petition and the Affidavit of Jason Zabinsky, filed;
AND UPON hearing counsel for TriStar;
AND UPON noting that the Executive Director of the Alberta Securities Commission (the "Executive Director")
has been notified of the proposed application as required by subsection 193(8) of the Business Corporations Act,
R.S.A. 2000, c. B-9 (the "ABCA") and does not intend to appear or make submissions;
FOR THE PURPOSES OF THIS ORDER:
(a)
the capitalized terms not defined in this Order shall have the meanings attributed to them in the
Information Circular and Proxy Statement of TriStar dated August 31, 2009 (the "Information
Circular"), a draft copy of which is attached as Exhibit “A” to the Affidavit of Jason Zabinsky, Chief
Financial Officer and Vice President, Finance of TriStar, sworn August 31, 2009 (the "Zabinsky
Affidavit"); and
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(b)
all references to "Arrangement" used herein mean the Plan of Arrangement as described in the
Zabinsky Affidavit and in the form attached as Schedule A to the Arrangement Agreement, as
amended, which is attached as Appendix B to the Information Circular.
IT IS HEREBY ORDERED, DECLARED AND DIRECTED THAT:
1.
The proposed course of action is an "Arrangement" within the definition of the ABCA and the Petitioners
may proceed with the Plan of Arrangement, as described in the Zabinsky Affidavit.
General
2.
TriStar shall seek approval of the Arrangement by the holders of common shares (the “TriStar Shares”) of
TriStar (the "TriStar Shareholders"), in the manner set forth below.
3.
TriStar shall convene a special meeting (the “TriStar Meeting”) of the TriStar Shareholders on or about
September 30, 2009, to consider among other things, and, if deemed advisable, to pass, with or without
variation, a special resolution (the “TriStar Arrangement Resolution”) approving a plan of arrangement
(the “Arrangement”) in respect of TriStar, Petrobank Energy and Resources Ltd. (“Petrobank”),
PetroBakken Energy Ltd. (“PetroBakken”) and the TriStar Shareholders as contemplated in the
Arrangement. A true copy of the Arrangement in its substantially final form is included as Schedule “A” of
Appendix C to the Information Circular that is Exhibit “A” to the Zabinksy Affidavit.
The TriStar
Shareholders may further deal with any other items of business as may be proposed and properly disclosed in
the Information Circular.
4.
The TriStar Meeting shall be called, held and conducted in accordance with the ABCA and the articles and
by-laws of TriStar, subject to what may be provided hereafter.
Notice of TriStar Meeting
5.
The only persons entitled to notice of the TriStar Meeting shall be the TriStar Shareholders of record as of
August 31, 2009 (the “Record Date”), and the directors and auditors of TriStar.
6.
At least twenty-one days (exclusive of the date of mailing or delivery but inclusive of the date of the TriStar
Meeting) prior to the day of the TriStar Meeting, TriStar shall send:
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(a)
the Notice of the Special Meeting of the TriStar Shareholders;
(b)
the Notice of Petition; and
(c)
the Information Circular and Proxy Statement;
all in substantially the forms contained in Exhibit “A” to the Zabinsky Affidavit, with such amendments as
counsel for TriStar may advise are necessary or desirable, provided that such amendments are not inconsistent
with the terms of this Order, to the TriStar Shareholders of record as of the Record Date and to the directors
and auditors of TriStar, by mailing the same by prepaid ordinary mail or by delivering the same by direct
courier at the expense of TriStar. Such mailing and delivery shall constitute good and sufficient service of
notice of the Petition, the TriStar Meeting and the hearing in respect of the Petition.
7.
The accidental omission to give notice of the TriStar Meeting to, or the non-receipt of the notice by, one or
more of the aforesaid persons, shall not invalidate any resolution passed or proceedings taken at the TriStar
Meeting.
Conduct of the TriStar Meeting
8.
The registered TriStar Shareholders present in person or represented by proxy at the TriStar Meeting shall be
the only persons entitled to vote on the TriStar Arrangement Resolution. On the TriStar Arrangement
Resolution, holders of issued and outstanding TriStar Shares as at the Record Date are entitled to one vote for
each TriStar Share held.
9.
The requisite majority for the approval of the TriStar Arrangement Resolution shall be at least 66⅔% of the
votes cast by the TriStar Shareholders present in person or represented by proxy at the TriStar Meeting.
10.
To be valid, proxies must be deposited with TriStar in the manner described in the Information Circular.
11.
An officer or a director of TriStar, or failing them, any person to be chosen at the TriStar Meeting, shall be the
Chair of the TriStar Meeting
12.
The quorum for the TriStar Meeting shall be two persons present in person or represented by proxy and
holding or representing not less than five percent (5%) of the outstanding TriStar Shares entitled to be voted
at the TriStar Meeting. If no quorum of TriStar Shareholders is present within thirty (30) minutes of the
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appointed TriStar Meeting time, the TriStar Meeting shall stand adjourned to the same day in the next week if
a Business Day, and, if not a business Day, to the next Business Day following one week after the day
appointed for the TriStar Meeting, at the same time and place or as may otherwise be determined by the Chair
of the TriStar Meeting, and at such adjourned meeting, those persons present in person or represented by
proxy, entitled to vote at such meeting, if at least two, shall constitute a quorum for the adjourned meeting.
Dissent Rights
13.
The registered TriStar Shareholders shall have the right to dissent from the TriStar Arrangement Resolution in
accordance with the provisions of Section 191 of the ABCA, as modified by this Order, and are entitled to be
paid the fair value of their TriStar Shares in respect of which such right of dissent is exercised, provided that:
(a)
notwithstanding Subsection 191(5) of the ABCA, the written objection to the TriStar Arrangement
Resolution approving the Arrangement referred to in Subsection 191(5) of the ABCA which is
required to be sent to TriStar must be received at or before 4:00 p.m. (Calgary time) on the Business
Day immediately preceding the TriStar Meeting, which notice must be received by TriStar care of its
solicitors, Heenan Blaikie LLP, 425 -1st Street S.W., Calgary, Alberta, T2P 3L8, Attention: Cynthia
Amsterdam;
(b)
a dissenting TriStar Shareholder must abstain from voting his or her TriStar Shares at the TriStar
Meeting either in person or represented by proxy, with respect to the TriStar Arrangement Resolution;
(c)
a TriStar Shareholder may not exercise the right of dissent in respect of only a portion of such
holder’s TriStar Shares, but may dissent only with respect to all of the TriStar Shares held by the
holder;
(d)
the TriStar Shareholder exercising such rights of dissent must otherwise comply with the
requirements of Section 191 of the ABCA;
(e)
payment of the fair value of TriStar Shares in respect of which the right of dissent is exercised, shall
be made by PetroBakken;
(f)
An application may be made to this Honourable Court by PetroBakken or by any TriStar Shareholder
to fix the fair value of the dissenting TriStar Shareholder’s Shares; and
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(g)
All TriStar Shares held by TriStar Shareholders who exercise their right of dissent will, if the holders
are ultimately entitled to be paid cash for the fair value thereof by PetroBakken, be transferred to
PetroBakken in exchange for such fair value or will, if such TriStar Shareholders ultimately are not so
entitled to be paid the fair value thereof, be deemed transferred to PetroBakken in exchange for
PetroBakken Class A Common Shares on the same basis as all other TriStar Shareholders under the
Arrangement.
14.
Notice to TriStar Shareholders of the right of dissent with respect to the TriStar Arrangement Resolution and
the right to receive, subject to the provisions of this Order and the ABCA, the fair value of their TriStar
Shares shall be good and sufficiently given by including information with respect thereto in the Information
Circular.
15.
The mailing of the Notice of Special Meeting, the Notice of Petition and Information Circular and Proxy
Statement referred to in paragraph 6 of this Order, in accordance with the provisions of this Order, shall
constitute good and sufficient service in respect of this Petition upon all persons who are entitled to receive
such notice pursuant to this Order and no other form of service need be made and no other material need be
served on such persons in respect of these proceedings, and service of the Petition and Affidavit is dispensed
with.
Final Approval
16.
Upon approval of the Arrangement at the TriStar Meeting in the manner set forth in this Order, TriStar may
apply before this Court for approval of the Arrangement, which application (the “Final Application”) shall
be heard by this Honourable Court at the Court House, 601 – 5th Street S.W., in the City of Calgary, in the
Province of Alberta, on September 30, 2009, at 1:30 p.m. (Calgary time) or at such time as the Court may
entertain it.
17.
Any TriStar Shareholder and any other interested persons may appear on the Final Application provided that
such holder or person shall file with this Court and serve on TriStar in care of its solicitors on or before 12:00
noon (Calgary time), on September 25, 2009, a Notice of Intention to Appear setting out the address for
service in respect of such holder or person, and indicating whether such holder or person intends to support or
oppose the Final Application or make submissions thereat, together with any evidence or materials which are
to be presented to this Court, such Notice of Intention to Appear to be effected by delivery at the address set
forth below:
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425 – 1st Street S.W., 12th Floor
Fifth Avenue Place
Calgary, Alberta T2P 3L8
Attention: Cynthia Amsterdam
18.
In the event that the Final Application is adjourned, only those persons who have filed and served a Notice of
Intention to Appear shall be served with the notice of the adjourned date.
19.
Service of the notice of this application on any person is hereby dispensed with.
20.
TriStar is entitled at any time to seek leave to vary this Interim Order upon such terms and the giving of such
notice as this Court may direct.
___(signed) "K.M. Eidsvik"___________
J.C.Q.B.A.
st
ENTERED this 31 day of August, 2009
_"V.A. Brandt"______________________
Clerk of the Court
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APPENDIX "C"
ARRANGEMENT AGREEMENT
C-1
ARRANGEMENT AGREEMENT
THIS ARRANGEMENT AGREEMENT is dated as of the 4th day of August, 2009,
BETWEEN:
PETROBAKKEN ENERGY LTD., a corporation incorporated under the laws of
the Province of Alberta (“PetroBakken”)
- and PETROBANK ENERGY AND RESOURCES LTD. a corporation incorporated
under the laws of the Province of Alberta (“Petrobank”)
- and TRISTAR OIL & GAS LTD., a corporation incorporated under the laws of the
Province of Alberta (“TriStar”)
WHEREAS PetroBakken is a wholly-owned subsidiary of Petrobank;
WHEREAS PetroBakken, Petrobank and TriStar wish to propose an arrangement involving TriStar and its
securityholders;
AND WHEREAS PetroBakken, Petrobank and TriStar intend to carry out the transactions contemplated by this
Agreement by way of an arrangement under the provisions of the Business Corporations Act (Alberta);
AND WHEREAS PetroBakken, Petrobank and TriStar have entered into this Agreement to provide for the matters
referred to in the foregoing recitals and for other matters relating to such arrangement;
NOW THEREFORE, in consideration of the covenants and agreements herein contained and other good and
valuable consideration (the receipt and sufficiency of which are hereby acknowledged), PetroBakken, Petrobank and
TriStar do hereby covenant and agree as follows:
ARTICLE 1 - - INTERPRETATION
1.1
Definitions
In this Agreement, unless there is something in the context or subject matter inconsistent therewith, the
following defined terms have the meanings hereinafter set forth:
(a)
“ABCA” means the Business Corporations Act, R.S.A. 2000, c. B-9;
(b)
“Acquisition Proposal” means any inquiry or the making of any proposal or offer to TriStar or its
shareholders from any Person, whether or not subject to due diligence or other conditions and
whether oral or in writing, which constitutes, or may reasonably be expected to lead to (in either case
whether in one transaction or a series of transactions): (i) an acquisition from TriStar or its
shareholders of securities of TriStar (other than on exercise of currently outstanding TriStar Options)
that, when taken together with the securities of TriStar held by the proposed acquirer, would
constitute more than 20% of the voting equity securities of TriStar; (ii) any acquisition of all or a
material portion of the assets of TriStar or any of its subsidiaries; (iii) an amalgamation, arrangement,
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merger, or consolidation involving TriStar or any of its subsidiaries; or (iv) any take-over bid, issuer
bid, exchange offer, recapitalization, liquidation, dissolution, reorganization into a royalty trust or
income fund or similar transaction involving TriStar or its subsidiaries or any other transaction, the
consummation of which would or could reasonably be expected to impede, interfere with, prevent or
delay the transactions contemplated by this Agreement or the Arrangement or which would or could
reasonably be expected to materially reduce the benefits to PetroBakken under this Agreement;
(c)
“Agreement”, “herein”, “hereof”, “hereto”, “hereunder” and similar expressions mean and refer to
this arrangement agreement (including the schedules hereto) as supplemented, modified or amended,
and not to any particular article, section, schedule or other portion hereof;
(d)
“Arrangement” means the arrangement pursuant to Section 193 of the ABCA, on the terms and
conditions set forth in the Plan of Arrangement;
(e)
“Arrangement Resolution” means the special resolution in respect of the Arrangement to be
considered by the TriStar Shareholders at the TriStar Meeting;
(f)
“Articles of Arrangement” means the articles of arrangement in respect of the Arrangement required
under Subsection 193(10) of the ABCA to be sent to the Registrar after the Final Order has been
granted, giving effect to the Arrangement;
(g)
“Assets” means Petrobank’s and all of its subsidiaries’ Canadian conventional petroleum and natural
gas assets and all tangibles, intangibles and facilities related thereto, including all of the assets
presently owned by or being held for the benefit of Petrobank Production Partnership and Petrobank
Oil and Gas Ventures, LP and defined in Petrobank’s public filings as its “Canadian Business Unit”
as evaluated in the independent engineering evaluation of the Petrobank’s Canadian Business Unit’s
crude oil and natural gas reserves in Canada prepared by Sproule Associates Limited, dated March
11, 2009, with an effective date of December 31, 2008 and such additional assets and liabilities as
Petrobank and TriStar shall agree, acting reasonably, to be transferred, directly or indirectly, by
Petrobank to PetroBakken prior to the Effective Time. For further clarity the Assets include all of the
petroleum and natural gas assets and all tangibles, intangibles and facilities related thereto, that are
held by or for the benefit of Petrobank and its subsidiaries other than such interests that form part of
Petrobank’s “Heavy Oil Business Unit” and “Latin American Business Unit” as such business units
are defined in Petrobank’s public filings;
(h)
“Business Day” means with respect to any action to be taken, any day, other than Saturday, Sunday
or a statutory holiday in the place where such action is to be taken;
(i)
“Certificate” means the certificate or other confirmation of filing to be issued by the Registrar
pursuant to Subsection 193(11) of the ABCA giving effect to the Arrangement;
(j)
“Circular” means the management proxy circular of TriStar to be sent by TriStar to the TriStar
Shareholders in connection with the TriStar Meeting;
(k)
“Common Shares” means common shares of TriStar;
(l)
“Competition Act” means the Competition Act, R.S. 1985, c. C-34;
(m)
“Confidentiality Agreement” means the confidentiality agreement between Petrobank and TriStar
dated June 3, 2009 in respect of information relating to TriStar;
(n)
“Court” means the Court of Queen’s Bench of Alberta;
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(o)
“Effective Date” means the date the Arrangement becomes effective under the ABCA which is
expected to occur on October 1, 2009 or such earlier or later date as may be agreed to by TriStar,
PetroBakken and Petrobank;
(p)
“Effective Time” means 12:01 a.m. (Calgary time) on the Effective Date;
(q)
“Encumbrance” includes, without limitation, any mortgage, pledge, assignment, charge, lien,
security interest, claim, trust, royalty or carried, participation, net profits or other third party interest
and any agreement, option, right of first refusal, right or privilege (whether by law, contract or
otherwise) capable of becoming any of the foregoing;
(r)
“Environment” means the natural environment (including soil, land surface or subsurface strata,
surface waters, groundwater, sediment, ambient air (including all layers of the atmosphere), organic
and inorganic matter and living organisms, and any other environmental medium or natural resource
and all sewer systems;
(s)
“Environmental Laws” means all applicable Canadian federal, provincial, municipal or local laws,
regulations, orders, government decrees or ordinances relating to public health and safety, noise
control, pollution or the protection of the Environment or to the generation, production, installation,
use, storage, treatment, transportation, Release or threatened Release of Hazardous Substances,
including civil responsibility for acts or omissions with respect to the Environment;
(t)
“Fairness Opinion” means the opinion of Macquarie Capital Markets Canada Ltd. to the effect that
the consideration to be received under the Arrangement is fair, from a financial point of view, to the
TriStar Shareholders;
(u)
“Final Order” means the order of the Court approving the Arrangement pursuant to Subsection
193(9) of the ABCA in respect of TriStar, as such order may be affirmed, amended or modified by
any court of competent jurisdiction;
(v)
“GLJ” means GLJ Petroleum Consultants Ltd., independent oil and gas reservoir engineers;
(w)
“Governmental Authority” means any federal, provincial, municipal or other political subdivision,
government, department, commission, board, bureau, agency or instrumentality;
(x)
“Hazardous Substances” means any waste or other substance that is prohibited, listed, defined,
designated or classified as dangerous, hazardous, radioactive, explosive or toxic or a pollutant or a
contaminant under or pursuant to any applicable Environmental Laws, and specifically including
petroleum and all derivatives thereof or synthetic substitutes therefor;
(y)
“Incentive Shares” means entitlements for the issuance of 2,691,673 Common Shares which have
been granted or will be granted prior to the Effective Date to certain directors, officers, employees
and consultants of TriStar pursuant to TriStar’s Stock Incentive Plan;
(z)
“Interim Order” means an interim order of the Court concerning the Arrangement under Subsection
193(4) of the ABCA in respect of TriStar, containing declarations and directions with respect to the
Arrangement and the holding of the TriStar Meeting, as such order may be affirmed, amended or
modified by any court of competent jurisdiction;
(aa)
“Laws” means all laws, by-laws, statutes, rules, regulations, principles of law, orders, ordinances,
protocols, codes, guidelines, policies, notices, directions and judgments or other requirements and the
terms and conditions of any grant of approval, permission, authority or license and the term
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“Applicable” with respect to such laws and in a context that refers to one or more Parties, means such
Laws as are applicable to such Party or its business, undertaking, property or securities and emanate
from a Person having jurisdiction over the Party or Parties or its or their business, undertaking,
property or securities, and “Laws” includes Environmental Laws;
(bb)
“Mailing Date” means the date on which the Circular is mailed to the TriStar Shareholders in
connection with the TriStar Meeting;
(cc)
“Material Adverse Change” or “Material Adverse Effect” means, with respect to PetroBakken and
Petrobank, any matter or action that has an effect or change that is, or would reasonably be expected
to be, material and adverse to the business, operations, assets, capitalization, financial condition or
prospects of such Parties and their subsidiaries, in respect of the Assets, PetroBakken and the
Petrobank Reorganization taken as a whole, and with respect to TriStar any matter or action that has
an effect or change that is, or would reasonably be expected to be, material and adverse to the
business, operations, assets, capitalization, financial condition or prospects of TriStar and its
subsidiaries, taken as a whole, whether before or after giving effect to the transactions contemplated
by this Agreement, other than any matter, action, effect or change relating to or resulting from: (i)
general economic, financial, currency exchange, securities or commodity prices in Canada or
elsewhere, (ii) conditions affecting the oil and gas exploration, exploitation, development and
production industry as a whole, and not specifically relating to any Party and/or its subsidiaries,
including changes in the Tax Act and other Applicable Laws relating to tax, (iii) any decline in crude
oil or natural gas prices on a current or forward basis, (iv) any matter which was publicly disclosed or
communicated in writing to the other Party as of the date of the Agreement, or (v) any changes arising
from matters permitted or contemplated by this Agreement or consented to or approved in writing by
the other Party;
(dd)
“material subsidiary” means each subsidiary of Petrobank, PetroBakken or TriStar, as the case may
be, the total assets of which constituted more than ten percent of the consolidated assets of such Party
and its subsidiaries or the total revenues of which constituted more than ten percent of the
consolidated revenues of such Party and its subsidiaries, in each case as set out in the consolidated
financial statements of such Party for the year ended December 31, 2008;
(ee)
“MI 61-101” means Multilateral Instrument 61-101 – Protection of Minority Securityholders in
Special Transactions – adopted by the securities regulatory authorities in the provinces of Ontario and
Quebec;
(ff)
“Optionholders” means the holders from time to time of Options;
(gg)
“Options” means the outstanding stock options of TriStar, whether or not vested, to acquire Common
Shares pursuant to TriStar’s Stock Option Plan;
(hh)
“Parties” means PetroBakken, Petrobank and TriStar; and “Party” means any one of them, or where
implied by the context, means PetroBakken and Petrobank or TriStar as the case may be;
(ii)
“Person” includes any individual, firm, partnership, joint venture, venture capital fund, association,
trust, trustee, executor, administrator, legal personal representative, estate group, body corporate,
corporation, unincorporated association or organization, Governmental Authority, syndicate or other
entity, whether or not having legal status;
(jj)
“PetroBakken” means PetroBakken Energy Ltd., a corporation incorporated under the ABCA;
(kk)
“PetroBakken Class A Shares” means class A common shares of in the capital of PetroBakken;
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(ll)
“PetroBakken Class B Shares” means the class B common shares in the capital of PetroBakken;
(mm)
“PetroBakken Debt” means total indebtedness, including obligations under capital leases, long-term
debt, bank debt and working capital (each as defined in accordance with Canadian generally accepted
accounting principles), which shall be deemed to include the amount of $25 million allocated to a
land acquisition as disclosed to TriStar prior to the date hereof, and to be completed by Petrobank or
PetroBakken prior to the Effective Time and shall exclude transaction costs associated with the
Arrangement;
(nn)
“PetroBakken Information” means the information describing the Assets, PetroBakken and its
business, operations, liabilities and affairs specifically provided by Petrobank or PetroBakken to
TriStar for inclusion in the Circular;
(oo)
“PetroBakken Operating Partnership” means a partnership to be formed pursuant to the Petrobank
Reorganization, which will be a direct and indirect wholly-owned subsidiary of PetroBakken, and
which will own the Assets on the Effective Date;
(pp)
“PetroBakken Partnership” means a partnership to be formed pursuant to the Petrobank
Reorganization, which will be a direct and indirect wholly-owned subsidiary of PetroBakken, and
which will own 99.99% of the Petrobank Operating Partnership on the Effective Date;
(qq)
“PetroBakken Public Record” means all information filed by Petrobank relating to the Assets, since
December 31, 2008, with any securities commission or similar securities regulatory authority in
Canada in compliance, or intended compliance, with Applicable Laws;
(rr)
“Petrobank” means Petrobank Energy and Resources Ltd., a corporation incorporated under the
ABCA;
(ss)
“Petrobank Confidentiality Agreement” means the confidentiality agreement entered into between
Petrobank and TriStar, dated June 29, 2009, in respect of information relating to Petrobank;
(tt)
“Petrobank Financial Statements” means, collectively, the audited financial statements of
Petrobank for the year ended December 31, 2008 together with the notes thereto and the report of the
auditors thereon and the interim unaudited financial statements of Petrobank for the three month
period ended March 31, 2009, together with the notes thereto;
(uu)
“Petrobank Reorganization” means the reorganization transactions, including the conveyance of the
Assets (including related obligations) from Petrobank and its subsidiaries to PetroBakken through a
series of transactions and events, and the assumption of liabilities and entering into a new banking
facility on customary and reasonable commercial terms, which shall result in the PetroBakken Debt,
assuming current forward-strip commodity prices, being equal to an amount not exceeding in the
aggregate $415 million, excluding financial instruments and associated liability for Taxes, before
costs associated with the Arrangement, immediately prior to the Effective Time unless prior written
consent of TriStar, acting reasonably, is obtained, to be undertaken by Petrobank on or before the
Effective Date substantially in the form disclosed by Petrobank to TriStar in writing on terms and
conditions satisfactory to TriStar, acting reasonably, provided that such terms and conditions will be
deemed reasonable if they do not result in a material difference from the form disclosed by Petrobank
to TriStar in writing prior to the date hereof or do not result in a Material Adverse Effect on
PetroBakken or the Assets;
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(vv)
“Petrobank Sproule Report” means the independent engineering evaluation of Petrobank’s
“Canadian Business Unit” crude oil and natural gas reserves in Canada prepared by Sproule, dated
March 11, 2009, with an effective date of December 31, 2008;
(ww)
“Plan of Arrangement” means the plan of arrangement substantially in the form set out in Schedule
“A” to this Agreement as amended or supplemented from time to time in accordance with Article 6
thereof and Article 7 hereof;
(xx)
“Registrar” means the Registrar of Corporations for the Province of Alberta duly appointed under
Section 263 of the ABCA;
(yy)
“Release” means any sudden, intermittent or gradual release, spill, leak, pumping, addition, pouring,
emission, emptying, discharge, migration, injection, escape, leaching, disposal, dumping, deposit,
spraying, burial abandonment, incineration, seepage, placement or introduction of a Hazardous
Substance, whether accidental or intentional, into the Environment;
(zz)
“Returns” shall mean all reports, estimates, elections, designations, forms, declarations of estimated
tax, information statements and returns relating to, or required to be filed in connection with, any
Taxes;
(aaa)
“Sproule” means Sproule Associates Limited;
(bbb)
“subsidiary” means, with respect to a specified entity at a particular time, any:
(i)
body corporate of which more than 50% of the outstanding shares ordinarily entitled to elect
a majority of the board of directors thereof (whether or not shares of any other class or classes
shall or might be entitled to vote upon the happening of any event or contingency) are at that
time owned directly or indirectly by such specified entity or indirectly by or for the benefit of
such specified entity; and
(ii)
organization or entity which is not a body corporate, of which more than 50% of the voting or
equity interests (including, for a partnership other than a limited partnership, the voting or
equity interests in such partnership) are at that time owned, directly or indirectly, by such
specified entity or indirectly by or for the benefit of such specified entity and in the case of a
partnership (including a limited partnership), of which such specified entity, or a subsidiary
of such specified entity, is at that time a general partner;
(ccc)
“Superior Proposal” has the meaning set forth in Section 3.4(b)(v)(A.) hereof;
(ddd)
“Tax Act” means the Income Tax Act (Canada) and the regulations thereunder, all as amended from
time to time;
(eee)
“Taxes” shall mean all taxes, however denominated, including any interest, penalties or other
additions that may become payable in respect thereof, imposed by any federal, provincial, territorial,
state, local or foreign government or any agency or political subdivision of any such government,
which taxes shall include, without limiting the generality of the foregoing, all income or profits taxes
(including, but not limited to, federal income taxes and provincial income taxes), payroll and
employee withholding taxes, unemployment insurance, social insurance taxes, sales and use taxes,
goods and services taxes, commodity taxes, ad valorem taxes, excise taxes, franchise taxes, gross
receipts taxes, business license taxes, occupation taxes, real and personal property taxes, stamp taxes,
environmental taxes, transfer taxes, workers compensation and other governmental charges, and other
obligations of the same or of a similar nature to any of the foregoing, which PetroBakken, Petrobank
C-7
or TriStar (or any of their respective subsidiaries), as the case may be, is required to pay, withhold,
remit or collect;
(fff)
“TriStar Debt” means total indebtedness, including obligations under capital leases, long-term debt,
bank debt and working capital (each as defined in accordance with Canadian generally accepted
accounting principles), excluding financial instruments and associated liability for Taxes and
excluding transaction costs associated with the Arrangement;
(ggg)
“TriStar Financial Statements” means, collectively, the audited consolidated financial statements of
TriStar for the year ended December 31, 2008, together with the notes thereto and the report of the
auditors thereon and the interim audited financial statements of TriStar for the three month period
ended March 31, 2009, together with the notes thereto;
(hhh)
“TriStar Incentive Shareholders” means the holders of Incentive Shares;
(iii)
“TriStar Lock-up Agreements” means agreements between PetroBakken and the TriStar Lock-Up
Securityholders pursuant to which the TriStar Lock-Up Securityholders have agreed to vote the
TriStar Securities beneficially owned or controlled by the TriStar Lock-Up Securityholders in favour
of the Arrangement Resolution and to otherwise support the Arrangement and other related matters to
be considered at the TriStar Meeting;
(jjj)
“TriStar Lock-up Securityholders” means those TriStar Securityholders that have entered into
TriStar Lock-Up Agreements with PetroBakken;
(kkk)
“TriStar Meeting” means the special meeting of TriStar Shareholders to be held to consider the
Arrangement Resolution and related matters, and any adjournments thereof;
(lll)
“TriStar Public Record” means all information filed by TriStar since December 31, 2008 with any
securities commission or similar securities regulatory authority in Canada in compliance, or intended
compliance, with Applicable Laws;
(mmm) “TriStar Securities” means, collectively, the Common Shares, the Incentive Shares and the Options;
1.2
(nnn)
“TriStar Securityholders” means, collectively, the TriStar Shareholders, TriStar Incentive
Shareholders and the Optionholders;
(ooo)
“TriStar Shareholders” means the holders from time to time of Common Shares;
(ppp)
“TriStar Reserve Report” means, collectively, the independent engineering evaluations of TriStar’s
crude oil, natural gas and natural gas liquids reserves prepared by Sproule and GLJ, with effective
dates of December 31, 2008; and
(qqq)
“TSX” means the Toronto Stock Exchange.
Interpretation Not Affected by Headings, etc.
The division of this Agreement into articles, sections and subsections is for convenience of reference only and
does not affect the construction or interpretation of this Agreement. The terms “this Agreement”, “hereof’, “herein”
and “hereunder” and similar expressions refer to this Agreement (including Schedule A hereto) and not to any
particular article, section or other portion hereof and include any agreement or instrument supplementary or ancillary
hereto.
C-8
1.3
Number, etc.
Words importing the singular number include the plural and vice versa, words importing the use of any
gender include all genders, and words importing persons include firms and corporations and vice versa.
1.4
Date for Any Action
If any date on which any action is required to be taken hereunder by any of the Parties is not a Business Day,
such action is required to be taken on the next succeeding day which is a Business Day.
1.5
Entire Agreement
This Agreement, the Confidentiality Agreement, the Petrobank Confidentiality Agreement and the TriStar
Lock-Up Agreements, together with the agreements and documents herein and therein referred to, constitute the entire
agreement among the Parties pertaining to the subject matter hereof and supersede all prior agreements,
understandings, negotiations and discussions, whether oral or written, among the Parties with respect to the subject
matter hereof. To the extent there is any inconsistency between this Agreement and the Confidentiality Agreement or
the Petrobank Confidentiality Agreement, this Agreement shall supercede the Confidentiality Agreement or the
Petrobank Confidentiality Agreement, as applicable.
1.6
Currency
All sums of money which are referred to in this Agreement are expressed in lawful money of Canada.
1.7
Accounting Matters
Unless otherwise stated, all accounting terms used in this Agreement shall have the meanings attributable
thereto under Canadian generally accepted accounting principles and all determinations of an accounting nature that
are required to be made shall be made in a manner consistent with Canadian generally accepted accounting principles.
1.8
Disclosure in Writing
Reference to disclosure in writing herein shall, in the case of PetroBakken or Petrobank, include disclosure to
PetroBakken, Petrobank or their representatives, or in the case of TriStar, include disclosure to TriStar or its
representatives.
1.9
References to Legislation
References in this Agreement to any statute or sections thereof shall include such statute as amended or
substituted and any regulations promulgated thereunder from time to time in effect.
1.10
Enforceability
All representations, warranties, covenants and opinions in or contemplated by this Agreement as to the
enforceability of any covenant, agreement or document are subject to enforceability being limited by applicable
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other laws relating to or affecting
creditors’ rights generally, and the discretionary nature of certain remedies (including specific performance and
injunctive relief and general principles of equity).
1.11
Schedules
The following schedules attached hereto are incorporated into and form an integral part of this Agreement:
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Schedule A - Plan of Arrangement
1.12
Knowledge
In this Agreement, references to "to the knowledge of" means the actual knowledge of the John D. Wright,
Corey Ruttan and R. Gregg Smith of Petrobank (in the case of PetroBakken and Petrobank) or Brett Herman, Jason
Zabinsky and Jeremy Wallis of TriStar (in the case of TriStar), in each case after reasonable inquiry, and such officers
shall make such inquiry as is reasonable in the circumstances.
1.13
Other Definitional and Interpretive Provisions
(a)
References in this Agreement to the words "include", "includes" or "including" shall be deemed to be
followed by the words "without limitation" whether or not they are in fact followed by those words or
words of like import.
(b)
Any capitalized terms used in any exhibit or Schedule but not otherwise defined therein, shall have
the meaning as defined in this Agreement.
(c)
References to any agreement or contract are to that agreement or contract as amended, modified or
supplemented from time to time in accordance with the terms hereof and thereof. Any reference in
this Agreement to a Person includes the heirs, administrators, executors, legal personal
representatives, predecessors, successors and permitted assigns of that Person.
ARTICLE 2 - - THE ARRANGEMENT
2.1
Plan of Arrangement
(a)
PetroBakken, Petrobank and TriStar agree that the Arrangement shall be implemented in accordance
with and subject to the terms and conditions contained in this Agreement and the Plan of
Arrangement;
(b)
as soon as reasonably practicable, but in any event not later than August 31, 2009 or such other date
as is agreed to by PetroBakken, Petrobank and TriStar, TriStar shall apply to the Court, in a manner
reasonably acceptable to PetroBakken and Petrobank, pursuant to section 193(4) of the ABCA for the
Interim Order and thereafter diligently seek the Interim Order and, upon receipt thereof, TriStar shall
forthwith carry out the terms of the Interim Order to the extent applicable to it;
(c)
provided all necessary approvals for the Arrangement Resolution are obtained from the TriStar
Shareholders, TriStar shall submit, in a manner reasonably acceptable to PetroBakken and Petrobank,
the Arrangement to the Court and apply for the Final Order;
(d)
upon issuance of the Final Order and subject to the conditions precedent in Article 5, each of
PetroBakken and Petrobank and TriStar shall execute such closing documents and instruments and
Tristar shall forthwith proceed to file the Articles of Arrangement, the Final Order and such other
documents as may be required to give effect to the Arrangement with the Registrar pursuant to
Subsection 193(10) of the ABCA, whereupon the transactions comprising the Arrangement shall
occur and shall be deemed to have occurred in the order set out therein without any act or formality;
(e)
TriStar shall permit PetroBakken and Petrobank and their counsel to review and comment upon drafts
of all material to be filed by TriStar with the Court in connection with the Arrangement, including the
Circular and any supplement or amendment thereto and provide counsel to PetroBakken and
Petrobank on a timely basis with copies of any notice of appearance and evidence served on TriStar
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or its counsel in respect of the application for the Interim Order and the Final Order or any appeal
therefrom and of any notice (written or oral) received by TriStar indicating any intention to oppose
the granting of the Interim Order or the Final Order or to appeal the Interim Order or the Final Order;
and
(f)
2.2
TriStar shall not file any material with the Court in connection with the Arrangement or serve any
such material and shall not agree to modify or amend materials so filed or served except as
contemplated hereby or with the prior written consent of PetroBakken and Petrobank, such consent
not to be unreasonably withheld or delayed.
Interim Order
The Interim Order shall provide:
2.3
(a)
for the class of persons to whom notice is to be provided in respect of the Arrangement and the
TriStar Meeting and for the manner in which such notice is to be provided;
(b)
that the TriStar Shareholders shall be entitled to vote with respect to the Arrangement Resolution,
with each TriStar Shareholder being entitled to one vote for each Common Share held; and
(c)
that the requisite majority for the approval of the Arrangement Resolution shall be: (i) two-thirds of
the votes cast by the TriStar Shareholders present in person or by proxy at the TriStar Meeting; and
(ii) a majority of the votes cast by TriStar Shareholders, after excluding the votes cast by those
persons whose votes must be excluded pursuant to MI 61-101.
Information Circular and Meeting
(a)
As promptly as practicable following the execution of this Agreement and in compliance with the
Interim Order and Applicable Laws, TriStar shall:
(i)
prepare the Circular, in consultation with PetroBakken and Petrobank, and cause such
circular to be mailed to the TriStar Shareholders and filed with applicable regulatory
authorities and other governmental authorities in all jurisdictions where the same are required
to be mailed and filed; and
(ii)
convene the TriStar Meeting.
(b)
TriStar shall ensure that the Circular includes the unanimous recommendation of the Board of
Directors of TriStar that the TriStar Shareholders vote in favour of the Arrangement Resolution,
unless such recommendation has been withdrawn, modified or amended in accordance with the terms
of this Agreement and shall include a copy of the Fairness Opinion;
(c)
PetroBakken and Petrobank shall, in a timely manner, furnish TriStar with the PetroBakken
Information; and
(d)
PetroBakken, Petrobank and TriStar shall cooperate in the preparation, filing and mailing of the
Circular. TriStar shall provide PetroBakken, Petrobank and their representatives with a reasonable
opportunity to review and comment on the Circular and any other relevant documentation and shall
incorporate all reasonable comments made by PetroBakken, Petrobank and their counsel, and the
Circular shall be reasonably satisfactory to PetroBakken and Petrobank before it is filed or distributed
to the TriStar Shareholders.
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2.4
Effective Date
The Arrangement shall become effective at the Effective Time on the Effective Date.
2.5
PetroBakken
(a)
the board of directors of PetroBakken shall initially be comprised of nine (9) members, six (6) of
whom shall be determined by Petrobank after consultation with TriStar prior to the Mailing Date and
three (3) of whom shall be determined by TriStar, prior to the Mailing Date, subject to PetroBakken
and Petrobank’s approval acting reasonably, and which shall include Brett Herman as one of TriStar’s
nominees;
(b)
the initial senior officers of PetroBakken shall be John D. Wright as Chairman and Chief Executive
Officer, R. Gregg Smith as President and Chief Operating Officer, and Corey C. Ruttan as Executive
Vice President and Chief Financial Officer;
(c)
on or before September 15, 2009, PetroBakken intends on issuing Confirmation of Employment
letters to all of the TriStar employees which letters will confirm that these employees will continue as
PetroBakken or TriStar employees, as the case may be, following the Effective Date. Should the
employment of any such employee cease on a without cause basis following the Effective Date, that
employee will be treated fairly and, at a minimum, in accordance with the terms of any employment
contract, the Employment Standards Code and the common law. TriStar consultants will have their
consulting or independent contractor agreements continued with TriStar or assigned to PetroBakken,
all on terms and conditions acceptable to PetroBakken, acting reasonably; and
(d)
PetroBakken shall adopt “security based compensation arrangements” (as defined in the TSX
Company Manual) having a maximum dilution effect of 10% on terms consistent with its industry
peer group and that initially results in aggregate dilution not exceeding 7% of outstanding
PetroBakken shares.
ARTICLE 3 - - COVENANTS
3.1
Covenants of PetroBakken and Petrobank
From the date hereof until the earlier of the completion of the Arrangement and the termination of this
Agreement in accordance with Article 8, except with the prior written consent of TriStar (such consent not to be
unreasonably withheld), and except as otherwise expressly permitted or specifically contemplated by this Agreement:
(a)
the business of Petrobank and PetroBakken and the business of their subsidiaries associated with the
Assets shall be conducted only in the usual and ordinary course of business consistent with past
practices (for greater certainty, where it is an operator of any Asset, it shall operate and maintain such
Asset in a proper and prudent manner in accordance with good industry practice and the agreements
governing the ownership and operation of such property);
(b)
except pursuant to the capital expenditure program for the Assets that Petrobank disclosed in writing
to TriStar prior to the execution of this Agreement or except with the written consent of TriStar, or as
contemplated by this Agreement or if not related to the Assets, such consent not to be unreasonably
withheld, Petrobank, PetroBakken shall not, and shall not permit any of their subsidiaries to, directly
or indirectly: (i) acquire any assets with an acquisition cost in excess of $500,000 other than in the
ordinary course of business consistent with past practice; (ii) incur any indebtedness for borrowed
money in excess of existing credit facilities, or any other material liability or obligation or issue any
debt securities or assume, guarantee, endorse or otherwise become responsible for, the obligations of
C-12
any other individual or entity, or make any loans or advances, other than in the ordinary course of
business consistent with past practice or in respect of the Arrangement; (iii) authorize, recommend or
propose any release or relinquishment or any material contract right other than in the ordinary course
of business consistent with past practice; (iv) waive, release, grant or transfer any material rights of
value or modify or change in any material respect any existing material license, lease, contract,
production sharing agreement, government land concession or other material document other than in
the ordinary course of business consistent with past practice; (v) other than Petrobank and
PetroBakken’s intent, as disclosed to TriStar, to enter into additional hedges, swaps or other financial
instruments comprising no greater than 10,000 barrels of oil per day of production from the Assets in
2010 and comprising no greater than 5,000 barrels of oil per day of production from the Assets in
2011, enter into or terminate any hedges, swaps or other financial instruments or like transactions
between the date hereof and the Effective Date without the consent of Tristar; or (vi) authorize or
propose any of the foregoing, or enter into or modify any contract, agreement, commitment or
arrangement to do any of the foregoing;
(c)
PetroBakken, Petrobank and their respective subsidiaries shall not do any of the following:
(i)
conduct any activity or operations that would otherwise be detrimental to the Arrangement; or
(ii)
take any action, refrain from taking any action, permit any action to be taken or not taken,
inconsistent with this Agreement, which might directly or indirectly interfere with or
adversely affect the consummation of the Arrangement;
(d)
other than as necessary to effect the Petrobank Reorganization, neither PetroBakken nor Petrobank
shall directly or indirectly do or permit to occur any of the following: (i) amend its constating
documents in a manner materially adverse to the consideration to be received by TriStar
Shareholders; (ii) declare, set aside or pay any dividend, distribution or payment (whether in cash,
shares or property) in respect of the outstanding PetroBakken Class A Shares or PetroBakken Class B
Shares; (iii) split, combine or reclassify any of the PetroBakken Class A Shares or PetroBakken Class
B Shares unless the Arrangement is amended upon the same terms and conditions; (iv) adopt a plan of
liquidation or arrangement or resolutions providing for the liquidation or dissolution of PetroBakken
or Petrobank; (v) other than as contemplated pursuant to this Agreement, cause PetroBakken to
pursue any material corporate acquisition or disposition, amalgamation, merger, arrangement or
purchase or sale of material assets or make any material change to the business, capital or affairs of
PetroBakken or the Assets; (vi) reduce the stated capital of PetroBakken or any of its outstanding
shares; (vii) other than pursuant to commitments entered into by Petrobank prior to the date of the
Agreement and disclosed in writing to TriStar prior to the execution of this Agreement, pay,
discharge or satisfy any material claims, liabilities or obligations of PetroBakken other than in the
ordinary course of business consistent with past practice; (viii) other than pursuant to commitments
entered into by Petrobank prior to the date of this Agreement and disclosed in writing to TriStar prior
to the execution of this Agreement, sell, dispose of, transfer, convey, encumber, surrender, release or
abandon the whole or any material part of the Assets, other than in the ordinary course of business
consistent with past practices; (ix) terminate any senior employees material to the operation of the
Assets; or (x) enter into or modify any material contract, agreement, commitment or arrangement
with respect of the foregoing;
(e)
neither PetroBakken nor Petrobank shall take any action that would render, or may reasonably be
expected to render, any representation or warranty made by it in this Agreement untrue in any
material respect at any time prior to completion of the Arrangement or termination of this Agreement,
whichever first occurs;
C-13
(f)
PetroBakken and Petrobank will promptly provide to TriStar, for review by TriStar and their counsel,
prior to filing or issuance of the same, any proposed public disclosure document relating to the
Arrangement or the Petrobank Reorganization, including without limitation, any press release or
material change report, subject to PetroBakken and Petrobank’s obligations under Applicable Laws to
make timely disclosure of material information, and TriStar agrees to keep such information
confidential until same is filed as part of the PetroBakken Public Record;
(g)
PetroBakken and Petrobank shall promptly notify TriStar in writing of any Material Adverse Change
(actual, anticipated, contemplated or, to the knowledge of PetroBakken or Petrobank threatened,) in
or to PetroBakken or Petrobank or of any change in any representation or warranty provided by
PetroBakken or Petrobank in this Agreement which change is or may be of such a nature to render
any representation or warranty misleading or untrue in any material respect and PetroBakken and
Petrobank shall in good faith discuss with TriStar any change in circumstances (actual, anticipated,
contemplated, or to the knowledge of PetroBakken or Petrobank are threatened) which is of such a
nature that there may be a reasonable question as to whether notice need to be given to TriStar
pursuant to this provision;
(h)
PetroBakken and Petrobank shall take all such actions as may be necessary to ensure that
PetroBakken shall have at the Effective Date available funds under its lines of credit or other bank
facilities or otherwise to permit the payment of the amounts required under the Plan of Arrangement;
(i)
PetroBakken and Petrobank shall assist TriStar in the preparation of the Circular and provide to
TriStar, in a timely and expeditious manner, all information as may be reasonably requested by
TriStar with respect to PetroBakken or Petrobank, including the PetroBakken Information, for
inclusion in the Circular and any amendments or supplements thereto, in each case complying in all
material respects with all Applicable Laws on the date of issue thereof;
(j)
PetroBakken and Petrobank shall jointly and severally indemnify and save harmless TriStar and the
directors, officers and agents of TriStar from and against any and all liabilities, claims, demands,
losses, costs, damages and expenses (excluding any loss of profits or consequential damages) to
which TriStar, or any director, officer or agent thereof may be subject or which TriStar, or any
director, officer or agent thereof may suffer, whether under the provisions of any statute or otherwise,
in any way caused by, or arising, directly or indirectly, from or in consequence of:
(i)
any misrepresentation or alleged misrepresentation in the PetroBakken Information or in the
PetroBakken Public Record;
(ii)
any order made or any inquiry, investigation or proceeding by any securities commission or
other competent authority based upon any untrue statement or omission or alleged untrue
statement or omission of a material fact or any misrepresentation or any alleged
misrepresentation in the PetroBakken Information or in the PetroBakken Public Record
which prevents or restricts the trading in the PetroBakken Class A Shares; or
(iii)
PetroBakken or Petrobank not complying with any requirement of Applicable Laws in
connection with the transactions contemplated in this Agreement;
(k)
PetroBakken and Petrobank shall use their reasonable commercial efforts to preserve intact the
Assets;
(l)
PetroBakken and Petrobank shall furnish promptly to TriStar and its counsel, a copy of each notice,
report, schedule or other document delivered, filed or received by PetroBakken and Petrobank from
regulatory agencies in connection with: (i) the Arrangement; (ii) the TriStar Meeting; and (iii) any
C-14
dealings with Governmental Authorities or the Court in connection with the transactions
contemplated by this Agreement;
3.2
(m)
except for non-substantive communications, PetroBakken shall furnish promptly to TriStar or
TriStar’s counsel, a copy of each notice, report, schedule or other document delivered, filed or
received by PetroBakken or Petrobank in connection with: (i) the Arrangement; (ii) any filings under
Applicable Laws in connection with the transactions contemplated by this Agreement; and (iii) any
dealings with Governmental Authorities in connection with the transactions contemplated by this
Agreement;
(n)
PetroBakken shall make application to the TSX, and use its reasonable commercial efforts to obtain
approval from the TSX, for the listing of PetroBakken Class A Shares, including the PetroBakken
Class A Shares to be issued to the holders of Common Shares under the Arrangement at the Effective
Time;
(o)
PetroBakken and Petrobank shall make all necessary filings and applications under Applicable Laws
required to be made on the part of PetroBakken in connection with the transactions contemplated by
this Agreement and shall take all reasonable commercial action necessary to be in compliance with
such Applicable Laws;
(p)
PetroBakken and Petrobank shall take all actions required to be taken on its part to give effect to the
transactions contemplated by this Agreement and the Arrangement;
(q)
PetroBakken and Petrobank shall take all actions required to be taken on its part to give effect to the
transactions contemplated by the Petrobank Reorganization on or before the Effective Date; and
(r)
PetroBakken and Petrobank shall use their reasonable commercial efforts to resolve any defects in
title to its properties of which they are aware prior to the Effective Date and agree to consult with
TriStar with respect to all such steps as are proposed to be taken in connection therewith.
Covenants of TriStar
From the date hereof until the earlier of the completion of the Arrangement and the termination of this
Agreement in accordance with Article 8, except with the prior written consent of PetroBakken and Petrobank (such
consent not to be unreasonably withheld), and except as otherwise expressly permitted or specifically contemplated by
this Agreement:
(a)
TriStar’s business and the business of each of its subsidiaries shall be conducted only in the usual and
ordinary course of business consistent with past practices (for greater certainty, where it is an operator
of any property, it shall operate and maintain such property in a proper and prudent manner in
accordance with good industry practice and the agreements governing the ownership and operation of
such property), TriStar shall consult with PetroBakken in respect of the ongoing business and affairs
of TriStar and its subsidiaries and keep PetroBakken apprised of all material developments relating
thereto;
(b)
TriStar shall not directly or indirectly do or permit to occur any of the following: (i) amend its
constating documents; (ii) declare, set aside or pay any dividend or other distribution or payment
(whether in cash, shares or property) in respect of its outstanding shares; (iii) issue (other than on
exercise or conversion of currently outstanding Options and the issuance of 468,822 Incentive
Shares), grant, sell or pledge or agree to issue, grant, sell or pledge any shares of TriStar, or securities
convertible into or exchangeable or exercisable for, or otherwise evidencing a right to acquire, shares
of TriStar; (iv) redeem, purchase or otherwise acquire any of its outstanding shares or other securities;
C-15
(v) split, combine or reclassify any of its securities; (vi) adopt a plan of liquidation or resolutions
providing for the liquidation, dissolution, merger, consolidation or reorganization of TriStar; (vii)
reduce the stated capital of TriStar or any of its outstanding shares; (viii) other than pursuant to
commitments entered into by TriStar prior to the date of the Agreement and disclosed in writing to
PetroBakken or Petrobank prior to the execution of this Agreement, pay, discharge or satisfy any
material claims, liabilities or obligations other than in the ordinary course of business consistent with
past practice; (ix) other than pursuant to commitments entered into by TriStar prior to the date of this
Agreement and disclosed in writing to PetroBakken prior to the execution of this Agreement, sell,
dispose of, transfer, convey, encumber, surrender, release or abandon the whole or any part of its
assets, other than in the ordinary course of business consistent with past practices; (x) terminate any
employees; (xi) take any action, refrain from taking any action, permit any action to be taken or not
taken, inconsistent with this Agreement, which might directly or indirectly interfere with or adversely
affect the consummation of the Arrangement; (xii) conduct any activity or operations that would
otherwise be detrimental to the Arrangement (xiii) enter into or modify any contract, agreement,
commitment or arrangement with respect to any of the foregoing; (xiv) enter into any agreement,
including any joint operating agreement, contemplated by the sharing agreement (the “Sharing
Agreement”) dated March 4, 2009 among TriStar, TOG Partnership, Crescent Point Resources
Limited Partnership and Crescent Point Energy Trust without the consent of Petrobank and
PetroBakken, not be unreasonably withheld;
(c)
except pursuant to the capital expenditure program that TriStar has disclosed in writing to
PetroBakken prior to the execution of this Agreement or except with the written consent of
PetroBakken, such consent not to be unreasonably withheld, TriStar shall not, and shall not permit
any of its subsidiaries to, directly or indirectly: (i) sell, pledge, dispose of or encumber any assets
having an individual value in excess of $500,000, other than in the ordinary course of business; (ii)
expend or commit to expend any amount with respect to any capital expenditures having an
individual value in excess of $500,000; (iii) expend or commit to expend any amounts with respect to
any operating expenses other than in the ordinary course of business; (iv) acquire or agree to acquire
(by merger, amalgamation, consolidation or acquisition of shares or assets) any corporation,
partnership or other business organization or division thereof which is not a subsidiary or affiliate of
TriStar as of the date hereof, or make any investment therein either by purchase of shares or
securities, contributions of capital or property transfer; (v) acquire any assets with an acquisition cost
in excess of $500,000 other than in the ordinary course of business consistent with past practices;
(vi) incur any indebtedness for borrowed money in excess of existing credit facilities, or any other
material liability or obligation or issue any debt securities or assume, guarantee, endorse or otherwise
become responsible for, the obligations of any other individual or entity, or make any loans or
advances, other than in the ordinary course of business consistent with past practices or in respect of
the Arrangement; (vii) authorize, recommend or propose any release or relinquishment of any
material contract right; (viii) waive, release, grant or transfer any material rights of value or modify or
change in any material respect any existing material license, lease, contract, production sharing
agreement, government land concession or other material document; (ix) enter into or terminate any
hedges, swaps or other financial instruments or like transactions; (x) enter into any agreement or
commitment to purchase any interest in land other than as contemplated by this section; (xi) authorize
or propose any of the foregoing, or enter into or modify any contract, agreement, commitment or
arrangement to do any of the foregoing;
(d)
TriStar will promptly provide to PetroBakken and Petrobank, for review by PetroBakken, Petrobank
and their counsel, prior to filing or issuance of the same, any proposed public disclosure document,
including without limitation, any press release or material change report, subject to TriStar’s
obligations under Applicable Laws to make timely disclosure of material information, and
PetroBakken agrees to keep such information confidential until same is filed as part of the TriStar
Public Record;
C-16
(e)
other than severance, bonus or other termination payments made on or prior to the Effective Date to
directors, officers and employees of TriStar pursuant to existing agreements, TriStar shall not, nor
permit any of its subsidiaries to, make any payment or agree to make any payment, to any employee,
consultant, officer or director outside of their ordinary and usual compensation for services provided.
Severance payments pursuant to written employment agreements (and otherwise) of TriStar shall not
exceed, in the aggregate, $4.1 million and no such payment shall be made without a form of release
(including a non-solicitation clause with respect to TriStar employees) being executed by the Person
receiving such payment in favour of TriStar and PetroBakken in a form acceptable to PetroBakken
and Petrobank, acting reasonably;
(f)
except as has been disclosed in writing to PetroBakken and Petrobank prior to the execution of this
Agreement, TriStar shall not, nor permit any of its subsidiaries to, adopt or amend or make any
contribution to any bonus, employee benefit plan, profit sharing, deferred compensation, insurance,
incentive compensation, other compensation or other similar plan, agreement, stock purchase plan,
fund or arrangement for the benefit of employees, except as is necessary to comply with the law or
with respect to existing provisions of any such plans, programs, arrangements or agreements,
including for greater certainty contributions under TriStar’s savings plan.
(g)
except as has been disclosed in writing to PetroBakken and Petrobank prior to the execution of this
Agreement, TriStar shall not, nor permit any of its subsidiaries to, (i) grant any officer, director or
employee an increase in compensation in any form; (ii) grant any general salary increase; (iii) take
any action with respect to the amendment of any severance or termination pay policies or
arrangements for any directors, officers or employees; (iv) adopt or amend (other than to permit
accelerated vesting of currently outstanding options) any stock option plan or the terms of any
outstanding options thereunder; nor (v) advance any loan to any officer, director or any other party
not at arm’s length;
(h)
TriStar shall use its reasonable commercial efforts to cause its current insurance (or reinsurance)
policies not to be cancelled or terminated or any of the coverage thereunder to lapse, unless
simultaneously with such termination, cancellation or lapse, replacement policies underwritten by
insurance or re-insurance companies of nationally recognized standing providing coverage equal to or
greater than the coverage under the cancelled, terminated or lapsed policies for substantially similar
premiums are in full force and effect and shall pay all premiums in respect of such insurance policies
that become due prior to the Effective Date;
(i)
TriStar shall not, and shall cause each of its subsidiaries not to, take any action that would render, or
may reasonably be expected to render, any representation or warranty made by TriStar in this
Agreement untrue in any material respect at any time prior to completion of the Arrangement or
termination of this Agreement, whichever first occurs;
(j)
TriStar shall promptly notify PetroBakken and Petrobank in writing of any Material Adverse Change
(actual, anticipated, contemplated or, to the knowledge of TriStar threatened), in or to TriStar or of
any change in any representation or warranty provided by TriStar in this Agreement which change is
or may be of such a nature to render any representation or warranty misleading or untrue in any
material respect and TriStar shall in good faith discuss with PetroBakken and Petrobank any change
in circumstances (actual, anticipated, contemplated, or to the knowledge of TriStar threatened) which
is of such a nature that there may be a reasonable question as to whether notice need to be given to
PetroBakken pursuant to this provision;
(k)
TriStar shall ensure that it has available funds under its lines of credit or other bank facilities to make,
within the time periods contemplated herein, the payment of the amount which may be required by
Section 6.1 hereof having regard to its other liabilities and obligations, and shall take all such actions
C-17
as may be necessary to ensure that it maintains such availability to ensure that it is able to pay such
amount when required;
(l)
TriStar shall use its reasonable commercial efforts to obtain the written consent of its bankers,
creditors, lessors and any other third parties as are required for the consummation of the Arrangement
or as otherwise contemplated hereby and shall provide a copy of each such consent to PetroBakken
and Petrobank on or prior to the Effective Date;
(m)
TriStar shall provide notice to PetroBakken and Petrobank of the TriStar Meeting and allow
PetroBakken and Petrobank’s representatives to attend such meeting;
(n)
TriStar shall ensure that the Circular has been prepared in compliance with Applicable Laws and
provides the TriStar Shareholders with information in sufficient detail to permit them to form a
reasoned judgment concerning the matters before them, and shall include, without limitation; (i) the
PetroBakken Information in the form approved by PetroBakken and Petrobank (as reviewed and
commented on by TriStar, acting reasonably); (ii) a copy of the Fairness Opinion; (iii) any financial
statements in respect of prior acquisitions made by it that are required to be included therein in
accordance with Applicable Laws; (iv) the unanimous determination of the independent members of
the board of directors of TriStar that the Arrangement is fair to the TriStar Shareholders based on the
Fairness Opinion, is in the best interests of TriStar and the TriStar Shareholders, and include the
unanimous recommendation of the independent members of the board of directors of TriStar that the
TriStar Shareholders vote in favour of the Arrangement Resolution; provided that, notwithstanding
the covenants of TriStar in (iv), prior to the completion of the Arrangement, the board of directors of
TriStar may withdraw, modify or change the recommendation regarding the Arrangement if, in the
opinion of such board of directors acting reasonably, having received the advice of its outside legal
counsel which is reflected in minutes of the meeting of the board of directors, such withdrawal,
modification or change is required to act in a manner consistent with the fiduciary duties of the board
of directors of TriStar and, if applicable, provided the board of directors and TriStar shall have
complied with the provisions of Sections 3.4 and 6.1 hereof;
(o)
TriStar shall indemnify and save harmless PetroBakken and Petrobank and the directors, officers and
agents of both PetroBakken and Petrobank from and against any and all liabilities, claims, demands,
losses, costs, damages and expenses (excluding any loss of profits or consequential damages) to
which PetroBakken or Petrobank, or any director, officer or agent thereof, may be subject or which
PetroBakken or Petrobank, or any director, officer or agent thereof, may suffer, whether under the
provisions of any statute or otherwise, in any way caused by, or arising, directly or indirectly, from or
in consequence of:
(i)
any misrepresentation or alleged misrepresentation in the Circular or in the TriStar Public
Record;
(ii)
any order made or any inquiry, investigation or proceeding by any securities commission or
other competent authority based upon any untrue statement or omission or alleged untrue
statement or omission of a material fact or any misrepresentation or any alleged
misrepresentation in the Circular or in the TriStar Public Record, which prevents or restricts
the trading in the TriStar Shares; and
(iii)
TriStar not complying with any requirement of Applicable Laws in connection with the
transactions contemplated in this Agreement,
except that TriStar shall not be liable in any such case to the extent that any such liabilities, claims,
demands, losses, costs, damages and expenses arise out of or are based upon any misrepresentation or
C-18
alleged misrepresentation of a material fact based solely on the PetroBakken Information included in
the Circular;
(p)
TriStar shall provide to PetroBakken and Petrobank all such information respecting its operations and
affairs as may be reasonably requested from time to time by PetroBakken or Petrobank;
(q)
TriStar shall keep PetroBakken and Petrobank informed as to the material decisions required with
respect to the most advantageous methods of exploring, operating and producing from its business, in
the opinion of TriStar;
(r)
TriStar shall use its reasonable commercial efforts to preserve intact its business organizations and
goodwill and to maintain satisfactory relationships with suppliers, distributors, customers and others
having business relationships with it;
(s)
except for proxies and other non-substantive communications with TriStar Securityholders, TriStar
shall furnish promptly to PetroBakken, Petrobank and their counsel, a copy of each notice, report,
schedule or other document delivered, filed or received by TriStar from TriStar Securityholders or
regulatory agencies in connection with: (i) the Arrangement; (ii) the TriStar Meeting; (iii) any filings
under Applicable Laws; and (iv) any dealings with regulatory agencies or the Court in connection
with the transactions contemplated by this Agreement;
(t)
TriStar and TriStar’s Board of Directors and senior management shall take all reasonable actions to
solicit proxies to be voted at the TriStar Meeting in favour of matters to be considered at the TriStar
Meeting, including the Arrangement Resolution, and in support of PetroBakken’s go forward
business plan. In addition, TriStar’s senior management shall take all reasonable actions, including
participating in news conferences, interviews, shareholder and analyst teleconferences, meetings and
road shows to solicit proxies to be voted at the TriStar Meeting in favour of matters to be considered
at the TriStar Meeting, including the Arrangement Resolution, and in support of PetroBakken’s go
forward business plan.
(u)
TriStar shall conduct the TriStar Meeting in accordance with the by-laws of TriStar and any
instrument governing the TriStar Meeting (including, without limitation, the Interim Order), as
applicable, and as otherwise required by law;
(v)
TriStar shall make all necessary filings and applications under Applicable Laws required to be made
on the part of TriStar in connection with the transactions contemplated by this Agreement and shall
take all reasonable action necessary to be in compliance with such Applicable Laws;
(w)
in the event that dissent rights are given to the TriStar Shareholders under the terms of the Interim
Order, TriStar shall promptly advise PetroBakken and Petrobank of the number of Common Shares
for which TriStar receives notices of dissent or written objections to the Arrangement and provide
PetroBakken and Petrobank with copies of such notices and written objections;
(x)
TriStar shall take all actions as are required to be taken by it to give effect to the transactions
contemplated by this Agreement and the Arrangement;
(y)
TriStar shall use its reasonable commercial efforts to resolve any defects in title to its properties of
which it is aware prior to the Effective Date and agrees to consult with PetroBakken and Petrobank
with respect to all such steps as are proposed to be taken in connection therewith;
(z)
TriStar shall take all such steps and complete all such transactions as may reasonably be requested by
PetroBakken, Petrobank and their tax advisors to effect the Arrangement in a tax effective manner for
C-19
PetroBakken and Petrobank and, in connection therewith, TriStar agrees to assist PetroBakken,
Petrobank and their tax advisors in making such investigations, inquiries and actions with respect to
TriStar and its subsidiaries as PetroBakken and its tax advisors shall consider necessary, acting
reasonably, provided that TriStar shall not be obligated to consent or agree to any structuring that has
the effect of reducing the consideration to be received under the Arrangement by the TriStar
Shareholders or if it has a Material Adverse Effect on the Assets or PetroBakken; and
(aa)
3.3
as soon as reasonably practicable and, in any event, prior to the Effective Date, TriStar or its
subsidiaries, as applicable, will file all Returns that have not been filed as of the date hereof and will
provide copies of all such Returns to PetroBakken and Petrobank for their review not less than 15
days prior to the filing thereof.
Mutual Covenants Regarding the Arrangement
From the date hereof until the earlier of the completion of the Arrangement and the termination of this
Agreement in accordance with Article 8, each of PetroBakken, Petrobank and TriStar shall:
(a)
use its reasonable commercial efforts to satisfy (or cause the satisfaction of) the conditions precedent
to its obligations hereunder and to take, or cause to be taken, all other action and to do, or cause to be
done, all other things necessary, proper or advisable under Applicable Laws to complete the
Arrangement and the Petrobank Reorganization, including using reasonable efforts:
(i)
to obtain all necessary waivers, consents and approvals required to be obtained by it from
other Parties to loan agreements, leases and other contracts;
(ii)
to obtain all necessary consents, assignments, waivers and amendments to or terminations of
any instruments and take such measures as may be appropriate to fulfill its obligations
hereunder and to carry out the transactions contemplated by this Agreement; and
(iii)
to effect all necessary registrations and filings and submission of information requested by
Governmental Authorities required to be effected by it in connection with the Arrangement,
(b)
use its reasonable commercial efforts to cooperate with the other in connection with the performance
by the other of their obligations under this Section 3.3 including, without limitation, continuing to
provide reasonable access to information and to maintain ongoing communications as between
representatives of PetroBakken, Petrobank and TriStar, subject in all cases to the Confidentiality
Agreement and the Petrobank Confidentiality Agreement, and to assist the proposed senior lenders
and their agent in connection with the syndication of PetroBakken's proposed new senior credit
facilities; and
(c)
cause PetroBakken to enter into written agreements or otherwise make arrangements effective as of
the Effective Date satisfactory to each of Petrobank and TriStar, acting reasonably, pursuant to which
PetroBakken shall agree that, for a period of six years after the Effective Date, PetroBakken shall
cause to be maintained in effect the current policies of directors’ and officers’ liability insurance
maintained by TriStar (provided that PetroBakken may substitute therefor policies of at least the same
claims coverage and amounts containing terms and conditions that are no less advantageous)
providing coverage on a “trailing” or “run-off” basis for all present and former directors and officers
of TriStar with respect to claims arising from facts or events which occurred before the Effective
Date.
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3.4
TriStar’s Covenants Regarding Non-Solicitation
(a)
TriStar shall immediately cease and cause to be terminated all existing discussions or negotiations
(including, without limitation, through any of its officers, directors, employees, advisors,
representatives and agents (“Representatives”)), if any, with any parties initiated before the date of
this Agreement with respect to any Acquisition Proposal and shall immediately request the return or
destruction of all information provided to any third party who has entered into a confidentiality
agreement with TriStar relating to an Acquisition Proposal and shall use all reasonable commercial
efforts to ensure that such requests are honoured.
(b)
TriStar shall not, directly or indirectly, do or authorize or permit any of its Representatives to do, any
of the following:
(i)
solicit, facilitate, initiate, encourage or take any action to solicit, facilitate, initiate, entertain
or encourage any inquiries or communication regarding or the making of any proposal or
offer that constitutes, may constitute, or may reasonably be expected to lead to, an
Acquisition Proposal, including, without limitation, by way of furnishing information;
(ii)
enter into or participate in any negotiations or initiate any discussion regarding an Acquisition
Proposal, or furnish to any other Person any information with respect to its securities,
business, properties, operations or conditions (financial or otherwise) in connection with, or
furtherance of, an Acquisition Proposal or otherwise cooperate in any way with, or assist or
participate in, facilitate or encourage, any effort or attempt of any other Person to do or seek
to do any of the foregoing;
(iii)
release, waive, or otherwise forbear in the enforcement of, or enter into or participate in any
discussions, negotiations or agreements to release, waive or otherwise forbear in respect of,
any rights or other benefits under any confidentiality agreements, including, without
limitation, any “standstill provisions” thereunder; or
(iv)
accept, recommend, approve or enter into an agreement to implement an Acquisition
Proposal;
provided, however, that notwithstanding any other provision hereof, TriStar and its Representatives
may:
(v)
enter into or participate in any discussions or negotiations with a third party who (without any
solicitation, initiation or encouragement, directly or indirectly, from or after the date of this
Agreement, by TriStar or any of its Representatives) seeks to initiate such discussions or
negotiations and, subject to execution of a confidentiality and standstill agreement
substantially similar to the Confidentiality Agreement (provided that such confidentiality
agreement shall provide for disclosure thereof (along with all information provided
thereunder) to PetroBakken and Petrobank as set out below), may furnish to such third party
information concerning TriStar and its business, properties and assets, in each case if, and
only to the extent that:
(i)
the third party has first made a written bona fide Acquisition Proposal and the board
of directors of TriStar determines in good faith: (1) that funds or other consideration
necessary for the Acquisition Proposal are or are likely to be available; (2) after
receiving advice of its financial advisors, the Acquisition Proposal would, if
consummated in accordance with its terms, result in a transaction financially superior
for TriStar Shareholders than the transaction contemplated by this Agreement; and
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(3) after receiving the advice of outside counsel as reflected in minutes of the board
of directors of TriStar, that the taking of such action is necessary for the board of
directors in discharge of its fiduciary duties under Applicable Laws (a “Superior
Proposal”) and for the purposes of this Agreement, the Parties confirm and
acknowledge that such a written Acquisition Proposal may include an Acquisition
Proposal made to TriStar by a third party who has entered into an agreement with
TriStar that contains standstill provisions, provided that such Acquisition Proposal
has not been solicited, initiated, encouraged or knowingly facilitated by TriStar or its
Representatives; and
(ii)
(c)
prior to furnishing such information to or entering into or participating in any such
negotiations or initiating any discussions with such third party, TriStar provides
prompt notice to PetroBakken to the effect that it is furnishing information to or
entering into or participating in discussions or negotiations with such Person or entity
together with a copy of the confidentiality agreement referenced above and if not
previously provided to Petrobank, copies of all information provided to such third
party concurrently with the provision of such information to such third party, and
provided further that TriStar shall notify PetroBakken and Petrobank orally and in
writing of any inquiries, offers or proposals with respect to a Superior Proposal
(which written notice shall include, without limitation, a summary of the details of
such proposal (and any amendments or supplements thereto), the identity of the
Person making it, if not previously provided to Petrobank, copies of all information
provided to such party and all other information reasonably requested by
PetroBakken or Petrobank), within 24 hours of the receipt thereof, shall keep
PetroBakken and Petrobank informed of the status and details of any such inquiry,
offer or proposal and answer PetroBakken and Petrobank’s questions with respect
thereto;
(vi)
comply with Section 2.17 of Multilateral Instrument 62-104 and similar provisions under
Applicable Laws relating to the provision of directors’ circulars and make appropriate
disclosure with respect thereto to its securityholders; and
(vii)
accept, recommend, approve or enter into an agreement to implement a Superior Proposal
from a third party, but only if prior to such acceptance, recommendation, approval or
implementation, its board of directors shall have concluded in good faith, after considering all
proposals to adjust the terms and conditions of this Agreement and after receiving the advice
of outside counsel as reflected in minutes of the board of directors of TriStar, that the taking
of such action is necessary for the board of directors in discharge of its fiduciary duties under
Applicable Laws and TriStar complies with its obligations set forth in Section 3.4(c) and pays
the amount required by Section 6.1(a).
In the event that TriStar is in receipt of a Superior Proposal, it shall give PetroBakken and Petrobank,
orally and in writing, at least 72 hours advance notice of any decision by its board of directors to
accept, recommend, approve or enter into an agreement to implement a Superior Proposal, which
notice shall confirm that the board of directors of TriStar has determined that such Acquisition
Proposal constitutes a Superior Proposal, shall identify the third party making the Superior Proposal
and shall provide a true and complete copy thereof and any amendments thereto. During such 72 hour
period, TriStar agrees not to accept, recommend, approve or enter into any agreement to implement
such Superior Proposal and not to release the party making the Superior Proposal from any standstill
provisions and shall not withdraw, redefine, modify or change its recommendation in respect of the
Arrangement. In addition, during such 72 hour period, TriStar shall, and shall cause its financial and
legal advisors to, negotiate in good faith with PetroBakken and Petrobank and their financial and
C-22
legal advisors to make such adjustments in the terms and conditions of this Agreement and the
Arrangement as would enable TriStar to proceed with the Arrangement as amended rather than the
Superior Proposal. In the event PetroBakken and Petrobank propose to amend this Agreement and
the Arrangement to provide that the TriStar Shareholders shall receive a value per TriStar Share equal
to or having a value greater than the value per TriStar Share provided in the Superior Proposal and so
advises the TriStar Board prior to the expiry of such 72 hour period, the board of directors of TriStar
shall not accept, recommend, approve or enter into any agreement to implement such Superior
Proposal and shall not release the party making the Superior Proposal from any standstill provisions
which, for greater certainty, shall not prevent the party making the Superior Proposal from making
any Acquisition Proposal to the Board of Directors of TriStar that is not solicited, initiated,
encouraged or knowingly facilitated by TriStar or any of its Representatives and shall not withdraw,
redefine, modify or change its recommendation in respect of the Arrangement. Notwithstanding the
foregoing, and for greater certainty, neither PetroBakken nor Petrobank shall have any obligation to
make or negotiate any changes to this Agreement or the Arrangement in the event that TriStar is in
receipt of a Superior Proposal.
3.5
(d)
PetroBakken and Petrobank agree that all information that may be provided to it by TriStar with
respect to any Superior Proposal pursuant to this Section 3.4 shall be treated as if it were
“Confidential Information” as that term is defined in the Confidentiality Agreement and shall not be
disclosed or used except in accordance with the provisions of the Confidentiality Agreement or in
order to enforce its rights under this Agreement in legal proceedings.
(e)
Each Party shall ensure that its officers, directors and employees and any investment bankers or other
advisers or representatives retained by it are aware of the provisions of this Section 3.4. PetroBakken
and Petrobank shall be responsible for any breach of this Section 3.4 by its officers, directors,
employees, investment bankers, advisers or representatives, and TriStar shall be responsible for any
breach of this Section 3.4 by its officers, directors, employees, investment bankers, advisers or
representatives.
Access to Information
(a)
Subject to compliance with Applicable Laws, from and after the date hereof, each Party shall provide
the other Parties and their representatives access, during normal business hours and at such other time
or times as such Party may reasonably request, to its premises (including field offices and sites),
books, contracts, records, computer systems, properties, employees and management personnel and
shall furnish promptly to the requesting Party all information concerning its business, properties and
personnel as may reasonably be requested in order to permit PetroBakken and Petrobank to be in a
position to expeditiously and efficiently integrate the business and operations of TriStar with those of
PetroBakken immediately upon but not prior to the Effective Date. Each Party agrees to keep the
other Parties fully appraised in a timely manner of every circumstance, action, occurrence or event
occurring or arising after the date hereof that would be relevant and material to a prudent operator of
the business and operations of TriStar and the Assets. Each Party shall confer with the other Parties
prior to taking action (other than in emergency situations) with respect to any material operational
matters involved in its business. For clarity, the provisions of this Section 3.5 as they relate to
Petrobank’s and PetroBakken’s obligations shall be limited to access and information related to
PetroBakken and the Assets and shall not extend to Petrobank’s remaining business interests and
operations.
(b)
Without limiting the generality of any of the other provisions of this Agreement, the Parties shall
make available all land, legal, title documents and related files, geologic maps, well files and well
logs, books, papers, financial information and pertinent documents or agreements.
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(c)
(d)
In addition, each of Parties agrees to:
(i)
permit the legal and professional representatives and agents of the other full access to such
other’s books, records and documents, provided that the disclosing Party is satisfied, acting
reasonably, that the confidentiality of the subject matter of the disclosure can be maintained
in accordance herewith; and
(ii)
endeavour to include in the information furnished to the other, or obtained by the other in the
course of the aforesaid investigations, all information which would reasonably be considered
to be relevant for the purposes of the other’s investigation and not knowingly withhold any
information which would make anything contained in the information delivered erroneous or
misleading.
The Parties acknowledge and agree that all information provided by one Party to the other pursuant to
this Section 3.5 shall remain subject to the provisions of the Confidentiality Agreements or the
Petrobank Confidentiality Agreement, as the case may be.
ARTICLE 4 - - REPRESENTATIONS AND WARRANTIES
4.1
Representations and Warranties of PetroBakken and Petrobank
PetroBakken and Petrobank, as applicable, hereby jointly and severally make the representations and
warranties set forth in this Section 4.1 to and in favour of TriStar and acknowledge that TriStar is relying upon such
representations and warranties in connection with the matters contemplated by this Agreement.
(a)
Each of PetroBakken and Petrobank is a corporation duly incorporated under the ABCA and each of
its subsidiaries is, or will at the Effective Time be, a corporation or partnership duly incorporated,
amalgamated or created and validly subsisting under the laws of its jurisdiction of incorporation,
amalgamation or creation, as applicable, and it and each of its subsidiaries has the requisite power and
authority to carry on its business as it is now being conducted;
(b)
PetroBakken and Petrobank and each of its subsidiaries is duly registered to do business and is in
good standing in each jurisdiction in which the character of its properties, owned or leased, or the
nature of its activities make such registration necessary, except where the failure to be so registered or
in good standing would not have a Material Adverse Effect;
(c)
PetroBakken and Petrobank have the requisite corporate power and authority to enter into this
Agreement and to carry out their obligations hereunder. The execution and delivery of this Agreement
and the documents relating to the Petrobank Reorganization and the consummation by PetroBakken
and Petrobank of the transactions contemplated by this Agreement and the Petrobank Reorganization
have been, or will be, duly authorized by the respective boards of directors of Petrobank and
PetroBakken and no other corporate proceedings on the part of PetroBakken or Petrobank are or shall
be necessary to consummate the transactions contemplated by this Agreement. This Agreement has
been duly executed and delivered by PetroBakken and Petrobank and constitute legal, valid and
binding obligations of PetroBakken and Petrobank enforceable against PetroBakken and Petrobank by
TriStar and by PetroBakken against Petrobank in accordance with its terms;
(d)
The Arrangement is not subject to the consent of Petrobank's loan trustee or the holders of
Petrobank’s outstanding convertible notes due in 2012 and 2015, provided however if such consent is
required, Petrobank shall obtain such consent;
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(e)
other than the consent of Petrobank’s senior lenders which is required, neither the execution and
delivery of this Agreement by PetroBakken or Petrobank, the consummation by PetroBakken and
Petrobank of the transactions contemplated by this Agreement nor compliance by PetroBakken and
Petrobank with any of the provisions hereof will: (i) violate, conflict with, or result in breach of any
provision of, require any consent, approval or notice under, or constitute a default (or an event which,
with notice or lapse of time or both, would constitute a default) or result in a right of termination or
acceleration under, or result in a creation of any lien, security interest, charge or Encumbrance upon
any of the properties or assets of PetroBakken or Petrobank or any of their subsidiaries under, any of
the terms, conditions or provisions of (x) the articles or bylaws or other constating documents of
PetroBakken or Petrobank or any of their subsidiaries, or (y) any note, bond, mortgage, indenture,
loan agreement, deed of trust, agreement, lien, contract or other instrument or obligation to which
PetroBakken or Petrobank is a party or to which it or its properties or assets, may be subject or by
which PetroBakken or Petrobank or any of their subsidiaries is bound; or (ii) violate any judgment,
ruling, order, writ, injunction, determination, award, decree, statute, ordinance, rule or regulation in
Canada applicable to PetroBakken or Petrobank or any of their subsidiaries (except, in the case of
each of clauses (i) and (ii) above, for such violations, conflicts, breaches, defaults, terminations
which, or any consents, approvals or notices which if not given or received, would not have any
Material Adverse Effect on the business, operations or financial condition of PetroBakken, Petrobank
and their subsidiaries, taken as a whole, the Assets or on the ability of PetroBakken or Petrobank to
consummate the transactions contemplated by this Agreement); or (iii) cause a suspension or
revocation of any authorization for the consent, approval or license currently in effect which would
have a Material Adverse Effect on the business, operations or financial condition of PetroBakken,
Petrobank and their subsidiaries, taken as a whole or the Assets;
(f)
other than in connection with or in compliance with the provisions of Applicable Laws and ordinary
course corporate filings in connection with the Petrobank Reorganization:
(i)
there is no legal impediment to PetroBakken or Petrobank’s consummation of the
transactions contemplated by this Agreement and the Petrobank Reorganization; and
(ii)
no filing or registration with, or authorization, consent or approval of, any domestic or
foreign public body or authority is necessary by PetroBakken or Petrobank in connection with
the consummation of the Arrangement and the Petrobank Reorganization, except for such
filings or registrations which, if not made, or for such authorizations, consents or approvals,
which, if not received, would not have any Material Adverse Effect on the ability of
PetroBakken to consummate the transactions contemplated by this Agreement.
(g)
PetroBakken has authorized an unlimited number of PetroBakken Class A Shares, an unlimited
number of PetroBakken Class B Shares and an unlimited number of preferred shares, issuable in
series. As at the date hereof, no PetroBakken Class A Shares are issued and outstanding and one
PetroBakken Class B Share is issued and outstanding and there are no options, warrants, rights or
other convertible securities of PetroBakken issued and outstanding. All outstanding PetroBakken
Shares have been duly authorized and validly issued, and are fully paid and non-assessable and are
not subject to, nor have they been issued in violation of, any pre-emptive rights;
(h)
PetroBakken has carried on no active business since its incorporation and has no assets other than
$1.00 in cash representing the initial subscription for one PetroBakken Class B Share from Petrobank.
PetroBakken has not entered into any agreement or incurred any obligations other than in respect of
this Agreement and in connection with the Petrobank Reorganization;
(i)
PetroBakken has not guaranteed, endorsed, assumed or indemnified, contingently or otherwise, the
obligations or indebtedness of any Person other than in the ordinary course of the oil and gas business
C-25
pursuant to title and operating documents governing the Assets and in connection with the Petrobank
Reorganization;
(j)
the only material subsidiaries of Petrobank are 683575 Alberta Inc., Petrobank Production
Partnership, 1081075 Alberta Ltd., Petrobank Oil and Gas Ventures LP, Petro International Ltd.,
Petrominerales Ltd., Petrominerales Colombia Ltd., Archon Technologies International Inc,
Whitesands Insitu Inc., Whitesands Insitu Partnership and Archon Technologies Ltd. PetroBakken
has no subsidiaries as at the date of this Agreement. Petrobank directly or indirectly beneficially owns
all of the outstanding shares or interests of each of the foregoing subsidiaries and no Person holds any
securities convertible or exchangeable into securities of such subsidiaries, other than Petrominerales
Ltd., or has any agreement, warrant, option, right or privilege (whether pre-emptive or contractual)
being or capable of becoming an agreement for the purchase or issuance of any shares or other
securities of such subsidiaries, other than Petrominerales Ltd.;
(k)
since the date of the Petrobank Financial Statements, except as disclosed in the PetroBakken Public
Record or as contemplated by this Agreement:
(l)
(i)
there has not been any Material Adverse Change in the Assets, or in the financial condition of
Petrobank and its subsidiaries, from the position set forth in the Petrobank Financial
Statements,
(ii)
there has not been any Material Adverse Change in the business, capital, operations or results
of the operations of PetroBakken, Petrobank and its subsidiaries, taken as a whole; and
(iii)
there have been no material facts, transactions, events or occurrences which, to the
knowledge of PetroBakken or Petrobank, could reasonably be expected to result in a Material
Adverse Change in the Assets, or in the liabilities, financial condition, business, capital,
operations or results of the operations of PetroBakken, Petrobank and its subsidiaries, taken
as a whole;
since the date of the Petrobank Financial Statements, except as disclosed in the PetroBakken Public
Record or as publicly disclosed by Petrobank or as contemplated by this Agreement:
(i)
PetroBakken and Petrobank have conducted their business only in the ordinary and normal
course, consistent with past practice; and
(ii)
no liability or obligation of any nature (whether absolute, accrued, contingent or otherwise)
material to the Assets, has been incurred other than in the ordinary and normal course of
business, consistent with past practice;
(m)
the data and information in respect of the Assets, PetroBakken and the Petrobank Reorganization
provided by PetroBakken, Petrobank or their advisors to TriStar or its advisors was and is accurate
and correct in all material respects as at the respective dates thereof and, in respect of any information
provided or requested, did not to the knowledge of PetroBakken or Petrobank omit any material data
or information necessary to make any data or information provided not misleading as at the respective
dates thereof. Neither PetroBakken nor Petrobank has any knowledge of any Material Adverse
Change from that disclosed in such data and information;
(n)
the information and statements set forth in the PetroBakken Public Record are true, correct, and
complete and did not contain any misrepresentation, as of the respective dates of such information or
statements, and no Material Adverse Change has occurred in relation to the Assets, taken as a whole,
which is not disclosed in the PetroBakken Public Record or which has not been publicly disclosed by
C-26
Petrobank, and neither PetroBakken nor Petrobank has filed any confidential material change reports
which continue to be confidential;
(o)
except as disclosed in the PetroBakken Public Record, as of the date hereof or as otherwise disclosed
in writing to TriStar by PetroBakken or Petrobank prior to the execution of this Agreement, there is
no court, administrative, regulatory or similar proceeding (whether civil, quasi-criminal or criminal),
arbitration or other dispute settlement procedure, investigation or inquiry by any Governmental
Authority, or any claim, action, suit, demand, arbitration, charge, indictment, hearing or other similar
civil, quasi-criminal or criminal, administrative or investigative material matter or proceeding
(collectively, “proceedings”) against or involving PetroBakken, Petrobank or any of their respective
subsidiaries, in respect of their respective businesses, properties or assets of or any of their respective
subsidiaries (whether in progress or, to the knowledge of PetroBakken or Petrobank, threatened), that
if adversely determined, would reasonably be expected to have a Material Adverse Effect in respect
of the Assets, or significantly impede the completion of the transactions contemplated by this
Agreement including the Petrobank Reorganization and, to the knowledge of PetroBakken and
Petrobank, no event has occurred which might reasonably be expected to give rise to any proceeding.
There is no judgment, writ, decree, injunction, rule, award or order of any Governmental Authority
outstanding against PetroBakken, Petrobank or any of their respective subsidiaries in respect of their
businesses, properties or assets that has had or would reasonably be expected to have a Material
Adverse Effect in respect of the Assets, taken as a whole, or significantly impede the completion of
the transactions contemplated by this Agreement including the Petrobank Reorganization;
(p)
the Petrobank Financial Statements fairly present, in accordance with generally accepted accounting
principles in Canada, consistently applied, the financial position and condition of Petrobank and its
subsidiaries on a consolidated basis at the dates thereof and the results of the operations of Petrobank
and its subsidiaries on a consolidated basis for the periods then ended and reflect in accordance with
generally accepted accounting principles in Canada, consistently applied, all material assets, liabilities
or obligations (absolute, accrued, contingent or otherwise) of Petrobank and its subsidiaries on a
consolidated basis as at the dates thereof;
(q)
neither PetroBakken nor Petrobank nor any of their respective subsidiaries has received notice of any
material violation of or investigation relating to any federal, provincial or local Law with respect to
PetroBakken or the Assets and Petrobank and its material subsidiaries hold, and PetroBakken and its
material subsidiaries shall hold, prior to the Effective Date all permits, licenses and other
authorizations which are required under federal, provincial or local Laws relating to Assets, except
where the failure to comply with the foregoing would not have a Material Adverse Effect in respect of
the Assets, taken as a whole. The Assets, taken as a whole, have been operated and maintained by
Petrobank and are in compliance with all terms and conditions of applicable laws, permits, licenses
and authorizations in all material respects;
(r)
no securities commission or similar regulatory authority, or stock exchange in Canada has issued any
order which is currently outstanding preventing or suspending trading in any securities of
PetroBakken, no such proceeding is, to the knowledge of PetroBakken, pending, contemplated or
threatened and PetroBakken is not, to its knowledge, in default of any requirement of any Applicable
Laws;
(s)
the boards of directors of each of PetroBakken and Petrobank have unanimously approved this
Agreement and the Arrangement;
(t)
neither of Petrobank or PetroBakken have retained any financial advisor, broker, agent or finder, or
paid or agreed to pay or have TriStar, PetroBakken or Petrobank pay any financial advisor, broker,
agent or finder on account of this Agreement or the Arrangement, any transaction contemplated
C-27
hereby or any transaction presently ongoing or contemplated, except that TD Securities Inc. has been,
and certain other advisors may be, retained as PetroBakken’s and Petrobank’s financial and strategic
advisors in connection with certain matters, including the transactions contemplated by this
Agreement. Petrobank has delivered or will deliver to TriStar true and current copies of all
agreements amongst PetroBakken or Petrobank and TD Securities Inc. and such other advisors which
could give rise to the payment of any fees to such financial advisers and such agreements accurately
reflect the fees payable to TD Securities Inc. and such other advisors, which amount shall not exceed
$7,200,000 payable in cash and $3,900,000 payable by the issuance of PetroBakken Class A shares to
the applicable financial advisor, such PetroBakken Class A to be issued post closing of the
Arrangement . Petrobank and PetroBakken may only retain additional financial advisors resulting in
additional fees above $1,900,000 with the prior written consent of TriStar, not to be unreasonably
withheld. Notwithstanding the foregoing, if TriStar receives a Superior Proposal, Petrobank and
PetroBakken may, acting reasonably, retain additional advisors without TriStar’s prior written
consent;
(u)
except to the extent that any violation or other matter referred to in this subparagraph does not have a
Material Adverse Effect on the Assets, taken as a whole, in respect of each of PetroBakken,
Petrobank and their respective subsidiaries, only as their operations relate to the Assets:
(i)
it is not in violation of any Environmental Laws;
(ii)
it has operated its business at all times and has received, handled, used, stored, treated,
shipped and disposed of all contaminants without violation of Environmental Laws;
(iii)
to the best of its knowledge, there have been no spills, releases, deposits or discharges of
hazardous or toxic substances, contaminants or wastes into the earth, air or into any body of
water or any municipal or other sewer or drain water systems by PetroBakken, Petrobank or
any of their respective subsidiaries that have not been remedied or are being remedied;
(iv)
no orders, directions or notices have been issued and remain outstanding pursuant to any
Environmental Laws relating to the business or assets of PetroBakken, Petrobank or any of
their respective subsidiaries;
(v)
it has not failed to report to the proper federal, provincial, municipal or other political
subdivision, government, department, commission, board, bureau, agency or instrumentality,
domestic or foreign the occurrence of any event which is required to be so reported by any
Environmental Law; and
(vi)
it holds all licenses, permits and approvals required under any Environmental Laws in
connection with the operation of its business and the ownership and use of its assets, all such
licenses, permits and approvals are in full force and effect, and except for notifications and
conditions of general application to assets of reclamation obligations under the
Environmental Protection and Enhancement Act (Alberta) and similar legislation in any other
jurisdiction in which it conducts its business, neither PetroBakken nor Petrobank nor any of
their respective subsidiaries has received any notification pursuant to any Environmental
Laws that any work, repairs, constructions or capital expenditures are required to be made by
it as a condition of continued compliance with any Environmental Laws, or any license,
permit or approval issued pursuant thereto, or that any license, permit or approval referred to
above is about to be reviewed, made subject to limitation or conditions, revoked, withdrawn
or terminated.
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(v)
the corporate records and minute books, books of account and other records of PetroBakken and
Petrobank and each of their respective material subsidiaries have (whether of a financial or
accounting nature or otherwise) been maintained in accordance with, in all material respects, all
applicable statutory requirements and prudent business practice and are complete and accurate in all
material respects;
(w)
PetroBakken will not be allocated any taxable income earned by the PetroBakken Partnership or the
PetroBakken Operating Partnership for any fiscal period of either partnership beginning before the
Effective Date;
(x)
no director, officer, insider or other non-arm’s length party to Petrobank or to PetroBakken or any of
their respective material subsidiaries (or any associate or affiliate thereof) has any right, title or
interest in (or the right to acquire any right, title or interest in) any royalty interest, carried interest,
participation interest or any other interest in the Assets whatsoever which are based on production
from or in respect of any properties comprising the Assets that shall be effective after the Effective
Date;
(y)
except as disclosed in the PetroBakken Public Record, no director, officer, insider or other non-arm’s
length party is indebted to PetroBakken or Petrobank or any of their respective material subsidiaries;
(z)
any and all operations of PetroBakken and Petrobank and their respective material subsidiaries, and to
the knowledge of PetroBakken and Petrobank, any and all operations by third parties, on or in respect
of the Assets, have been conducted in material compliance with good oilfield practices;
(aa)
Petrobank made available to Sproule, prior to the issuance of the Petrobank Sproule Report for the
purpose of preparing such report, all information requested by Sproule, which information did not
contain any material misrepresentation at the time such information was so provided. PetroBakken
and Petrobank have no knowledge of a Material Adverse Change in any information provided to
Sproule since the date that such information was provided. PetroBakken and Petrobank believe that
the Petrobank Sproule Report complies with the requirements of National Instrument 51-101 and
believes that the Petrobank Sproule Report reasonably presented the quantity and pre-tax present
worth values of estimated oil, natural gas, natural gas liquids and bitumen reserves attributable to the
properties evaluated therein as at the date stated therein based upon information available at the time
the Petrobank Sproule Report was prepared and the assumptions as to commodity prices and costs
contained therein. Sproule has not re-evaluated any of the reserves of Petrobank or its subsidiaries
since the date of the Petrobank Sproule Report prepared by Sproule;
(bb)
although they do not warrant title, neither PetroBakken nor Petrobank has any reason to believe that
Petrobank or any of its subsidiaries does not have title to or the irrevocable right to produce and sell
its petroleum, natural gas and related hydrocarbons that comprise the Assets (for the purposes of this
clause, the foregoing are referred to as the “PetroBakken Interests”) and they do represent and
warrant that, to the knowledge of PetroBakken and Petrobank, the PetroBakken Interests are free and
clear of adverse claims created by, through or under PetroBakken, Petrobank or their subsidiaries,
except as disclosed in the PetroBakken Public Record or as publicly disclosed by Petrobank, related
to bank financing or those arising in the ordinary course of business, and, to the knowledge of
PetroBakken and Petrobank, PetroBakken, Petrobank or their respective subsidiaries hold the
PetroBakken Interests under valid and subsisting leases, licenses, permits, concessions, concession
agreements, contracts, subleases, reservations or other agreements except where the failure to so hold
the Interest would not have a Material Adverse Effect on the Assets;
(cc)
neither PetroBakken nor Petrobank is aware of any defects, failures or impairments in the title of
PetroBakken, Petrobank or any of their respective subsidiaries to its oil and gas properties which
C-29
comprise the Assets, whether or not an action, suit, proceeding or inquiry is pending or threatened and
whether or not discovered by any third party, which in aggregate could have a Material Adverse
Effect on: (i) the quantity and pre-tax present worth values of the oil and gas reserves of the Assets,
taken as a whole, and shown in the Petrobank Sproule Report; (ii) the current production of the
Assets, taken as a whole; (iii) the current cash flow derived from the Assets, taken as a whole; or (iv)
the current cash flow of PetroBakken, Petrobank and their respective subsidiaries, taken as a whole;
(dd)
to the knowledge of PetroBakken and Petrobank, PetroBakken and Petrobank have not withheld from
TriStar any material information or documents concerning the Assets during the course of TriStar’s
review of the Assets. No representation or warranty contained herein and no statement contained in
any schedule or other disclosure document provided or to be provided to TriStar by PetroBakken or
Petrobank pursuant hereto contains or shall contain any untrue statement of a material fact which is
necessary to make the statements herein or therein not misleading;
(ee)
all Taxes, including all ad valorem, property, production, severance and similar taxes and assessments
based on or measured by the ownership of property or the production of its hydrocarbon substances,
or the receipt of proceeds therefrom, payable in respect of the Assets prior to the date hereof, and
those Taxes payable in respect of the Assets prior to the Effective Time will have been properly and
fully paid and discharged, and there are no unpaid taxes or assessments due or delinquent which
could result in a lien or charge on the Assets;
(ff)
except as disclosed as of the date hereof in writing, by PetroBakken or Petrobank to TriStar, neither
PetroBakken or Petrobank nor any of their respective subsidiaries is a party to or bound or affected by
any commitment, agreement or document containing any covenant expressly limiting its freedom to
compete in any line of business, compete in any geographic region, transfer or move any of its assets
or operations, where such covenant would have a Material Adverse Effect on the Assets, taken as a
whole;
(gg)
there are policies of insurance in force at the date hereof naming Petrobank as an insured and, to the
knowledge of Petrobank, remain in force and effect and shall not be cancelled or otherwise
terminated as a result of the transactions contemplated by this Agreement. Such policies of insurance
adequately cover all risks as are customarily covered by oil and gas producers in the industry,
including those associated with the Assets. As of the Effective Date, these policies of insurance (or
new policies of insurance that are no less favourable to PetroBakken than such policies were to
Petrobank) will be held by PetroBakken and shall be in full force and effect;
(hh)
other than as disclosed in writing to TriStar prior to the execution of this Agreement, there is no noncompetition, exclusivity, area of mutual interest agreement or other similar agreement, commitment
or understanding in place to which Petrobank or PetroBakken is a party or by which either is
otherwise bound that would now or hereafter in any material way limit the business or operations of
PetroBakken in a particular manner or to a particular locality or geographic region or for a limited
period of time and the execution, delivery and performance of this Agreement does not and will not
result in the restriction of PetroBakken from engaging in this business or from competing with any
Person or in any geographic area;
(ii)
there are no agreements material to the conduct of Petrobank’s or PetroBakken’s affairs or businesses
in respect of the Assets, except for those agreements disclosed in the PetroBakken Public Record or
those entered into in the ordinary course of business, and all such material agreements are valid and
subsisting and that PetroBakken and Petrobank, as the case may be, are not in material default under
any such agreements;
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(jj)
PetroBakken and Petrobank have filed and as of the Effective Time will have filed all documents
required to be filed by it with all applicable Governmental Authorities and all such documents were,
as of their respective dates, in compliance in all material respects with all Applicable Laws and at the
time filed did not contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading;
(kk)
PetroBakken and Petrobank will deliver to TriStar, as soon as they become available, true and
complete copies of any material reports or statements required to be filed by PetroBakken and
Petrobank with any Governmental Authority subsequent to the date of the Agreement. As of their
respective dates, such reports and statements (excluding any information therein provided by TriStar,
as to which PetroBakken and Petrobank make no representation) will not contain any untrue
statement of a material fact or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which they are made, not misleading and
will comply in all material respects with all Applicable Laws;
(ll)
except as disclosed in the PetroBakken Public Record, each of PetroBakken and Petrobank has
obtained and is in compliance with all licences, permits, certificates, consents, orders, grants and
other authorizations of or from any Governmental Authority necessary to conduct its businesses as it
relates to the Assets as they are now being or are proposed to be conducted, other than such licences,
permits, certificates, consents, orders, grants and other authorizations the absence of which would not
have a Material Adverse Effect in respect of the Assets;
(mm)
neither Petrobank nor PetroBakken is a “non-Canadian” within the meaning of the Investment
Canada Act (Canada);
(nn)
Petrobank has not received notice of any default under any of the leases and other title and operating
documents or any other agreement or instrument pertaining to the Assets to which Petrobank or any
of its subsidiaries is a party or by or to which Petrobank or any of its subsidiaries or any of the Assets
are bound or subject except to the extent that such defaults would not in the aggregate have a Material
Adverse Effect;
(oo)
to their knowledge,
(i)
each of PetroBakken and Petrobank is in good standing under all, and is not in default under
any; and
(ii)
there is no existing condition, circumstance or matter which constitutes or which, with the
passage of time or the giving of notice, would constitute a default under any,
leases and other title and operating documents or any other agreements and instruments pertaining to
the Assets to which it is a party or by or to which it or the Assets are bound or subject and all such
leases, title and operating documents and other agreements and instruments are in good standing and
in full force and effect and none of the counterparties to such leases, title and operating documents
and other agreements and instruments is in default thereunder except to the extent that such defaults
would not in the aggregate have a Material Adverse Effect;
(pp)
except as disclosed to TriStar and except as is reflected in the Petrobank Sproule Report, none of the
Assets are subject to reduction by reference to payout of or production penalty on any well or
otherwise or to change to an interest of any other size or nature by virtue of or through any right or
interest granted by, through or under Petrobank or any of its subsidiaries except to the extent that such
reduction or change to an interest would not in the aggregate have a Material Adverse Effect;
C-31
(qq)
all royalties and rentals payable on or before the date hereof under the leases and other title and
operating documents pertaining to the Assets and all ad valorem, property, production, severance and
similar taxes and assessments based upon or measured by the ownership of such assets or the
production of petroleum substances derived therefrom or allocated thereto or the proceeds of sales
thereof payable on or before the date hereof have been properly paid in full and in a timely manner
except to the extent that such non-payment would not in the aggregate have a Material Adverse
Effect;
(rr)
none of the wells in which Petrobank or its subsidiaries holds an interest that forms part of the Assets
has been produced in excess of applicable production allowables imposed by any applicable law or
any governmental authority and none of Petrobank or its subsidiaries has any knowledge of any
impending change in production allowables imposed by any Applicable Law or any Governmental
Authority that may be applicable to any of the wells that form part of the Assets, other than changes
of general application in the jurisdiction in which such wells are situate except to the extent that such
non-compliance or changes would not in the aggregate have a Material Adverse Effect;
(ss)
none of Petrobank or its subsidiaries has received notice of any production penalty or similar
production restriction of any nature imposed or to be imposed by any Governmental Authority,
including gas-oil ratio, off-target and overproduction penalties imposed by a Governmental Authority
in respect of the Assets, and none of such wells in which any of them holds an interest is subject to
any such penalty or restriction except to the extent that any such penalty or restriction would not in
the aggregate have a Material Adverse Effect;
(tt)
the tangible depreciable property used or intended for use in connection with the Assets:
(i)
for which any of Petrobank or its subsidiaries was or is operator, was or has been constructed,
operated and maintained in accordance with good and prudent oil and gas industry practices
in Canada and all Applicable Law during all periods in which Petrobank or its subsidiaries
was operator thereof and is in good condition and repair, ordinary wear and tear excepted,
and is useable in the ordinary course of business; and
(ii)
for which none of Petrobank or its subsidiaries was or is operator, to their knowledge, was or
has been constructed, operated and maintained in accordance with good and prudent oil and
gas industry practices in Canada and all Applicable Law during all periods in which none of
Petrobank or its subsidiaries was operator thereof and is in good condition and repair,
ordinary wear and tear excepted, and is useable in the ordinary course of business;
except to the extent that such non-compliance with prudent oil and gas industry practices or
Applicable Law would not in the aggregate have a Material Adverse Effect;
(uu)
as at the Effective Date, Petrobank and PetroBakken have available funds from cash on hand and
under existing lines of credit to permit the payment of the amounts required to be paid to the TriStar
Shareholders pursuant to the Arrangement;
(vv)
as of the date hereof, Petrobank has more than $400 million of cash and available financial resources;
(ww)
there are no outstanding authorizations for expenditure pertaining to any of the Assets or any other
commitments, approvals or authorizations pursuant to which an expenditure may be required to be
made in respect of such assets after the date of the most recent Petrobank Financial Statements in
excess of $1.5 million for each such commitment, approval or authorization other than pursuant to the
2009 capital budget disclosed by Petrobank to TriStar;
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4.2
(xx)
PetroBakken and Petrobank have provided to TriStar copies of all management recommendation
letters relating to Petrobank or any of its subsidiaries received from Petrobank’s auditor;
(yy)
the PetroBakken Information contained in the Circular shall, as of the Mailing Date and as of the
Effective Date will be true and complete in all material respects and shall not contain any
misrepresentation; and
(zz)
the fees and expenses of legal counsel (including tax and due diligence counsel) and tax advisors to
PetroBakken and Petrobank, in the aggregate, shall not exceed $650,000 (excluding disbursements
and G.S.T).
Representations and Warranties of TriStar
TriStar hereby makes the representations and warranties set forth in this Section 4.2 to and in favour of
PetroBakken and Petrobank and acknowledges that PetroBakken and Petrobank are relying upon such representations
and warranties in connection with the matters contemplated by this Agreement.
(a)
TriStar is a corporation duly incorporated under the ABCA and each of TriStar’s subsidiaries is a
corporation or partnership duly incorporated, amalgamated or created and validly subsisting under the
laws of its jurisdiction of incorporation, amalgamation or creation, as applicable, and TriStar and each
of its subsidiaries has the requisite power and authority to carry on its business as it is now being
conducted;
(b)
TriStar and each of its subsidiaries is duly registered to do business and is in good standing in each
jurisdiction in which the character of its properties, owned or leased, or the nature of its activities
make such registration necessary, except where the failure to be so registered or in good standing
would not have a Material Adverse Effect on TriStar and its subsidiaries, taken as a whole;
(c)
TriStar has the requisite corporate power and authority to enter into this Agreement and to carry out
its obligations hereunder. The execution and delivery of this Agreement and the consummation by
TriStar of the transactions contemplated by this Agreement have been duly authorized by TriStar’s
board of directors and, subject to obtaining shareholder approval, no other corporate proceedings on
the part of TriStar are or shall be necessary to consummate the transactions contemplated by this
Agreement. This Agreement has been duly executed and delivered by TriStar and constitutes a legal,
valid and binding obligation of TriStar enforceable against TriStar in accordance with its terms;
(d)
other than the consent of TriStar’s lenders which is required, neither the execution and delivery of this
Agreement by TriStar, the consummation by TriStar or any of its subsidiaries of the transactions
contemplated by this Agreement nor compliance by TriStar with any of the provisions hereof will: (i)
violate, conflict with, or result in breach of any provision of, require any consent, approval or notice
under, or constitute a default (or an event which, with notice or lapse of time or both, would constitute
a default) or result in a right of termination or acceleration under, or result in a creation of any lien,
security interest, charge or Encumbrance upon any of the properties or assets of TriStar or any of its
subsidiaries under, any of the terms, conditions or provisions of (x) the articles, bylaws or other
constating documents of TriStar or any of its subsidiaries, or (y) any note, bond, mortgage, indenture,
loan agreement, deed of trust, agreement, lien, contract or other instrument or obligation to which
TriStar or any of its subsidiaries is a party or to which it, or its properties or assets, may be subject or
by which TriStar or any of its subsidiaries is bound (subject to obtaining the consent of TriStar’s
bankers and the consent of TriStar’s landlord under its office lease); or (ii) violate any judgment,
ruling, order, writ, injunction, determination, award, decree, statute, ordinance, rule or regulation in
Canada applicable to TriStar or any of its subsidiaries (except, in the case of each of clauses (i) and
(ii) above, for such violations, conflicts, breaches, defaults, terminations which, or any consents,
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approvals or notices which if not given or received, would not have any Material Adverse Effect on
the business, operations or financial condition of TriStar and its subsidiaries, taken as a whole, or on
the ability of TriStar or any of its subsidiaries to consummate the transactions contemplated by this
Agreement); or (iii) cause a suspension or revocation of any authorization for the consent, approval or
license currently in effect which would have a Material Adverse Effect on the business, operations or
financial condition of TriStar and its subsidiaries, taken as a whole;
(e)
other than in connection with or in compliance with the provisions of Applicable Laws:
(i)
there is no legal impediment to TriStar’s consummation of the transactions contemplated by
this Agreement; and
(ii)
no filing or registration with, or authorization, consent or approval of, any domestic or
foreign public body or authority is necessary by TriStar in connection with the consummation
of the Arrangement, except for such filings or registrations which, if not made, or for such
authorizations, consents or approvals, which, if not received, would not have any Material
Adverse Effect on the ability of TriStar to consummate the transactions contemplated by this
Agreement;
(f)
TriStar has authorized an unlimited number of Common Shares. As at the date hereof, 152,043,172
Common Shares, 4,254,434 Options and 2,316,673 Incentive Shares are issued and outstanding.
Except as aforesaid, there are no other outstanding securities of TriStar or options, warrants, rights of
conversion or exchange privileges or other securities entitling anyone to acquire any securities of
TriStar or any other rights, agreements or commitments of any character whatsoever requiring the
issuance, sale or transfer by TriStar of any securities. All outstanding Common Shares and Incentive
Shares have been duly authorized and validly issued, and are fully paid and non-assessable and are
not subject to, nor have they been issued in violation of, any pre-emptive rights;
(g)
the only material subsidiaries of TriStar are TOG Partnership, TriStar AP Partnership, Vortex Energy
Corporation, Southside Petroleum Ltd. and Southside Oil & Gas Ltd. TriStar, directly or indirectly,
legally and beneficially owns all of the outstanding shares and other securities or interests of the
foregoing subsidiaries and no Person holds any securities convertible or exchangeable into securities
of such subsidiaries or has any agreement, warrant, option, right or privilege (whether pre-emptive or
contractual) being or capable of becoming an agreement for the purchase or issuance of any shares or
other securities of such subsidiaries;
(h)
since the date of the TriStar Financial Statements, except as disclosed in the TriStar Public Record or
as contemplated by this Agreement:
(i)
(i)
there has not been any Material Adverse Change in the assets, liabilities or financial condition
of TriStar and its subsidiaries, taken as a whole, from the position set forth in the TriStar
Financial Statements;
(ii)
there has not been any Material Adverse Change in the business, capital, operations or results
of the operations of TriStar and its subsidiaries, taken as a whole; and
(iii)
there have been no material facts, transactions, events or occurrences which, to the
knowledge of TriStar, could reasonably be expected to result in a Material Adverse Change in
the assets, liabilities, financial condition, business, capital, operations or results of the
operations of TriStar and its subsidiaries, taken as a whole.
since the date of the TriStar Financial Statements, except as disclosed in the TriStar Public Record:
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(i)
TriStar and each of its subsidiaries has conducted its business only in the ordinary and normal
course, consistent with past practice; and
(ii)
no liability or obligation of any nature (whether absolute, accrued, contingent or otherwise)
material to TriStar and its subsidiaries, taken as a whole, has been incurred other than in the
ordinary and normal course of business, consistent with past practice;
(j)
the data and information in respect of TriStar and its assets, reserves, liabilities, business and
operations provided by TriStar or its advisors to PetroBakken or its advisors was and is accurate and
correct in all material respects as at the respective dates thereof and, in respect of any information
provided or requested, did not, to the knowledge of TriStar, omit any material data or information
necessary to make any data or information provided not misleading as at the respective dates thereof.
TriStar has no knowledge of any Material Adverse Change to the oil and gas reserves of TriStar from
that disclosed in such data and information;
(k)
the information and statements set forth in the TriStar Public Record are true, correct, and complete
and did not contain any misrepresentation as of the respective dates of such information or
statements, and no material change has occurred in relation to TriStar and its subsidiaries, taken as a
whole, which is not disclosed in the TriStar Public Record, and TriStar has not filed any confidential
material change reports which continue to be confidential;
(l)
except as disclosed in the TriStar Public Record as of the date hereof or as otherwise disclosed as of
the date hereof in writing to PetroBakken and Petrobank by TriStar prior to the execution of this
Agreement, there is no court, administrative, regulatory or similar proceeding (whether civil, quasicriminal or criminal), arbitration or other dispute settlement procedure, investigation or inquiry by
any Governmental Authority, or any claim, action, suit, demand, arbitration, charge, indictment,
hearing or other similar civil, quasi-criminal or criminal, administrative or investigative material
matter or proceeding (collectively, “proceedings”) against or involving it or any of its subsidiaries, in
respect of the businesses, properties or assets of it or any of its subsidiaries (whether in progress or, to
the knowledge of TriStar, threatened), that if adversely determined, would reasonably be expected to
have a materially adverse effect on TriStar and its subsidiaries, taken as a whole, or significantly
impede the completion of the transactions contemplated by this Agreement and to the knowledge of
TriStar, no event has occurred which might reasonably be expected to give rise to any proceeding.
There is no judgment, writ, decree, injunction, rule, award or order of any Governmental Authority
outstanding against TriStar or any of its subsidiaries in respect of their businesses, properties or assets
that has had or would reasonably be expected to have a materially adverse effect on TriStar or its
subsidiaries, taken as a whole, or significantly impede the completion of the transactions
contemplated by this Agreement;
(m)
the TriStar Financial Statements fairly present, in accordance with generally accepted accounting
principles in Canada, consistently applied, the financial position and condition of TriStar and its
subsidiaries on a consolidated basis at the dates thereof and the results of the operations of TriStar and
its subsidiaries on a consolidated basis for the periods then ended and reflect in accordance with
generally accepted accounting principles in Canada, consistently applied, all material assets, liabilities
or obligations (absolute, accrued, contingent or otherwise) of TriStar and its subsidiaries on a
consolidated basis as at the dates thereof;
(n)
neither TriStar nor any of its subsidiaries has received notice of any material violation of or
investigation relating to any federal, provincial or local law, regulation or ordinance with respect to its
assets, business or operations and TriStar and its subsidiaries hold all permits, licenses and other
authorizations which are required under federal, provincial or local laws relating to TriStar’s assets,
business or operations, except where the failure to comply with the foregoing would not have a
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Material Adverse Effect on TriStar and its subsidiaries, taken as a whole. The assets of TriStar and its
subsidiaries, taken as a whole, are operated and maintained by it in compliance with all terms and
conditions of applicable laws, permits, licenses and authorizations in all material respects;
(o)
no securities commission or similar regulatory authority, or stock exchange in Canada has issued any
order which is currently outstanding preventing or suspending trading in any securities of TriStar, no
such proceeding is, to the knowledge of TriStar, pending, contemplated or threatened and TriStar is
not, to its knowledge, in default of any requirement of any Applicable Laws;
(p)
there are no payments to directors, officers and employees of TriStar prior to the Effective Date under
all contract settlements, bonus plans, retention arrangements, change of control agreements and
severance obligations (whether resulting from termination or alteration of duties) other than the
amounts payable pursuant to payments referenced in Sections 3.2(e) and 3.2(f);
(q)
TriStar has not retained any financial advisor, broker, agent or finder, or paid or agreed to pay or have
PetroBakken or Petrobank pay any financial advisor, broker, agent or finder on account of this
Agreement or the Arrangement, any transaction contemplated hereby or any transaction presently
ongoing or contemplated, except that Macquarie Capital Markets Canada Ltd. and BMO Capital
Markets have been retained as TriStar’s financial advisors and GMP Securities L.P., CIBC World
Markets Inc., and National Bank Financial Ltd. have been retained as TriStar’s strategic advisors in
connection with certain matters, including the transactions contemplated by this Agreement. TriStar
has delivered or will deliver to Petrobank true and current copies of all agreements between TriStar
and Macquarie Capital Markets Canada Ltd., BMO Capital Markets, GMP Securities L.P., CIBC
World Markets Inc., and National Bank Financial Ltd. which could give rise to the payment of any
fees to such advisors and such agreements accurately reflect the fees payable to Macquarie Capital
Markets Canada Ltd., BMO Capital Markets, GMP Securities L.P., CIBC World Markets Inc., and
National Bank Financial Ltd., which amount shall not exceed in the aggregate $13,000,000, such
amount to be payable in cash as to 66.66% and PetroBakken Class A shares as to 33.33%, payable by
the issuance of PetroBakken Class A shares to the applicable financial advisor, such PetroBakken
Class A to be issued post closing of the Arrangement. TriStar may only retain additional financial
advisors with the prior written consent of Petrobank;
(r)
the fees and expenses of legal counsel (including due diligence counsel and tax counsel) and tax
advisors to TriStar shall not exceed $700,000 in the aggregate (excluding disbursements and G.S.T);
(s)
the board of directors of TriStar have unanimously endorsed the Arrangement and approved this
Agreement, have unanimously determined that the Arrangement and this Agreement are in the best
interests of TriStar and the TriStar Shareholders, have unanimously determined that the Arrangement
is fair, from a financial point of view, to the TriStar Shareholders and have resolved to unanimously
recommend approval of the Arrangement by the TriStar Shareholders;
(t)
TriStar is not a party to and, prior to the Effective Date, TriStar shall not implement, a shareholder
rights plan or any other form of plan, agreement, contract or instrument that shall trigger any rights to
acquire Common Shares or other securities of TriStar or its subsidiaries or rights, entitlements or
privileges in favour of any Person upon the entering into of this Agreement or the Arrangement;
(u)
none of the Common Shares are the subject of any escrow, voting trust or other similar agreement to
which TriStar is a party and TriStar has no knowledge of any other such arrangement to which it is
not a party;
(v)
TriStar does not have any outstanding obligations to incur and/or renounce any Canadian exploration
expenditures or Canadian development expenditures to any purchaser of the shares of TriStar that
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have not yet been fully expended and renounced and reflected in the TriStar Financial Statements,
other than as disclosed in writing to PetroBakken and Petrobank prior to the execution of this
Agreement;
(w)
except to the extent that any violation or other matter referred to in this subparagraph does not have a
Material Adverse Effect on TriStar and its subsidiaries, taken as a whole, in respect of each of TriStar
and its subsidiaries:
(i)
it is not in violation of any Environmental Laws;
(ii)
it has operated its business at all times and has received, handled, used, stored, treated,
shipped and disposed of all contaminants without violation of Environmental Laws;
(iii)
to the best of its knowledge, there have been no spills, releases, deposits or discharges of
hazardous or toxic substances, contaminants or wastes into the earth, air or into any body of
water or any municipal or other sewer or drain water systems by TriStar or any of its
subsidiaries that have not been remedied;
(iv)
no orders, directions or notices have been issued and remain outstanding pursuant to any
Environmental Laws relating to the business or assets of TriStar or any of its subsidiaries;
(v)
it has not failed to report to the proper federal, provincial, municipal or other political
subdivision, government, department, commission, board, bureau, agency or instrumentality,
domestic or foreign the occurrence of any event which is required to be so reported by any
Environmental Law; and
(vi)
it holds all licenses, permits and approvals required under any Environmental Laws in
connection with the operation of its business and the ownership and use of its assets, all such
licenses, permits and approvals are in full force and effect, and except for notifications and
conditions of general application to assets of reclamation obligations under the
Environmental Protection and Enhancement Act (Alberta) and similar legislation in any other
jurisdiction in which it conducts its business, neither TriStar nor any of its subsidiaries has
received any notification pursuant to any Environmental Laws that any work, repairs,
constructions or capital expenditures are required to be made by it as a condition of continued
compliance with any Environmental Laws, or any license, permit or approval issued pursuant
thereto, or that any license, permit or approval referred to above is about to be reviewed,
made subject to limitation or conditions, revoked, withdrawn or terminated;
(x)
the corporate records and minute books, books of account and other records of TriStar and each of its
subsidiaries have (whether of a financial or accounting nature or otherwise) been maintained in
accordance with, in all material respects, all applicable statutory requirements and prudent business
practice and are complete and accurate in all material respects (provided, however, minutes of board
and committee meetings which relate to the transactions contemplated herein have not been disclosed
to Petrobank);
(y)
TriStar is a “reporting issuer” or equivalent in British Columbia, Alberta, Saskatchewan, Manitoba,
Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and the
outstanding Common Shares are listed and posted for trading on the TSX;
(z)
Olympia Trust Company at its principal office in Calgary, Alberta is the duly appointed registrar and
transfer agent of TriStar with respect to the TriStar Shares;
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(aa)
except as disclosed as of the date hereof by TriStar to PetroBakken and Petrobank, all Returns
required to be filed by TriStar have been duly filed, in all material respects, on a timely basis and, in
any event, prior to the Effective Date, and all Taxes shown to be payable on such Returns or on
subsequent assessments with respect thereto have been paid in full on a timely basis and, in any event,
prior to the Effective Date. Except for matters disclosed in the TriStar Financial Statements that may
give rise to the filing of amended Returns, the filed Returns are true, complete and correct in all
material respects, and no other Taxes are payable by TriStar or any of its subsidiaries with respect to
items or periods covered by such Returns;
(bb)
TriStar has paid or provided adequate accruals in the TriStar Financial Statements for Taxes,
including income taxes and related future taxes, in conformity with generally accepted accounting
principles applicable in Canada;
(cc)
except as disclosed as of the date hereof in writing by TriStar to PetroBakken and Petrobank, no
material deficiencies exist or have been asserted with respect to Taxes. Neither TriStar nor any of its
subsidiaries is a party to any action or proceeding for assessment or collection of Taxes, nor has such
event been asserted or threatened against TriStar or any of its subsidiaries or any of their respective
assets. No waiver or extension of any statute of limitations is in effect with respect to Taxes or
Returns. Except as disclosed to PetroBakken and Petrobank prior to the date hereof, the Returns have
never been audited by a government or taxing authority, nor is any such audit in process, pending or
threatened which resulted in or could result in a reassessment of Taxes owing by TriStar or any of its
subsidiaries. TriStar and its subsidiaries have withheld any Taxes required to be withheld by the
applicable laws and the Tax Act and has paid or remitted on a timely basis, the full amount of any
Taxes which have been withheld to the applicable Governmental Authority;
(dd)
no director, officer, insider or other non-arm’s length party to TriStar or any of its subsidiaries (or any
associate or affiliate thereof) has any right, title or interest in (or the right to acquire any right, title or
interest in) any royalty interest, carried interest, participation interest or any other interest whatsoever
which are based on production from or in respect of any properties of TriStar or any of its subsidiaries
that shall be effective after the Effective Date;
(ee)
except as disclosed in the TriStar Public Record, no director, officer, insider or other non-arm’s
length party of TriStar or any of its subsidiaries is indebted to TriStar or any of its subsidiaries;
(ff)
except as disclosed in writing prior to the date hereof and except for indemnity agreements with its
directors and officers as contemplated by the by-laws of TriStar and Applicable Laws and other than
standard or customary indemnity agreements in acquisition, purchase and sale, underwriting and
agency agreements and in the ordinary course provided to service providers, neither TriStar nor any
of its subsidiaries is a party to or bound by any agreement, guarantee, indemnification, or
endorsement or like commitment of the obligations, liabilities (contingent or otherwise) or
indebtedness of any Person;
(gg)
any and all operations of TriStar and its subsidiaries, and to the knowledge of TriStar, any and all
operations by third parties, on or in respect of the assets and properties of TriStar or any of its
subsidiaries, have been conducted in material compliance with good oilfield practices;
(hh)
TriStar made available to Sproule and GLJ, prior to the issuance of the TriStar Reserve Report, for
the purpose of preparing such report, all information requested by Sproule, which information did not
contain any material misrepresentation at the time such information was so provided. TriStar has no
knowledge of a Material Adverse Change in any information provided to Sproule and GLJ since that
date. TriStar believes that the TriStar Reserve Report complies with the requirements of National
Instrument 51-101 and believes that the TriStar Reserve Report reasonably presented the quantity and
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pre-tax present worth values of estimated oil and gas reserves attributable to the properties evaluated
therein as at the date stated therein based upon information available at the time the TriStar Reserve
Report was prepared and the assumptions as to commodity prices and costs contained therein. Sproule
and GLJ have not re-evaluated any of the reserves of TriStar since the TriStar Reserve Report;
(ii)
although it does not warrant title, TriStar does not have reason to believe that TriStar or any of its
subsidiaries does not have title to or the irrevocable right to produce and sell its petroleum, natural
gas and related hydrocarbons (for the purposes of this clause, the foregoing are referred to as the
“TriStar Interests”) and does represent and warrant that, to the knowledge of TriStar, the TriStar
Interests are free and clear of adverse claims created by, through or under TriStar, except as disclosed
in the TriStar Public Record, related to bank financing or those arising in the ordinary course of
business, and, to the knowledge of TriStar, TriStar and each of its subsidiaries holds its TriStar
Interests under valid and subsisting leases, licenses, permits, concessions, concession agreements,
contracts, subleases, reservations or other agreements except where the failure to so hold the Interest
would not have a Material Adverse Effect upon TriStar and its subsidiaries, taken as a whole;
(jj)
TriStar is not aware of any defects, failures or impairments in the title of TriStar or any of its
subsidiaries to its oil and gas properties, whether or not an action, suit, proceeding or inquiry is
pending or threatened and whether or not discovered by any third party, which in aggregate could
have a Material Adverse Effect on: (i) the quantity and pre-tax present worth values of the oil and gas
reserves of TriStar and its subsidiaries shown in the applicable independent engineering report
attributable to such properties; (ii) the current production of TriStar and its subsidiaries, taken as a
whole; or (iii) the current cash flow of TriStar and its subsidiaries, taken as a whole;
(kk)
TriStar has withheld from each payment made to any of its present or former employees, officers and
directors, and to all persons who are non-residents of Canada for the purposes of the Tax Act all
amounts required by law and shall continue to do so until the Effective Date and has remitted such
withheld amounts within the prescribed periods to the appropriate Governmental Authority. TriStar
has remitted all Canada Pension Plan contributions, unemployment insurance premiums, employer
health taxes and other taxes payable by it in respect of its employees and has or shall have remitted
such amounts to the proper Governmental Authority within the time required by applicable law.
TriStar has charged, collected and remitted on a timely basis all taxes as required by applicable law
on any sale, supply or delivery whatsoever, made by TriStar;
(ll)
all Taxes, including all ad valorem, property, production, severance and similar taxes and assessments
based on or measured by the ownership of property or the production of its hydrocarbon substances,
or the receipt of proceeds therefrom, payable in respect of its oil and gas assets prior to the date
hereof, have been properly and fully paid and discharged, and there are no unpaid taxes or
assessments due or delinquent which could result in a lien or charge on its oil and gas assets;
(mm)
except as disclosed as of the date hereof in writing, by TriStar to PetroBakken and Petrobank, neither
TriStar nor any of its subsidiaries is a party to or bound or affected by any commitment, agreement or
document containing any covenant expressly limiting its freedom to compete in any line of business,
compete in any geographic region, transfer or move any of its assets or operations, where such
covenant would have a Material Adverse Effect on the business of TriStar and its subsidiaries, taken
as a whole;
(nn)
there are policies of insurance in force at the date hereof naming TriStar as an insured and, to the
knowledge of TriStar, remain in force and effect and shall not be cancelled or otherwise terminated as
a result of the transactions contemplated by this Agreement. Such policies of insurance adequately
cover all risks as are customarily covered by oil and gas producers in the industry;
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(oo)
TriStar has provided to Petrobank copies of all management recommendation letters relating to
TriStar or any of its subsidiaries received from TriStar’s current auditor or any previous auditor
during the two years prior to the date hereof;
(pp)
to the knowledge of TriStar, TriStar has not withheld from PetroBakken or Petrobank any material
information or documents concerning TriStar or any of its subsidiaries or their respective assets or
liabilities during the course of PetroBakken and Petrobank’s review of TriStar and its assets. No
representation or warranty contained herein and no statement contained in any schedule or other
disclosure document provided or to be provided to PetroBakken or Petrobank by TriStar pursuant
hereto contains or shall contain any untrue statement of a material fact which is necessary to make the
statements herein or therein not misleading;
(qq)
all information in the Circular (other than in respect of the PetroBakken and Petrobank Information,
in respect of which TriStar makes no representation or warranty) shall, as of the Mailing Date and as
of the Effective Date be true and complete in all material respects and shall not contain any
misrepresentation;
(rr)
other than for as disclosed in writing to PetroBakken and Petrobank prior to the execution of this
Agreement, there is no non-competition, exclusivity, area of mutual interest agreement or other
similar agreement, commitment or understanding in place to which TriStar is a party or by which it is
otherwise bound that would now or hereafter in any way limit the business or operations of TriStar in
a particular manner or to a particular locality or geographic region or for a limited period of time and
the execution, delivery and performance of this Agreement does not and will not result in the
restriction of TriStar from engaging in this business or from competing with any Person or in any
geographic area;
(ss)
the TriStar Debt as at June 30, 2009 did not exceed $402 million, the TriStar Debt as of the date
hereof does not exceed $415 million, and TriStar Debt as at the Effective Date, assuming current
forward-strip commodity pricing, shall not exceed $420 million without the prior written consent of
Petrobank and PetroBakken acting reasonably;
(tt)
neither TriStar nor the board of directors of TriStar has agreed or consented to the release of any
director, officer, employee or consultant of TriStar or any of its subsidiaries from any fiduciary or
other duty owed by such Person to TriStar or the TriStar Shareholders, including, without limitation,
as would allow any such Person to pursue any opportunities which might otherwise be available to
TriStar or its subsidiaries in their personal capacities or otherwise;
(uu)
there are no agreements material to the conduct of TriStar’s affairs or business, except for those
agreements disclosed in the TriStar Public Record or those entered into in the ordinary course of
business, and all such material agreements are valid and subsisting and that TriStar is not in material
default under any such agreements;
(vv)
TriStar has filed all documents required to be filed by it with all applicable Governmental Authorities
and all such documents were, as of their respective dates, in compliance in all material respects with
all Applicable Laws and at the time filed did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. TriStar will deliver to
PetroBakken and Petrobank, as soon as they become available, true and complete copies of any
material reports or statements required to be filed by TriStar with any Governmental Authority
subsequent to the date of the Agreement. As of their respective dates, such reports and statements
(excluding any information therein provided by PetroBakken and Petrobank, as to which TriStar
makes no representation) will not contain any untrue statement of a material fact or omit to state a
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material fact required to be stated therein or necessary to make the statements therein, in light of the
circumstances in which they are made, not misleading and will comply in all material respects with
all Applicable Laws;
(ww)
except as disclosed in the TriStar Public Record, TriStar has obtained and is in compliance with all
licences, permits, certificates, consents, orders, grants and other authorizations of or from any
Governmental Authority necessary to conduct its business as it is now being or are proposed to be
conducted, other than such licences, permits, certificates, consents, orders, grants and other
authorizations the absence of which would not have a Material Adverse Effect;
(xx)
TriStar has not received notice of any default under any of the leases and other title and operating
documents or any other agreement or instrument pertaining TriStar’s assets to which TriStar or any of
its subsidiaries is a party or by or to which TriStar or any of its subsidiaries or any such assets are
bound or subject except to the extent that such defaults would not in the aggregate have a Material
Adverse Effect;
(yy)
to its knowledge:
(i)
TriStar is in good standing under all, and is not in default under any; and
(ii)
there is no existing condition, circumstance or matter which constitutes or which, with the
passage of time or the giving of notice, would constitute a default under any,
leases and other title and operating documents or any other agreements and instruments
pertaining to its oil and gas assets to which it is a party or by or to which it or such assets are
bound or subject and, to their knowledge, all such leases, title and operating documents and
other agreements and instruments are in good standing and in full force and effect and none
of the counterparties to such leases, title and operating documents and other agreements and
instruments is in default thereunder except to the extent that such defaults would not in the
aggregate have a Material Adverse Effect;
(zz)
except as disclosed to PetroBakken and Petrobank and except as is reflected in the TriStar Reserve
Report, none of TriStar’s assets are subject to reduction by reference to payout of or production
penalty on any well or otherwise or to change to an interest of any other size or nature by virtue of or
through any right or interest granted by, through or under TriStar or any of its subsidiaries except to
the extent that such reduction or change to an interest would not in the aggregate have a Material
Adverse Effect;
(aaa)
none of the wells in which TriStar or its subsidiaries holds an interest has been produced in excess of
applicable production allowables imposed by any applicable law or any governmental authority and
none of TriStar or its subsidiaries has any knowledge of any impending change in production
allowables imposed by any Applicable Law or any Governmental Authority that may be applicable to
any of the wells in which any of them holds an interest, other than changes of general application in
the jurisdiction in which such wells are situate except to the extent that such non-compliance or
changes would not in the aggregate have a Material Adverse Effect;
(bbb)
none of TriStar or its subsidiaries has received notice of any production penalty or similar production
restriction of any nature imposed or to be imposed by any Governmental Authority, including gas-oil
ratio, off-target and overproduction penalties imposed by a Governmental Authority and, to their
knowledge, none of such wells in which any of them holds an interest is subject to any such penalty
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or restriction except to the extent that any such penalty or restriction would not in the aggregate have
a Material Adverse Effect;
(ccc)
the tangible depreciable property used or intended for use in connection with TriStar’s assets:
(i)
for which any of TriStar or its subsidiaries was or is operator, was or has been constructed,
operated and maintained in accordance with good and prudent oil and gas industry practices
in Canada and all Applicable Law during all periods in which TriStar or its subsidiaries was
operator thereof and is in good condition and repair, ordinary wear and tear excepted, and is
useable in the ordinary course of business; and
(ii)
for which none of TriStar or its subsidiaries was or is operator, to their knowledge, was or has
been constructed, operated and maintained in accordance with good and prudent oil and gas
industry practices in Canada and all Applicable Law during all periods in which none of
TriStar or its subsidiaries was operator thereof and is in good condition and repair, ordinary
wear and tear excepted, and is useable in the ordinary course of business;
except to the extent that such non-compliance with prudent oil and gas industry practices or
Applicable Law would not in the aggregate have a Material Adverse Effect;
4.3
(ddd)
there are no outstanding authorizations for expenditure pertaining to any of TriStar’s assets or any
other commitments, approvals or authorizations pursuant to which an expenditure may be required to
be made in respect of such assets after the date of the most recent TriStar Financial Statements in
excess of $1 million for each such commitment, approval or authorization other than pursuant to the
2009 capital budget disclosed by TriStar to Petrobank; and
(eee)
to the best of TriStar’s knowledge, as of the date hereof TriStar does not hold assets located in the
United States with a fair market value of greater than US$65.2 million and has not made aggregate
sales in or into the United States of over US$65.2 million in its most recent fiscal year.
Privacy Issues
(a)
For the purposes of this Section 4.3, the following definitions shall apply:
(i)
“applicable law” means, in relation to any Person, transaction or event, all applicable
provisions of laws, statutes, rules, regulations, official directives and orders of and the terms
of all judgments, orders and decrees issued by any authorized authority by which such Person
is bound or having application to the transaction or event in question, including applicable
privacy laws.
(ii)
“applicable privacy laws” means any and all applicable laws relating to privacy and the
collection, use and disclosure of Personal Information in all applicable jurisdictions,
including but not limited to the Personal Information Protection and Electronic Documents
Act (Canada) and/or any comparable provincial law including the Personal Information
Protection Act (Alberta).
(iii)
“authorized authority” means, in relation to any Person, transaction or event, any (a)
federal, provincial, municipal or local governmental body (whether administrative,
legislative, executive or otherwise), both domestic and foreign, (b) agency, authority,
commission, instrumentality, regulatory body, court, central bank or other entity exercising
executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or
pertaining to government, (c) court, arbitrator, commission or body exercising judicial, quasi-
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judicial, administrative or similar functions, and (d) other body or entity created under the
authority of or otherwise subject to the jurisdiction of any of the foregoing, including any
stock or other securities exchange, in each case having jurisdiction over such Person,
transaction or event.
(iv)
“Personal Information” means information about an individual transferred to TriStar by
PetroBakken in accordance with this Agreement and/or as a condition of the Transaction;
(b)
the Parties hereto acknowledge that they are responsible for compliance at all times with applicable
privacy laws which govern the collection, use and disclosure of Personal Information acquired by or
disclosed to either Party pursuant to or in connection with this Agreement (the “Disclosed Personal
Information”);
(c)
no Party shall use the Disclosed Personal Information for any purposes other than those related to the
performance of this Agreement and the completion of the Arrangement;
(d)
each Party acknowledges and confirms that the disclosure of Personal Information is necessary for the
purposes of determining if the Parties shall proceed with the Arrangement, and that the disclosure of
Personal Information relates solely to the carrying on of the business and the completion of the
Arrangement;
(e)
each Party acknowledges and confirms that it has and shall continue to employ appropriate
technology and procedures in accordance with applicable law to prevent accidental loss or corruption
of the Disclosed Personal Information, unauthorized input or access to the Disclosed Personal
Information, or unauthorized or unlawful collection, storage, disclosure, recording, copying,
alteration, removal, deletion, use or other processing of such Disclosed Personal Information;
(f)
each Party shall at all times keep strictly confidential all Disclosed Personal Information provided to
it, and shall instruct those employees or advisors responsible for processing such Disclosed Personal
Information to protect the confidentiality of such information in a manner consistent with the Parties’
obligations hereunder. Each Party shall ensure that access to the Disclosed Personal Information shall
be restricted to those employees or advisors of the respective Party who have a bona fide need to
access to such information in order to complete the Arrangement;
(g)
each Party shall promptly notify the other Party to this Agreement of all inquiries, complaints,
requests for access, and claims of which the Party is made aware in connection with the Disclosed
Personal Information. The Parties shall fully co-operate with one another, with the persons to whom
the Personal Information relates, and any authorized authority charged with enforcement of applicable
privacy laws, in responding to such inquiries, complaints, requests for access, and claims; and
(h)
upon the expiry or termination of this Agreement, or otherwise upon the reasonable request of either
Party, the counterparty shall forthwith cease all use of the Personal Information acquired by the
counterparty in connection with this Agreement and shall return to the Party or, at the Party’s request,
destroy in a secure manner, the Disclosed Personal Information (and any copies).
ARTICLE 5 - - CONDITIONS PRECEDENT
5.1
Mutual Conditions Precedent
The respective obligations of the Parties to consummate the transactions contemplated by this Agreement, and
in particular the Arrangement, are subject to the satisfaction, on or before the Effective Date or such other time
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specified, of the following conditions, any of which may be waived by the mutual written consent of such Parties
without prejudice to their right to rely on any other of such conditions:
(a)
on or about August 31, 2009 but no later than September 18, 2009, the Interim Order shall have been
granted in form and substance satisfactory to each of PetroBakken, Petrobank and TriStar, acting
reasonably, and such order shall not have been set aside or modified in a manner unacceptable to
PetroBakken, Petrobank or TriStar, acting reasonably, on appeal or otherwise;
(b)
the Arrangement Resolution shall have been passed by the TriStar Shareholders on or about October
1, 2009, but no later than October 16, 2009, in accordance with the Interim Order and in form and
substance satisfactory to each of PetroBakken, Petrobank and TriStar, acting reasonably;
(c)
on or about September 30, 2009 but no later than October 30, 2009, subject to section (h) below, the
Final Order shall have been granted in form and substance satisfactory to PetroBakken, Petrobank and
TriStar, acting reasonably;
(d)
the Articles of Arrangement to be filed with the Registrar in accordance with the Arrangement shall
be in accordance with the terms of the Plan of Arrangement and in form and substance satisfactory to
each of PetroBakken, Petrobank and TriStar, acting reasonably, and such Articles of Arrangement
shall have been filed with the Registrar on or about October 1, 2009 but no later than October 30,
2009, subject to section (h) below;
(e)
the TSX shall have approved the listing of all of the PetroBakken Class A Shares issuable to TriStar
Shareholders pursuant to the Arrangement, subject to customary conditions;
(f)
the relevant waiting period in Section 123 of the Competition Act shall have expired and: (i) an
advance ruling certificate (“ARC”) pursuant to Section 102 of the Competition Act shall have been
issued by the Commissioner of the Competition Bureau (“Commissioner”) appointed under the
Competition Act; or (ii) a “no action letter” satisfactory to each of PetroBakken and TriStar, acting
reasonably, indicating that the Commissioner has determined not to make an application for an order
under section 92 of the Competition Act shall have been received from the Commissioner, and any
terms and conditions attached to any such letter shall be acceptable to each of PetroBakken and
TriStar, acting reasonably; and in addition, in the event that the ARC or “no action” letter described in
(i) or (ii) in the foregoing is issued, there shall be no threatened or actual application by the
Commissioner for an order under Section 92 or 100 of the Competition Act; and
(g)
no action shall have been taken under any existing applicable law or regulation, nor any statute, rule,
regulation or order which is enacted, enforced, promulgated or issued by any court, department,
commission, board, regulatory body, government or Governmental Authority or similar agency,
domestic or foreign, that:
(h)
(i)
makes illegal or otherwise directly or indirectly restrains, enjoins or prohibits the
Arrangement or any other transactions contemplated by this Agreement; or
(ii)
results in a judgment or assessment of material damages directly or indirectly relating to the
transactions contemplated by this Agreement.
Notwithstanding the foregoing, the outside deadlines referred to in section 5.1(c) and 5.1(d) hereof
shall be extended to February 1, 2010 in the event that a material adverse event or other circumstance
has occurred that materially limits Petrobank’s and/or PetroBakken’s ability to access the domestic
market for syndicated credit facilities or the financial, banking, loan syndication or capital markets
generally.
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The foregoing conditions are for the benefit of PetroBakken, Petrobank and TriStar may be asserted by
PetroBakken, Petrobank or TriStar regardless of the circumstances and may be waived by PetroBakken, Petrobank or
TriStar (with respect to such Party) in their sole discretion, in whole or in part, at any time and from time to time
without prejudice to any other rights which PetroBakken, Petrobank or TriStar may have.
5.2
Additional Conditions to Obligations of PetroBakken
The obligations of PetroBakken and Petrobank to consummate the transactions contemplated by this
Agreement, and in particular the Arrangement, is subject to the satisfaction, on or before the Effective Date or such
other time specified, of the following conditions:
(a)
TriStar shall have mailed the Circular and other documentation required in connection with the
TriStar Meeting on or about August 31, 2009 but no later than September 18, 2009, provided that any
failure to mail by such date is not caused by a material breach of PetroBakken’s covenants under this
Agreement;
(b)
the representations and warranties made by TriStar in Section 4.2 of this Agreement shall be true and
correct in all material respects (except for representations and warranties containing qualifiers as to
materiality, which shall be true and correct) as of the Effective Date as if made on and as of such date
(except for representations and warranties which refer only to another specific date, which shall be
true and correct as of that date) and TriStar shall have provided to PetroBakken a certificate of an
officer of TriStar certifying as to such matters on behalf of TriStar on the Effective Date;
(c)
TriStar shall have complied in all material respects with its covenants in this Agreement and TriStar
shall have provided to PetroBakken and Petrobank a certificate of a senior officer of TriStar
certifying, on behalf of TriStar, as to such compliance and PetroBakken and Petrobank shall have no
actual knowledge to the contrary;
(d)
prior to the Mailing Date, Optionholders representing at least 90% of the outstanding Options shall
have entered into agreements with TriStar in a form acceptable to PetroBakken and Petrobank, acting
reasonably, whereby each such holder agrees that, prior to the Effective Date, such holder’s Options
shall be exercised for Common Shares or surrendered for a cash payment equal to the “in-the-money
amount” of such holder’s Options, determined in a manner satisfactory to PetroBakken and
Petrobank, acting reasonably and PetroBakken and Petrobank shall be satisfied that all Options will
be exercised or cancelled on or before the Effective Date provided that only nominal consideration
shall be paid in respect of the cancellation or exercise of Options with an exercise price greater than
$14.75;
(e)
prior to the Mailing Date, holders of Incentive Shares representing at least 90% of the outstanding
Incentive Shares shall have entered into agreements with TriStar whereby each such holder agrees
that, prior to the Effective Date, such holder’s Incentive Shares shall be redeemed for Common
Shares or cancelled or Petrobank and PetroBakken shall otherwise be satisfied that all Incentive
Shares will otherwise be redeemed or cancelled on or before the Effective Date;
(f)
TriStar shall have furnished PetroBakken with:
(i)
certified copies of the resolutions duly passed by the boards of directors of TriStar approving
this Agreement and the consummation of the transactions contemplated by this Agreement;
and
(ii)
certified copies of the resolutions of TriStar Shareholders, duly passed at the TriStar Meeting,
approving the Arrangement Resolution;
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(g)
no Material Adverse Change shall have occurred in respect of TriStar from and after the date hereof
and prior to the Effective Date, and no Material Adverse Change in respect of TriStar shall have
occurred prior to the date hereof or shall occur from and after the date hereof and prior to the
Effective Date from that reflected in the unaudited financial statements of TriStar for the fiscal period
ended June 30, 2009;
(h)
no act, action, suit, proceeding, objection or opposition shall have been threatened or taken against or
affecting TriStar before or by any domestic or foreign court, tribunal or governmental agency or other
regulatory or administrative agency or commission by any elected or appointed public official or
private Person in Canada or elsewhere, whether or not having the force of law and no law, regulation,
policy, judgment, decision, order, ruling or directive (whether or not having the force of law) shall
have been proposed, enacted, promulgated, amended or applied, which in the sole judgment of
PetroBakken and Petrobank acting reasonably, in either case has had or, if the Arrangement was
consummated, would result in a Material Adverse Change in respect of TriStar or would have a
material adverse effect on the ability of the Parties to complete the Arrangement;
(i)
TriStar shall not be in material breach of its obligations under this Agreement;
(j)
TriStar shall have obtained all required third party consents and approvals required to be obtained by
it in respect of the transactions contemplated by this Agreement on terms and conditions satisfactory
to Petrobank and PetroBakken, acting reasonably; and
(k)
if dissent rights are granted to the TriStar Shareholders by the Court in connection with the
Arrangement, holders of not more than 5% of the issued and outstanding Common Shares, in the
aggregate, shall have exercised rights of dissent in relation to the Arrangement.
The conditions in this Section 5.2 are for the exclusive benefit of PetroBakken and Petrobank and may be
asserted by PetroBakken or Petrobank regardless of the circumstances or may be waived by PetroBakken or
Petrobank in their sole discretion, in whole or in part, at any time and from time to time without prejudice to any other
rights which PetroBakken or Petrobank may have.
5.3
Additional Conditions to Obligations of TriStar
The obligations of TriStar to consummate the transactions contemplated by this Agreement, and in particular
the Arrangement, are subject to the satisfaction, on or before the Effective Date or such other time specified, of the
following conditions:
(a)
the representations and warranties made by PetroBakken and Petrobank, as applicable, in Section 4.1
of this Agreement shall be true and correct in all material respects (except for representations and
warranties containing qualifiers as to materiality, which shall be true and correct) as of the Effective
Date as if made on and as of such date (except for representations and warranties which refer to
another specific date, which shall be true and correct as of that date) and PetroBakken and Petrobank,
as applicable, shall have provided to TriStar certificates of officers of PetroBakken and Petrobank, as
applicable, certifying as to such matters on behalf of PetroBakken and Petrobank, as applicable, on
the Effective Date;
(b)
PetroBakken, and Petrobank, as applicable, shall have complied in all material respects with its
covenants in this Agreement and shall have provided to TriStar a certificate of senior officers of
PetroBakken and Petrobank, as applicable, certifying, on behalf of PetroBakken and Petrobank, as
applicable, as to such compliance and TriStar shall have no actual knowledge to the contrary;
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(c)
PetroBakken and Petrobank shall have furnished TriStar with certified copies of the resolutions duly
passed by the boards of directors of PetroBakken and Petrobank, respectively, approving this
Agreement and the consummation of the transactions contemplated by this Agreement;
(d)
the Petrobank Reorganization shall have been completed;
(e)
the payments referenced in Section 3.2(e) and the payments pursuant to the written agreements
provided to Petrobank shall have been made (or provisions to make such payments shall have been
made to the satisfaction of TriStar) to the directors, officers and employees of TriStar on the Effective
Date;
(f)
no Material Adverse Change shall have occurred in respect of PetroBakken or the Assets from and
after the date hereof and prior to the Effective Date, and no Material Adverse Change shall have
occurred in respect of PetroBakken or the Assets prior to the date hereof or shall occur from and after
the date hereof and prior to the Effective Date from that reflected in the unaudited consolidated
financial statements of Petrobank for the fiscal period ended June 30, 2009;
(g)
no act, action, suit, proceeding, objection or opposition shall have been threatened or taken against or
affecting PetroBakken or Petrobank before or by any domestic or foreign court, tribunal or
governmental agency or other regulatory or administrative agency or commission by any elected or
appointed public official or private Person in Canada or elsewhere, whether or not having the force of
law and no law, regulation, policy, judgment, decision, order, ruling or directive (whether or not
having the force of law) shall have been proposed, enacted, promulgated, amended or applied, which
in the sole judgment of TriStar, acting reasonably, in either case has had or, if the Arrangement was
consummated, would result in a Material Adverse Change in respect of PetroBakken or the Assets or
would have a material adverse effect on the ability of the Parties to complete the Arrangement;
(h)
neither PetroBakken nor Petrobank shall be in material breach of its obligations under this
Agreement;
(i)
each of PetroBakken and Petrobank shall have obtained all required third party consents and
approvals required to be obtained by it in respect of the transactions contemplated by this Agreement
on terms and conditions satisfactory to TriStar, acting reasonably; and
(j)
consent to the Arrangement shall have been received from Petrobank's senior lenders or the
applicable credit facilities shall have been paid out and the security related thereto shall have been
released.
The conditions in this Section 5.3 are for the exclusive benefit of TriStar and may be asserted by TriStar
regardless of the circumstances or may be waived by TriStar in its sole discretion, in whole or in part, at any time and
from time to time without prejudice to any other rights which TriStar may have.
5.4
Notice and Effect of Failure to Comply with Conditions
(a)
Each of PetroBakken, Petrobank and TriStar shall give prompt notice to the other of the occurrence,
or failure to occur, at any time from the date hereof to the Effective Date of any event or state of facts
which occurrence or failure would, or would be likely to, (i) cause any of the representations or
warranties of such Party contained herein to be untrue or inaccurate in any material respect, or (ii)
result in the failure to comply with or satisfy any covenant, condition or agreement to be complied
with or satisfied by any Party hereunder; provided, however, that no such notification shall affect the
representations or warranties of the Parties or the conditions to the obligations of the Parties
hereunder.
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(b)
5.5
if any of the conditions precedents set forth in Sections 5.1, 5.2 or 5.3 hereof will not be complied
with or waived by the Party or Parties for whose benefit such conditions are provided on or before the
date required for the performance thereof, then a Party for whose benefit the condition precedent is
provided may, in addition to any other remedies they may have at law or equity, rescind and terminate
this Agreement provided that prior to the filing of the Articles of Arrangement for the purpose of
giving effect to the Arrangement, the Party intending to rely thereon has delivered a written notice to
the other Party, specifying in reasonable detail all breaches of covenants, representations and
warranties or other matters which the Party delivering such notice is asserting as the basis for the nonfulfillment of the applicable conditions precedent and provides the other Party 72 hours to rectify the
breaches before the effective date of rescission of termination. More than one such notice maybe
delivered by a Party.
Satisfaction of Conditions
The conditions set out in this Article 5 are conclusively deemed to have been satisfied, waived or released
when, with the agreement of the Parties, Articles of Arrangement are filed under the ABCA to give effect to the
Arrangement.
ARTICLE 6 - - AGREEMENT AS TO DAMAGES AND OTHER ARRANGEMENTS
6.1
PetroBakken and Petrobank Damages Event
(a)
If at any time after the execution of this Agreement:
(i)
the Arrangement is not completed, otherwise than as a result of the default of PetroBakken or
Petrobank under this Agreement or by the failure of TriStar’s Shareholders to approve the
Arrangement, and any other Acquisition Proposal is completed within 180 days from the date
of termination of this Agreement;
(ii)
the board of directors of TriStar fails to unanimously recommend or changes, withdraws or
modifies any of its recommendations or determinations referred to in subsection 3.2(n) in a
manner adverse to PetroBakken or Petrobank or otherwise fails to mail the Circular to the
TriStar Shareholders containing the recommendations or determinations referred to in
subsection 3.2(n);
(iii)
there shall be a material breach or non-performance by TriStar of any of its material
representations, warranties or covenants made in this Agreement, except where such breach is
itself the result of a material breach or non-performance by PetroBakken or Petrobank of any
of their respective material representations, warranties or covenants made in this Agreement,
provided that TriStar shall have been given notice of and five days to cure any such breach by
PetroBakken or Petrobank, if such breach is capable of being cured, and such breach shall not
have been cured,
(iv)
a bona fide Acquisition Proposal (or a bona fide intention to make one) is publicly
announced, proposed, offered or made to TriStar or the TriStar Shareholders, and the board of
directors of TriStar fails to publicly reaffirm its recommendations or determinations referred
to in subsection 3.2(n) within 10 days after such Acquisition Proposal is publicly announced,
proposed, offered or made;
(v)
TriStar accepts, recommends, approves or enters into an agreement to implement a Superior
Proposal; or
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(vi)
the board of directors of TriStar recommends that the TriStar Shareholders deposit their
shares under, vote in favour of, or otherwise accept an Acquisition Proposal;
(each of the above being a “PetroBakken and Petrobank Damages Event”), then in the event of the
termination of this Agreement pursuant to Section 8.1, TriStar shall pay to Petrobank, or PetroBakken
if directed by Petrobank, $77.5 million (the “Termination Fee”) as liquidated damages as well as the
Special Expense Reimbursement (defined below) in immediately available funds to an account
designated by Petrobank, or PetroBakken, as applicable, within three Business Days after the first to
occur of the events described above, and after such event but prior to payment of such amount,
TriStar shall be deemed to hold such funds in trust for PetroBakken.
6.2
(b)
if at any time after the execution of this Agreement there is a material breach or non-performance by
Petrobank of any of its material representations, warranties, or covenants contained in this Agreement
(except where such breach is itself the result of a material breach or non-performance by TriStar of
any of its material representations, warranties or covenants contained in this Agreement) (“TriStar
Damages Event”), Petrobank shall pay to TriStar the Termination Fee as liquidated damages and the
Special Expense Reimbursement in immediately available funds to an account designated by TriStar
within three Business Days after the first to occur of the events described above, and after such event
but prior to payment of such amount, Petrobank shall be deemed to hold such funds in trust for
TriStar.
(c)
“Special Expense Reimbursement” means, if TriStar is making a payment to Petrobank or
PetroBakken, all reasonable third party costs and expenses incurred by Petrobank prior to Petrobank
becoming aware of the occurrence of any of the events listed in subsections 6.1(a)(i) through
6.1(a)(vi), inclusive, above in connection with the Arrangement which would not have otherwise been
incurred by Petrobank (or PetroBakken) but for Petrobank (or PetroBakken) pursuing completion of
the Arrangement, to an aggregate maximum of $2,500,000; and, if Petrobank is making a payment to
TriStar, all reasonable third party costs and expenses incurred by TriStar prior to TriStar becoming
aware of the occurrence of the event described in subsection 6.1(b) above in connection with the
Arrangement which would not have otherwise been incurred by TriStar but for Petrobank making this
Proposed Transaction, to an aggregate maximum of $2,500,000.
Liquidated Damages
Each Party acknowledges that the payment of the amount set out in Sections 6.1 (other than the Special
Expense Reimbursement) is a payment of liquidated damages which are a genuine pre-estimate of the damages which
it shall suffer or incur as a result of the event giving rise to such damages and resultant termination of this Agreement
and is not a penalty. Each Party irrevocably waives any right it may have to raise as a defence that any such liquidated
damages are excessive or punitive. For greater certainty, the Parties agree that payment of the amount pursuant to
Section 6.1 is the sole monetary remedy of each Party hereunder. Nothing herein shall preclude a Party from seeking
injunctive relief to restrain any breach or threatened breach of the covenants or agreements set forth in this
Agreement, the Confidentiality Agreement or the Petrobank Confidentiality Agreement or otherwise to obtain specific
performance of any of such act, covenants or agreements, without the necessity of posting bond or security in
connection therewith.
6.3
Cost re-imbursement payable to Petrobank
In the event that the Arrangement is not completed by the failure of the TriStar Shareholders to approve the
Arrangement at the TriStar Meeting, or a shareholders’ vote is not held through no fault of any Party, and provided
that there shall not have been a material breach or non-performance by PetroBakken or Petrobank of any of their
material representations, warranties, or covenants contained in the this Agreement (except where such breach is itself
the result of a material breach or non-performance by TriStar of any of its material representations, warranties, or
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covenants contained in this Agreement), TriStar shall reimburse PetroBakken and Petrobank for all reasonable third
party costs and expenses incurred by PetroBakken and Petrobank in connection with the Arrangement which would
not have otherwise been occurred by PetroBakken and Petrobank but for PetroBakken and Petrobank pursuing the
completion of the Arrangement, to an aggregate maximum of $2,500,000; and provided further, that in no
circumstances shall PetroBakken and Petrobank be entitled to both the Special Expenses Reimbursement and the
reimbursement of expenses pursuant to this paragraph 6.3.
ARTICLE 7 - - AMENDMENT
7.1
Amendment
This Agreement may at any time and from time to time before or after the holding of the TriStar Meeting be
amended by written agreement of the Parties hereto without, subject to Applicable Laws, further notice to or
authorization on the part of their respective securityholders and any such amendment may, without limitation:
(a)
change the time for performance of any of the obligations or acts of the Parties;
(b)
waive any inaccuracies or modify any representation or warranty contained herein or in any document
delivered pursuant hereto;
(c)
waive compliance with or modify any of the covenants herein contained and waive or modify
performance of any of the obligations of the Parties; or
(d)
waive compliance with or modify any other conditions precedent contained herein;
provided that no such amendment reduces or materially adversely affects the consideration to be received by a TriStar
Shareholder without approval by the TriStar Shareholders given in the same manner as required for the approval of
the Arrangement or as may be ordered by the Court.
ARTICLE 8 - - TERMINATION
8.1
Termination
This Agreement may be terminated at any time prior to the Effective Date:
(a)
by written consent of PetroBakken, Petrobank and TriStar;
(b)
as provided in Sections 5.1, 5.2 and 5.3, provided that the terminating party is not materially in
default of its representations, warranties and covenants under this Agreement;
(c)
by PetroBakken or Petrobank upon the occurrence of a PetroBakken and Petrobank Damages Event
and the payment by TriStar to Petrobank as provided in Section 6.1; or
(d)
by TriStar upon the occurrence of a TriStar Damages Event and the payment by Petrobank or
PetroBakken to TriStar of the amount required by Section 6.1.
In the event of the termination of this Agreement in the circumstances set out in paragraphs (a) through (d) of
this Section 8.1, this Agreement shall forthwith become void and neither Party shall have any liability or further
obligation to the other Party hereunder except with respect to the obligations set forth in or as otherwise specified in
Article 6 which shall survive such termination.
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Unless otherwise provided herein, the exercise by any Party of any right of termination hereunder shall be
without prejudice to any other remedy available to such Party.
ARTICLE 9 - - NOTICES
9.1
Notices
All notices which may or are required to be given pursuant to any provision of this Agreement are to be given
or made in writing and served personally or sent by telecopy and in the case of:
(a)
PetroBakken, addressed to:
PetroBakken Energy Ltd.
1900, 111 - 5th Avenue S.W.
Calgary, AB T2P 3Y6
Attention:
Telecopier:
John D. Wright
(403) 266-5794
with a copy to:
McCarthy Tétrault LLP
Suite 3300, 421 – 7th Avenue S.W.
Calgary, Alberta T2P 4K9
Attention:
Telecopier:
(b)
Andrew D. Grasby
(403) 260-3501
Petrobank, addressed to:
Petrobank Energy and Resources Ltd.
1900, 111 - 5th Avenue S.W.
Calgary, AB T2P 3Y6
Attention:
Telecopier:
John D. Wright
(403) 266-5794
with a copy to:
McCarthy Tétrault LLP
Suite 3300, 421 – 7th Avenue S.W.
Calgary, Alberta T2P 4K9
Attention:
Telecopier:
(c)
Andrew D. Grasby
(403) 260-3501
TriStar, addressed to:
TriStar Oil & Gas Ltd.
Fifth Avenue Place, East Tower
Suite 800, 425 - 1st Street SW
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Calgary, AB T2P 3L8
Attention:
Telecopier:
Brett Herman
(403) 213-3456
with a copy to:
Heenan Blaikie LLP
12th Floor, 425 – 1st Street S.W.
Calgary, AB T2P 3L8
Attention:
Telecopier:
Thomas Cotter
(403) 234-7987
or such other address as the Parties may, from time to time, advise to the other Parties hereto by notice in writing. The
date or time of receipt of any such notice shall be deemed to be the date of delivery or the time such telecopy is
received.
ARTICLE 10 - - GENERAL
10.1
Binding Effect
This Agreement shall be binding upon and enure to the benefit of the Parties hereto.
10.2
Assignment and Enurement
This Agreement shall enure to the benefit of and be binding upon the Parties hereto and their respective
successors and assigns. This Agreement may not be assigned by any Party hereto without the prior consent of the
other Parties hereto except that PetroBakken may assign all or a portion of its rights under this Agreement to any
subsidiary of PetroBakken, but no assignment shall relieve PetroBakken of its obligations hereunder.
10.3
Disclosure
Each Party shall receive the prior consent, not to be unreasonably withheld, of the other Party prior to issuing
or permitting any director, officer, employee or agent to issue, any press release or other written statement with
respect to this Agreement or the transactions contemplated by this Agreement. Notwithstanding the foregoing, if
either Party is required by law or administrative regulation to make any disclosure relating to the transactions
contemplated by this Agreement, such disclosure may be made, but that Party shall consult with the other Party as to
the wording of such disclosure prior to its being made.
10.4
Costs
Except as contemplated herein, each Party hereto covenants and agrees to bear its own costs and expenses in
connection with the transactions contemplated by this Agreement. PetroBakken and TriStar shall incur and bear
equally the filing fees payable for the applications made under the Competition Act in respect of the transactions
contemplated by the Arrangement.
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10.5
Severability
If any one or more of the provisions or parts thereof contained in this Agreement should be or become invalid,
illegal or unenforceable in any respect in any jurisdiction, the remaining provisions or parts thereof contained herein
shall be and shall be conclusively deemed to be, as to such jurisdiction, severable therefrom and:
10.6
(a)
the validity, legality or enforceability of such remaining provisions or parts thereof will not in any
way be affected or impaired by the severance of the provisions or parts thereof severed; and
(b)
the invalidity, illegality or unenforceability of any provision or part thereof contained in this
Agreement in any jurisdiction shall not affect or impair such provision or part thereof or any other
provisions of this Agreement in any other jurisdiction.
Further Assurances
Each Party hereto shall, from time to time and at all times hereafter, at the request of the other Party hereto,
but without further consideration, do all such further acts, and execute and deliver all such further documents and
instruments as may be reasonably required in order to fully perform and carry out the terms and intent hereof.
10.7
Time of Essence
Time shall be of the essence of this Agreement.
10.8
Governing Law
This Agreement shall be governed by and construed in accordance with the laws of the Province of Alberta
and the laws of Canada applicable therein and the Parties hereto irrevocably attorn to the jurisdiction of the courts of
the Province of Alberta, judicial district of Calgary. Each of the Parties hereto hereby irrevocably and unconditionally
consents to and submits to the jurisdiction of the courts of the Province of Alberta in respect of all actions, suits or
proceedings arising out of or relating to this Agreement or the matters contemplated hereby (and agrees not to
commence any action, suit or proceeding relating thereto except in such courts) and further agrees that service of any
process, summons, notice or document by single registered mail to the addresses of the Parties set forth in this
Agreement shall be effective service of process for any action, suit or proceeding brought against either Party in such
court. The Parties hereby irrevocably and unconditionally waive any objection to the laying of venue of any action,
suit or proceeding arising out of this Agreement or the matters contemplated hereby in the courts of the Province of
Alberta, judicial district of Calgary, and hereby further irrevocably and unconditionally waive and agree not to plead
or claim in any such court that any such action, suit or proceeding so brought has been brought in an inconvenient
forum.
10.9
Waiver
No waiver by any Party shall be effective unless in writing and any waiver shall affect only the matter, and
the occurrence thereof, specifically identified and shall not extend to any other matter or occurrence.
10.10
Counterparts
This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which
together constitute one and the same instrument.
[Remainder of page intentionally left blank. Signature page follows.]
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IN WITNESS WHEREOF the Parties have executed this Agreement as of the date first above written.
PETROBANK ENERGY AND RESOURCES LTD.
By: (signed) "John D. Wright"
By: (signed) "Corey Ruttan"
PETROBAKKEN ENERGY LTD.
By: (signed) "John D. Wright"
By: (signed) "Corey Ruttan"
TRISTAR OIL & GAS LTD.
By: (signed) "Brett Herman"
By: (signed) "Jason Zabinsky"
C-54
PLAN OF ARRANGEMENT UNDER SECTION 193
OF THE
BUSINESS CORPORATIONS ACT (ALBERTA)
ARTICLE 1 INTERPRETATION
1.1
In this Plan of Arrangement, the following terms have the following meanings:
“ABCA” means the Business Corporations Act (Alberta), R.S.A. 2000, c. B-9, as amended, including the regulations
promulgated thereunder;
“Arrangement”, “herein”, “hereof”, “hereto”, “hereunder” and similar expressions mean and refer to the proposed
arrangement involving PetroBakken, TriStar and the TriStar Shareholders pursuant to section 193 of the ABCA, on
the terms and conditions set forth in this Plan of Arrangement as supplemented, modified or amended, and not to any
particular article, section or other portion hereof;
“Arrangement Agreement” means the arrangement agreement dated August 4, 2009 among Petrobank, PetroBakken
and TriStar with respect to the Arrangement, and all amendments thereto;
“Articles of Arrangement” means the articles of arrangement in respect of the Arrangement required under
subsection 193(10) of the ABCA to be sent to the Registrar after the Final Order has been granted, giving effect to the
Arrangement;
“Business Day” means with respect to any action to be taken, any day, other than Saturday, Sunday or a statutory
holiday in the place where such action is to be taken;
“Cash Alternative” means cash consideration equal to $14.75 per TriStar Share and, in the case of an election under
Section 3.1(b)(i)(B) or an adjustment under Section 3.3(c) or (d), a percentage of $14.75 as consideration for the same
percentage of one TriStar Share;
“Certificate” means the certificate or other confirmation of filing to be issued by the Registrar pursuant to
subsection 193(11) of the ABCA giving effect to the Arrangement;
“Court” means the Court of Queen’s Bench of Alberta;
“Depositary” means Olympia Trust Company at its offices referred to in the Letter of Transmittal;
“Dissent Rights” means the right of a registered TriStar Shareholder to dissent to the resolution approving the
Arrangement and to be paid the fair value of the TriStar Shares in respect of which the holder dissents, all in
accordance with Section 191 of the ABCA, the Interim Order and Article 5 hereof;
“Dissenting Shareholders” means the registered TriStar Shareholders that validly exercise the Dissent Rights and
“Dissenting Shareholder” means any one of them;
“Effective Date” means the date the Arrangement becomes effective under the ABCA;
“Effective Time” means 12:01 a.m. (Calgary time) on the Effective Date;
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“Election Deadline” means 4:30 p.m. (Calgary time) on the third (3rd) Business Day immediately prior to the date of
the TriStar Meeting or, if the TriStar Meeting is adjourned, such time on the third (3rd) Business Day immediately
prior to the date of such adjourned TriStar Meeting;
“Eligible Holder” means a TriStar Shareholder who is:
(a)
a resident of Canada for the purposes of the ITA, other than a TriStar Shareholder who is exempt
from tax under the ITA, or
(b)
a partnership, if all of its members would be Eligible Holders if the members held the TriStar
common shares directly;
“Final Order” means the order of the Court approving the Arrangement pursuant to subsection 193(9) of the ABCA
in respect of TriStar, as such order may be affirmed, amended or modified by any court of competent jurisdiction;
“Interim Order” means the interim order of the Court concerning the Arrangement under Section 193(4) of the
ABCA in respect of TriStar, containing declarations and directions with respect to the Arrangement and the holding of
the TriStar Meeting, as such order may be affirmed, amended or modified by any court of competent jurisdiction;
“ITA” means the Income Tax Act (Canada) and the regulations thereunder, all as amended from time to time;
“Letter of Transmittal and Election Form” means the Letter of Transmittal and Election Form enclosed with the
Circular pursuant to which TriStar Shareholders are required to deliver certificates representing TriStar Shares and
may elect to receive on completion of the Arrangement the Cash Alternative or the Share Alternative, subject in each
case to prorating in the event that the TriStar Shareholders elect to receive, in aggregate, an amount of cash or number
of PetroBakken Shares in excess of the Maximum Cash Consideration or the Maximum Share Consideration
respectively;
“Maximum Cash Consideration” means $600,000,000, less the aggregate amount paid by TriStar in respect of
TriStar stock options exercised or cancelled on a cashless basis prior to the Effective Time;
“Maximum Share Consideration” means the maximum number of PetroBakken Shares issuable pursuant to the
Arrangement, which number shall be equal to 61,762,500 PetroBakken Shares, being equal to 36% of the aggregate
issued and outstanding Class A Common Shares and Class B Common Shares of PetroBakken immediately following
the Arrangement;
“Parties” means, collectively, TriStar and PetroBakken and “Party” means either one of them;
“PetroBakken” means PetroBakken Energy Ltd., a corporation incorporated under the ABCA;
“PetroBakken Shares” means Class A common shares of PetroBakken;
“Plan” or “Plan of Arrangement” means this plan of arrangement as amended or supplemented from time to time in
accordance with the terms hereof;
“Registrar” means the Registrar of Corporations duly appointed under the ABCA;
“Share Alternative” means 0.5350 PetroBakken Shares per TriStar Share and, in the case of an election under
Section 3.1(b)(i)(B) or an adjustment under Section 3.3(c) or (d), a percentage of 0.5350 PetroBakken Shares as
consideration for the same percentage of one TriStar Share;
“TriStar” means TriStar Oil & Gas Ltd., a corporation incorporated under the ABCA;
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“TriStar Information Circular” means the management proxy circular of TriStar to be sent by TriStar to the TriStar
Shareholders in connection with the Meeting;
“TriStar Meeting” means the special meeting of the TriStar Shareholders to be held to consider the Arrangement and
related matters, and any adjournments thereof.
“TriStar Shareholder” means the holders from time to time of TriStar Shares; and
“TriStar Shares” means common shares of TriStar.
1.2
The division of this Plan of Arrangement into articles and sections and the insertion of headings are for
convenience of reference only and shall not affect the construction or interpretation of this Plan of
Arrangement.
1.3
Unless reference is specifically made to some other document or instrument, all references herein to articles
and sections are to articles and sections of this Plan of Arrangement.
1.4
Unless the context otherwise requires, words importing the singular number shall include the plural and vice
versa; words importing any gender shall include all genders; and words importing persons shall include
individuals, partnerships, associations, corporations, funds, unincorporated organizations, governments,
regulatory authorities, and other entities.
1.5
In the event that the date on which any action is required to be taken hereunder by any of the Parties is not a
Business Day in the place where the action is required to be taken, such action shall be required to be taken on
the next succeeding day which is a Business Day in such place.
1.6
References in this Plan of Arrangement to any statute or sections thereof shall include such statute as
amended or substituted and any regulations promulgated thereunder from time to time in effect.
ARTICLE 2 ARRANGEMENT AGREEMENT
2.1
This Plan of Arrangement is made pursuant and subject to the provisions of, and forms part of, the
Arrangement Agreement.
2.2
This Plan of Arrangement, upon the filing of the Articles of Arrangement and the issuance of the Certificate,
will become effective on and after, the Effective Time and will be binding on: (i) the TriStar Shareholders;
(ii) TriStar; and (iii) PetroBakken.
2.3
The Articles of Arrangement and Certificate shall be filed and issued, respectively, with respect to this
Arrangement in its entirety. The Certificate shall be conclusive evidence that the Arrangement has become
effective and that each of the provisions of Article 3 has become effective in the sequence and at the times set
out therein.
ARTICLE 3 ARRANGEMENT
3.1
Commencing at the Effective Time, each of the events set out below shall occur and shall be deemed to occur
in the following sequence without any further act or formality except as otherwise provided herein:
(a)
the TriStar Shares held by Dissenting Shareholders who have exercised Dissent Rights which remain
valid immediately prior to the Effective Time shall, as of the Effective Time, be deemed to have been
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transferred to PetroBakken and, as of the Effective Time, such Dissenting Shareholders shall cease to
have any rights as TriStar Shareholders, other than the right to be paid by PetroBakken the fair value
of their TriStar Shares in accordance with the Dissent Rights;
(b)
3.2
(i)
subject to the limits set forth in Section 3.3(c) and (d), the Cash Alternative for (A) all TriStar
Shares held or (B) a percentage (to be determined by such TriStar Shareholder and set out in
the Letter of Transmittal and Election Form) of each TriStar Share held and Petrobakken
Shares for the remaining percentage of each TriStar Shares held and notwithstanding
anything to the contrary, consideration payable under this Section 3.1(b)(i)(B) for each
TriStar Share shall be a combination of cash and PetroBakken Shares for each TriStar Share;
or
(ii)
subject to the limits set forth in Section 3.3(d), the Share Alternative for all TriStar Shares
held.
With respect to each TriStar Shareholder, other than Dissenting Shareholders, at the Effective Time:
(a)
3.3
subject to Section 3.3, all TriStar Shares (other than those held by or on behalf of Dissenting
Shareholders) shall be transferred to PetroBakken and each holder thereof shall be entitled to receive
from PetroBakken, consideration comprised of, at the election of such TriStar Shareholder:
upon the transfer of each TriStar Share from the TriStar Shareholders to PetroBakken pursuant to
Section 3.1(b):
(i)
each holder of a TriStar Share shall cease to be a holder of the TriStar Shares so transferred
and the name of such holder shall be removed from the register of holders of TriStar Shares
as it relates to the TriStar Shares so transferred;
(ii)
PetroBakken shall become the holder of the TriStar Shares so transferred and shall be added
to the register of holders of TriStar Shares; and
(iii)
PetroBakken shall allot and issue to such holder the number of PetroBakken Shares issuable
to such holder on the basis set forth in Section 3.1(b)(i)(B) or Section 3.1(b)(ii) and the name
of such holder shall be added to the register of holders of PetroBakken Shares.
With respect to the election required to be made by a TriStar Shareholder pursuant to Section 3.1(b):
(a)
each holder shall elect to receive either the Cash Alternative or the Share Alternative in respect of all
or such portion of each TriStar Share held by such holder as is designated by such holder, by
depositing with the Depositary prior to the Election Deadline, a duly completed Letter of Transmittal
and Election Form indicating such holder's election, together with certificates representing all of such
holder's TriStar Shares;
(b)
any TriStar Shareholder who does not deposit with the Depositary a duly completed Letter of
Transmittal and Election Form prior to the Election Deadline or otherwise fails to fully comply with
the requirements of Section 3.3(a) shall be deemed to have elected to receive the Share Alternative for
all such holder's TriStar Shares;
(c)
if the aggregate amount of cash that would otherwise be payable to all TriStar Shareholders electing
the Cash Alternative in respect of their TriStar Shares exceeds the Maximum Cash Consideration, the
amount of cash equal to the Maximum Cash Consideration will be prorated among the TriStar
Shareholders electing the Cash Alternative such that each TriStar Shareholder electing the Cash
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Alternative shall be entitled to be paid the amount of cash consideration equal to the amount of cash
consideration sought to be received by such TriStar Shareholder in respect of its TriStar Shares
multiplied by a fraction, the numerator of which is the Maximum Cash Consideration and the
denominator of which is the aggregate amount of cash consideration sought to be received by all
TriStar Shareholders electing the Cash Alternative in respect of their TriStar Shares, and each TriStar
Shareholder electing the Cash Alternative will be deemed for all purposes to have made an election
under Section 3.1(b)(i)(B) to receive PetroBakken Shares for a fraction of each TriStar Share in
excess of the fraction thereof for which cash is received, and shall receive the balance of the purchase
price payable under the Arrangement in cash;
(d)
if the aggregate number of PetroBakken Shares that would otherwise be issuable to all TriStar
Shareholders electing the Share Alternative in respect of their TriStar Shares exceeds the Maximum
Share Consideration, the number of PetroBakken Shares equal to the Maximum Share Consideration
will be prorated among such TriStar Shareholders such that each TriStar Shareholder to which
Petrobakken Shares would otherwise be issuable shall be entitled to be issued the number of
PetroBakken Shares equal to the number of PetroBakken Shares sought by such TriStar Shareholder
in respect of its TriStar Shares multiplied by a fraction, the numerator of which is the Maximum
Share Consideration and the denominator of which is the aggregate number of PetroBakken Shares
sought to be received by all TriStar Shareholders to which Petrobakken Shares would otherwise be
issuable in respect of their TriStar Shares, rounded down to the nearest whole number (with cash paid
in lieu of any fractional PetroBakken Share on the basis of $14.75 per TriStar Share), and each such
TriStar Shareholder will be deemed for all purposes to have made an election under
Section 3.1(b)(i)(B) to receive the Cash Alternative for a fraction of each TriStar Share in excess of
the fraction thereof for which PetroBakken Shares are issued, and shall receive the balance of the
purchase price payable under the Arrangement in PetroBakken Shares;
(e)
any deposit of a Letter of Transmittal and Election Form and accompanying certificates may be made
at any of the addresses of the Depositary specified in the Letter of Transmittal and Election Form; and
(f)
any holder who holds TriStar Shares as a nominee, custodian, depository, trustee or in any other
representative capacity for beneficial owners of TriStar Shares may submit a separate Letter of
Transmittal and Election Form for each such beneficial owner.
3.4
TriStar and PetroBakken shall make the appropriate entries in their securities registers to reflect the matters
referred to under Sections 3.1, 3.2 and 3.3.
3.5
An Eligible Holder of a TriStar Share who receives PetroBakken Shares as consideration, in whole or in part,
for the transfer of such holder’s TriStar Shares to PetroBakken shall be entitled to make an income tax
election pursuant to subsection 85(1) of the ITA or, if the holder is a partnership, subsection 85(2) of the ITA
(and in each case, where applicable, the analogous provisions of provincial income tax law) with respect to
the transfer of such holder’s TriStar Shares to PetroBakken by providing two signed copies of the necessary
prescribed election forms to the Depositary within 90 days following the Effective Date, duly completed with
the details of the number of TriStar Shares transferred and the applicable agreed amounts for the purpose of
such elections. Thereafter, subject to the election forms being correct and complete and complying with the
provisions of the ITA (or any applicable provincial income tax law), the forms will be signed by PetroBakken
and forwarded by mail within 30 days after the receipt thereof by the Depositary to the Canada Revenue
Agency (and any applicable provincial taxing authority). PetroBakken will not be responsible for the proper
completion of any election form and, except for PetroBakken’s obligation to forward by mail to the Canada
Revenue Agency (and any applicable provincial taxing authority) the duly completed election forms which
are received by the Depositary, within 30 days after the receipt thereof by the Depositary, PetroBakken will
not be responsible for any taxes, interest, penalties or any other costs or damages resulting from the failure by
a holder of TriStar Shares to properly complete the election forms in the form and manner prescribed by the
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ITA (or any applicable provincial income tax law). In its sole discretion, PetroBakken may choose to sign
and forward by mail to the Canada Revenue Agency (or the applicable provincial taxing authority) an election
form received more than 90 days following the Effective Date, but PetroBakken will have no obligation to do
so.
ARTICLE 4 OUTSTANDING CERTIFICATES AND FRACTIONAL SECURITIES
4.1
From and after the Effective Time, certificates formerly representing TriStar Shares shall represent only the
right to receive the consideration to which the holders are entitled under the Arrangement, or as to those held
by Dissenting Shareholders, to receive the fair value of the TriStar Shares represented by such certificates.
4.2
PetroBakken, as soon as practicable following the later of the Effective Date and the date of deposit by a
former holder of TriStar Shares of a duly completed Letter of Transmittal and the certificates representing
such TriStar Shares, either will:
(a)
forward or cause to be forwarded by first class mail (postage prepaid) to such former holder at the
address specified in the Letter of Transmittal; or
(b)
if requested by such holder in the Letter of Transmittal, make available or cause to be made available
at the Depositary for pickup by such holder;
certificate(s) representing the number of PetroBakken Shares issued to such holder under the Arrangement
and/or a cheque representing the cash to which such holder is entitled to receive under the terms of the
Arrangement.
4.3
If any certificate which immediately prior to the Effective Time represented an interest in outstanding TriStar
Shares that were transferred or cancelled pursuant to Section 3.1 has been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such certificate to have been lost, stolen or
destroyed, the Depositary will issue and deliver in exchange for such lost stolen or destroyed certificate the
consideration to which the holder is entitled pursuant to the Arrangement (and any dividends or distributions
with respect thereto) as determined in accordance with the Arrangement. The person who is entitled to receive
such consideration shall, as a condition precedent to the receipt thereof, give a bond to PetroBakken and its
transfer agent, which bond is in form and substance satisfactory to PetroBakken and its transfer agent, or shall
otherwise indemnify PetroBakken and its transfer agent against any claim that may be made against any of
them with respect to the certificate alleged to have been lost, stolen or destroyed.
4.4
TriStar Shareholders shall not be entitled to any interest, dividend, premium or other payment on or with
respect to the TriStar Shares other than the PetroBakken Shares which they are entitled to receive for the
TriStar Shares held by them pursuant to this Plan of Arrangement.
4.5
Any certificate formerly representing TriStar Shares that is not deposited with all other documents as required
by this Plan of Arrangement on or before the fourth anniversary of the Effective Date shall cease to represent
a right or claim of any kind or nature and, for greater certainty, the right of the holder of such TriStar Shares
to receive certificates representing PetroBakken Shares shall be deemed to be surrendered to PetroBakken.
4.6
No fractional PetroBakken Shares will be issued. In the event that a TriStar Shareholder would otherwise be
entitled to a fractional PetroBakken Share hereunder, the number of PetroBakken Shares issued to such
TriStar Shareholder shall be rounded up to the next greater whole number of PetroBakken Shares, if the
fractional entitlement is equal to or greater than 0.5 and shall, without any additional compensation, be
rounded down to the next lesser whole number of PetroBakken Shares if the fractional entitlement is less than
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0.5. In calculating such fractional interests, all TriStar Shares registered in the name of or beneficially held by
such TriStar Shareholder or their nominee shall be aggregated.
ARTICLE 5 DISSENTING SHAREHOLDERS
5.1
Each registered holder of TriStar Shares shall have the right to dissent with respect to the Arrangement in
accordance with the Interim Order. A Dissenting Shareholder shall, at the Effective Time, cease to have any
rights as a holder of TriStar Shares and shall only be entitled to be paid the fair value of the holder’s TriStar
Shares. A Dissenting Shareholder who is paid the fair value of the holder’s TriStar Shares shall be deemed to
have transferred the holder’s TriStar Shares to PetroBakken at the Effective Time, notwithstanding the
provisions of Section 191 of the ABCA. A Dissenting Shareholder who, for any reason is not entitled to be
paid the fair value of the holder’s TriStar Shares, shall be treated as if the holder had participated in the
Arrangement on the same basis as a non-dissenting holder of TriStar Shares, notwithstanding the provisions
of Section 191 of the ABCA. The fair value of the TriStar Shares shall be determined as of the close of
business on the last business day before the day on which the Arrangement is approved by the holders of
TriStar Shares at the TriStar Meetings or, if not the same day, the day the last approval is obtained; but in no
event shall TriStar or PetroBakken be required to recognize such Dissenting Shareholder as a shareholder of
TriStar after the Effective Time and the name of such holder shall be removed from the applicable TriStar
register of shareholders as at the Effective Time. For greater certainty, in addition to any other restrictions in
Section 191 of the ABCA, no person who has voted in favour of the Arrangement shall be entitled to dissent
with respect to the Arrangement.
ARTICLE 6 AMENDMENTS
6.1
TriStar and PetroBakken may amend, modify and/or supplement this Plan of Arrangement at any time and
from time to time prior to the Effective Time, provided that each such amendment, modification and/or
supplement must be: (i) set out in writing; (ii) filed with the Court and, if made following the TriStar
Meeting, approved by the Court; and (iii) communicated to holders of TriStar Shares if and as required by the
Court.
6.2
Any amendment, modification or supplement to this Plan of Arrangement may be proposed by TriStar and
PetroBakken at any time prior to or at the earliest TriStar Meeting with or without any other prior notice or
communication, and if so proposed and accepted by the persons voting at the TriStar Meeting (other than as
may be required under the Interim Order), shall become part of this Plan of Arrangement for all purposes.
6.3
TriStar or PetroBakken, with the consent of the other party, may amend, modify and/or supplement this Plan
of Arrangement at any time and from time to time after the TriStar Meeting and prior to the Effective Time
with the approval of the Court.
6.4
Any amendment, modification or supplement to this Plan of Arrangement may be made following the
Effective Time but shall only be effective if it is consented to by PetroBakken and TriStar, provided that such
amendment, modification or supplement concerns a matter which, in the reasonable opinion of the
PetroBakken and TriStar, is of an administrative nature required to better give effect to the implementation of
this Plan of Arrangement and is not adverse to the financial or economic interests of the PetroBakken and
TriStar or any former holder of TriStar Shares.
C-61
AMENDMENT TO
ARRANGEMENT AGREEMENT
AMONG
PETROBAKKEN ENERGY LTD.
PETROBANK ENERGY AND RESOURCES LTD.
- AND TRISTAR OIL & GAS LTD.
DATED AUGUST 4, 2009
Effective as of August 31, 2009
C - 62
ARRANGEMENT AGREEMENT AMENDMENT
THIS ARRANGEMENT AGREEMENT AMENDMENT (the “Amending
Agreement”), dated effective as of August 31, 2009 among PetroBakken Energy Ltd.
(“PetroBakken”), Petrobank Energy and Resources Ltd. (“Petrobank”) and TriStar Oil & Gas Ltd.
(“TriStar”);
WITNESSES THAT, WHEREAS Petrobank, PetroBakken and TriStar entered into
an arrangement agreement (the “Arrangement Agreement”) dated as of August 4, 2009 pursuant to
which PetroBakken has agreed to acquire all of the issued and outstanding Common Shares, in
exchange for, at the election or deemed election of the TriStar Shareholder and subject to prorationing, either (a) $14.75 cash, (b) 0.5350 of a PetroBakken Share or (c) cash for a percentage (to
be determined by such TriStar Shareholder) of each TriStar Share held and Petrobakken Shares for
the remaining percentage of each TriStar Share held, subject to an aggregate maximum of
$600,000,000, less the aggregate amount to be paid by TriStar in respect of TriStar Options
surrendered to TriStar for cash prior to the Effective Time, cash consideration being payable by
PetroBakken to holders electing to receive cash and an aggregate maximum of 61,762,500
PetroBakken Shares being issuable by PetroBakken to holders electing to receive PetroBakken
Shares;
AND WHEREAS the parties wish to amend the Arrangement Agreement and the
Plan of Arrangement to: (a) amend the deemed consideration payable to any TriStar Shareholder
who does not properly deposit a Letter or Transmittal and Election Form prior to the Election
Deadline or otherwise fully comply with the requirements of the Plan of Arrangement; and (b)
provide that, pursuant to the Plan of Arrangement, compensation be paid in the form of
PetroBakken Shares to certain financial advisors who have been retained by TriStar, Petrobank
or PetroBakken in connection with the Plan of Arrangement;
NOW THEREFORE in consideration of the covenants and agreements herein
contained and for other good and valuable consideration (the receipt and sufficiency of which are
hereby acknowledged), the parties covenant and agree as follows:
1.
Definitions
Unless there is something in the subject matter or context inconsistent therewith, all
terms contained in this Amending Agreement which are defined in the Arrangement Agreement,
shall, for all purposes hereof have the meanings given to such terms in the Arrangement Agreement
as amended by this Amending Agreement.
2.
Amendments to the Arrangement Agreement
Pursuant to Article 7 of the Arrangement Agreement and Article 6 of the Plan of
Arrangement, the Plan of Arrangement is amended as follows:
(a)
by adding the following definition to Section 1.1:
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“Financial Advisors” means, in the respect of TriStar, Macquarie Capital
Markets Canada Ltd., BMO Capital Markets Corp., CIBC World Markets Inc.,
GMP Securities L.P. and National Bank Financial Inc. and, in respect of
PetroBakken and Petrobank, TD Securities Inc., Haywood Securities Inc. and
UBS Securities Canada Inc.;”
(b)
by replacing the definition of “Maximum Share Consideration” in Section 1.1 with
the following:
“Maximum Share Consideration” means the maximum number of PetroBakken
Shares” to be received by TriStar Shareholders electing or deemed to be electing
to receive PetroBakken Shares pursuant to the Arrangement, which number shall
be equal to 61,762,500 PetroBakken Shares, being equal to 36% of the aggregate
issued and outstanding Class A Common Shares and Class B Common Shares of
PetroBakken immediately following the Arrangement;”
(c)
by deleting “.” at the end of Section 3.1(b) and replacing therewith “; and”
(d)
by adding the following Section 3.1(c):
“(c)
(e)
an aggregate of 286,545 PetroBakken Shares shall be issued to the
Financial Advisors, in the respective amounts determined by PetroBakken,
at a deemed issue price of $27.57 per PetroBakken Share, as partial
consideration for the services provided by the Financial Advisors to
TriStar, PetroBakken and Petrobank, as applicable, in connection with the
Arrangement.”;
by deleting Section 3.3(b) in its entirety and replacing therewith the following:
“any TriStar Shareholder who does not deposit with the Depositary a duly
completed Letter of Transmittal and Election Form prior to the Election Deadline
or otherwise fails to fully comply with the requirements of Section 3.3(a) shall be
deemed to have elected to receive $3.75 in cash and 0.3989 of a PetroBakken
Share for each of such holder’s TriStar Shares, subject to the limits set forth in
Section 3.3(c) and (d);”.
3.
Confirmation of Arrangement Agreement
(a)
The representations and warranties of each of the parties contained in the
Arrangement Agreement, are restated as of the date of this Amending Agreement
as if set out in full in this Amending Agreement.
(b)
Except as expressly amended by this Amending Agreement, all of the other terms
and provisions of the Arrangement Agreement shall be and continue to be in full
force and effect. The Arrangement Agreement, as amended by this Amending
Agreement, is hereby ratified and confirmed and shall, from and after the date hereof,
continue in full force and effect as herein amended.
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4.
General
(a)
This Amending Agreement may be executed in any number of counterparts, each of
which will be deemed an original, but all of which together will constitute one and
the same instrument.
(b)
Capitalized terms used herein without express definition shall have the same
meanings herein as are ascribed thereto in the Arrangement Agreement.
(c)
The division of this Amending Agreement into Sections and the insertion of headings
are for convenience of reference only and shall not affect the construction or
interpretation of this Amending Agreement. The terms “this Amending Agreement”,
“hereof”, “hereunder” and similar expressions refer to this Amending Agreement and
not to any particular Section or other portion hereof and include any agreements
supplemental hereto.
(d)
The Parties shall execute, acknowledge and deliver such instruments and take such
other actions as may be reasonably necessary to fulfil their respective obligations
under this Amending Agreement.
(e)
This Amending Agreement shall be governed by and construed in accordance with
the laws of the Province of Alberta and the federal laws of Canada applicable therein.
[THE REMAINDER OF THIS PAGE HAS INTENTIONALLY BEEN LEFT BLANK]
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In witness whereof, Petrobank, PetroBakken and TriStar have caused this Amending
Agreement to be executed as of the date first written above by their respective officers thereunto
duly authorized.
PETROBAKKEN ENERGY LTD.
By:
(signed) "Corey Ruttan"
By:
PETROBANK ENERGY AND
RESOURCES LTD.
By:
(signed) "Corey Ruttan"
By:
TRISTAR OIL & GAS LTD.
By:
(signed) "Brett Herman"
By:
(signed) "Jason Zabinsky"
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APPENDIX "D"
FAIRNESS OPINIONS
D-1
Macquarie Capital Markets Canada Ltd.
1210, 335 – 8th Avenue SW
Calgary, Alberta T2P 1C9
CANADA
Telephone
Facsimile
Internet
+1 403 218 6650
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August 4, 2009
STRICTLY CONFIDENTIAL
The Board of Directors of
TriStar Oil & Gas Ltd.
Fifth Avenue Place, East Tower
Suite 800, 425-1st Street SW
Calgary, AB T2P 3L8
To the Board of Directors of TriStar Oil & Gas Ltd. (the “TriStar Board”):
Introduction
Macquarie Capital Markets Canada Ltd., (“Macquarie”) understands that TriStar
Oil & Gas Ltd. (“TriStar”), Petrobank Energy and Resources Ltd. (“Petrobank”) and
PetroBakken Energy Ltd. (“PetroBakken”) have entered into an arrangement
agreement dated August 4, 2009, as amended effective August 28, 2009 (the
“Arrangement Agreement”), whereby pursuant to a series of reorganization
transactions Petrobank will capitalize PetroBakken with its Canadian Business Unit
assets and $400 million of cash, and PetroBakken will, thereafter, acquire all of the
issued and outstanding common shares of TriStar (“TriStar Shares”), including any
TriStar Shares that are issued on the exercise of TriStar options and incentive shares
pursuant to a plan of arrangement under the provisions of the Business Corporation
Act (Alberta) (the “Arrangement”).
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THE ARRANGEMENT
Pursuant to the Arrangement, holders of TriStar Shares (“TriStar Shareholders”) shall
receive, at their election and subject to pro-rationing (as described in the
Arrangement Circular), either (a) cash consideration in the amount of $14.75, (b)
share consideration consisting of 0.5350 of a PetroBakken share (“PetroBakken
Share”), or (c) a combination thereof, for each TriStar Share held. Completion of
the Arrangement is subject to approval of the TriStar Shareholders, court approval
and various conditions, including, without limitation, receipt of all required
regulatory approvals, that the Toronto Stock Exchange (“TSX”) has approved the
listing of all PetroBakken Shares issued to TriStar Shareholders under the
Arrangement, and other customary conditions. The terms of, and conditions
necessary to complete, the Arrangement are set forth in the Arrangement
Agreement and are described in the TriStar’s management information circular
dated August 31, 2009 (the “Arrangement Circular”), prepared in connection with
the meeting of the TriStar Shareholders called to approve the Arrangement (the
“TriStar Meeting”). Macquarie understands that all directors and executive officers
of TriStar (the “Supporting Shareholders”) have agreed pursuant to lock-up
agreements (the “Lock-up Agreements”) to vote their TriStar Shares in favour of the
Arrangement.
Macquarie Capital Markets Canada Ltd. is not an authorised deposit-taking institution for the purposes of the Banking
Act 1959 (Commonwealth of Australia), and Macquarie Capital Markets Canada Ltd.’s obligations do not represent
deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542. Macquarie Bank Limited does not guarantee
or otherwise provide assurance in respect of the obligations of Macquarie Capital Markets Canada Ltd.
Macquarie Capital Markets Canada Ltd.
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MACQUARIE’S ROLE
TriStar formally engaged Macquarie pursuant to an engagement agreement
dated June 15, 2009 to provide financial advisory services in connection with the
Arrangement (the “TriStar Engagement”), including Macquarie’s opinion to the
TriStar Board as to the fairness, from a financial point of view, of the consideration
to be received by the holders of TriStar Shares pursuant to the Arrangement (the
“Opinion”). In consideration for providing the Opinion, TriStar is to pay Macquarie a
fee and reimburse Macquarie for its reasonable out-of-pocket expenses.
Macquarie will also be entitled to a separate fee and is to be reimbursed for
reasonable out-of-pocket expenses in connection with the other financial advisory
and professional services provided under the TriStar Engagement. In addition,
Macquarie and its affiliates and their respective directors, officers, employees,
agents and consultants are to be indemnified by TriStar under certain
circumstances from and against certain liabilities arising in connection with the
financial advisory and professional services rendered to TriStar and the TriStar Board
under the TriStar Engagement. There are no understandings, agreements or
commitments between Macquarie and TriStar, Petrobank, PetroBakken or any of
their associates with respect to any future business dealings; however, Macquarie
may in the future in the ordinary course of business seek to perform financial
advisory services for any one or more of them from time to time. Macquarie has
not been engaged to prepare, and has not prepared, a valuation or appraisal of
TriStar or Petrobank or any of its assets, securities or liabilities, and this Opinion
should not be construed as such. Furthermore, this Opinion is not, and should not
be construed as, advice as to the price at which the TriStar Shares or any
PetroBakken Shares received in exchange therefore may trade at any future date
(whether before or after the completion of the Arrangement).
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CREDENTIALS OF MACQUARIE
Macquarie Capital Markets Canada Ltd. is a wholly owned subsidiary of the
Macquarie Group which is a diversified international provider of specialist
investment, advisory, trading and financial services in select markets around the
world with approximately $200 billion of total assets under management.
Macquarie is a member of the Investment Industry Regulatory Organization of
Canada and a member of the TSX and the TSX Venture Exchange. Macquarie’s
advisory services include the areas of mergers, acquisitions, divestments,
restructurings, fairness opinions and valuations. The Opinion expressed herein is
Macquarie’s and has been approved by senior corporate and financial advisory
professionals of Macquarie who have been involved in a number of transactions
involving the merger, acquisition, divestiture and valuation of publicly traded
Canadian issuers and in providing fairness opinions in respect of such transactions.
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INDEPENDENCE OF MACQUARIE
None of Macquarie, its affiliates or associates, is an insider, associate or affiliate
(within the meanings attributed to those terms in the Securities Act (Alberta)), or a
related entity of TriStar, Petrobank, PetroBakken or any of their respective
associates or affiliates. Macquarie has been retained by TriStar to act as financial
advisor in connection with the Arrangement and to provide the Opinion to the
TriStar Board in respect to the Arrangement and is not acting as an advisor,
financial or otherwise, to Petrobank or any of its associates or affiliates in
connection with any other transaction. Macquarie has acted as agent or
underwriter to TriStar in the past two years.
Macquarie acts as a trader and dealer, both as principal and agent, in all major
financial markets in Canada and, as such, may have, today, or in the future,
positions in the securities of TriStar, Petrobank or PetroBakken and from time to time
Macquarie Capital Markets Canada Ltd.
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may have executed or may execute transactions on behalf of TriStar, Petrobank,
PetroBakken or clients for which it received or may receive compensation. In
addition, as an investment dealer, Macquarie conducts research on securities and
may, in the ordinary course of its business, provide research reports and investment
advice to its clients on issues and investment matters, including research with
respect to TriStar, Petrobank or PetroBakken.
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SCOPE OF REVIEW
In connection with rendering our Opinion, we have reviewed and relied upon, or
carried out, among other things, the following:
In the case of TriStar:
(a) the annual report of TriStar for the period ended December 31, 2008;
(b) the annual information form of TriStar dated March 9, 2009 for the year
ended December 31, 2008;
(c) audited annual financial statements of TriStar as at and for the fiscal years
ended December 31, 2008 and December 31, 2007, respectively, together
with management’s discussion & analysis of financial condition and
operating results for each such fiscal period and management’s
certifications of annual filings in respect thereof (in each case, as publicly
filed by TriStar with applicable securities regulatory authorities);
(d) independent reserve reports concerning TriStar’s oil, natural gas liquids and
natural gas reserves and the estimated future cash flow from certain of
such reserves, effective as of December 31, 2008, prepared by Sproule
Associates Ltd., and effective as of December 31, 2008, prepared by GLJ
Petroleum Consultants Ltd.;
(e) the management information circular of TriStar in respect of the annual
meeting of TriStar shareholders held on May 14, 2009;
(f) unaudited financial statements of TriStar as at and for the interim periods
ended March 31, 2009, and June 30, 2009, respectively, together with
management’s discussion & analysis of financial condition and operating
results for each such interim periods and management’s certifications of
interim filings in respect thereof (in each case, as publicly filed by TriStar with
applicable securities regulatory authorities);
(g) certain internal financial information, and financial and operational
projections and models of TriStar as provided by TriStar’s management;
(h) a material change report dated March 3, 2009, in relation to TriStar’s
acquisition of Southeast Saskatchewan assets and issuance of subscription
receipts;
(i) a certificate of representation as to certain factual matters dated the date
hereof, addressed to Macquarie provided by senior officers of TriStar; and
(j) discussions with management of TriStar with regard to, among other things,
the business, operations, quality of assets, future potential and
environmental matters of TriStar.
In the case of Petrobank and PetroBakken:
Macquarie Capital Markets Canada Ltd.
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(a) the annual report of Petrobank for the period ended December 31, 2008;
(b) the annual information form of Petrobank dated March 17, 2009 for the
year ended December 31, 2008;
(c) audited annual financial statements of Petrobank as at and for the fiscal
years ended December 31, 2008 and December 31, 2007, respectively,
together with management’s discussion & analysis of financial condition
and operating results for each such fiscal period and management’s
certifications of annual filings in respect thereof (in each case, as publicly
filed by Petrobank with applicable securities regulatory authorities);
(d) independent reserve reports concerning Petrobank’s oil, natural gas liquids
and natural gas reserves and the estimated future cash flow from certain of
such reserves, effective as of December 31, 2008, prepared by Sproule
Associates Ltd., ,effective as of December 31, 2008, prepared by McDaniel
and Associates Consultants Ltd., and effective as of December 31, 2008,
prepared by DeGolyer and MacNaughton;
(e) the management information circular of Petrobank in respect of the annual
meeting of Petrobank shareholders held on May 12, 2009;
(f) unaudited financial statements of Petrobank as at and for the interim
periods ended March 31, 2009, and June 30, 2009, respectively, together
with management’s discussion & analysis of financial condition and
operating results for each such interim periods and management’s
certifications of interim filings in respect thereof (in each case, as publicly
filed by Petrobank with applicable securities regulatory authorities);
(g) certain internal financial information, and financial and operational
projections and models of Petrobank as provided by Petrobank’s
management;
(h) public information relating to the business, financial condition and trading
history of Petrobank Shares and other selected public oil and gas
companies we considered relevant;
(i) information with respect to selected precedent merger and acquisition
transactions we considered relevant;
(j) a certificate of representation as to certain factual matters dated the date
hereof, addressed to Macquarie provided by senior officers of Petrobank;
and
(k) discussions with management of Petrobank with regard to, among other
things, the business, operations, quality of assets, future potential and
environmental matters of Petrobank.
In addition to the information detailed above, Macquarie has further reviewed,
considered and relied upon, among other things, the following:
a) drafts of the Arrangement Circular which contain, or incorporate by
reference, the Arrangement Agreement, among other things;
b) public information related to the business, operations, financial
performance and stock trading histories of TriStar and Petrobank, and other
selected public oil and gas companies;
Macquarie Capital Markets Canada Ltd.
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c) trading comparables of companies Macquarie has deemed to be
comparable; and
d) other information, analysis and investigations as Macquarie considered
appropriate in the circumstances.
Macquarie did not meet with the auditors of TriStar, Petrobank or PetroBakken and
has assumed the accuracy and fair presentation of the audited and unaudited
financial statements of TriStar, Petrobank or PetroBakken, and, as applicable, the
reports of the auditors thereon.
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ASSUMPTIONS AND LIMITATIONS
Macquarie has relied upon and has assumed the completeness, accuracy and fair
representation of all financial and other information, data, advice, opinions and
representations obtained by Macquarie, including information relating to TriStar,
Petrobank or PetroBakken, provided to Macquarie by TriStar, Petrobank or
PetroBakken, their affiliates or advisors or otherwise pursuant to the TriStar
Engagement, and this Opinion is conditional upon such completeness, accuracy,
and fairness. Macquarie has not attempted to verify independently the accuracy
or completeness of any such information, data, advice, opinions, and
representations. Senior management of TriStar, Petrobank and PetroBakken have
represented to Macquarie, in certificates delivered as at the date hereof, among
other things, that to the best of their knowledge after due inquiry, with the
exception of certain forecasts, projections or estimates, the information, data,
opinions, and other materials (oral or written) (collectively referred to as the
“Information”) provided to Macquarie on behalf of TriStar, Petrobank or
PetroBakken, as the case may be, are complete and correct at the date the
Information was provided to Macquarie and that since the date of the
Information, there has been no material change, financial or otherwise, in the
positions of TriStar, Petrobank, PetroBakken or in their respective assets, liabilities
(contingent or otherwise), business or operations and there has been no change in
any material fact or no new material fact and which is of a nature as to render the
Information or any part of the Information untrue or misleading in any material
respect or which could reasonably be expected to have a material effect on the
Opinion. Macquarie has not, to its knowledge, been denied access to any
information requested.
Macquarie was similarly not engaged to review any legal, tax or accounting
aspects of the Arrangement and, accordingly, expresses no view thereon. The
Arrangement is subject to a number of conditions outside the control of any party
involved in the Arrangement and Macquarie has assumed all conditions
precedent to the completion of the Arrangement can be satisfied in due course
and all consents, permissions, exemptions or orders of relevant regulatory
authorities will be obtained, without adverse conditions or qualification. In
rendering this Opinion, Macquarie expresses no view as to the likelihood that the
conditions respecting the Arrangement will be satisfied or waived or that the
Arrangement will be implemented within the time frame indicated in the
Arrangement Circular.
The Opinion is rendered on the basis of securities markets, economic and general
business and financial conditions prevailing as at the date hereof, and the
condition and prospects, financial and otherwise, of TriStar and PetroBakken, as
reflected in the Information and documents reviewed by Macquarie and as they
were represented to Macquarie in our discussions with management, officers and
directors of TriStar. In addition, Macquarie considered the financial condition and
prospects of TriStar as they are reflected in the Information and documents
Macquarie Capital Markets Canada Ltd.
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reviewed by Macquarie. In rendering this Opinion, Macquarie has assumed that
there are no undisclosed material facts relating to TriStar or its businesses,
operations, capital or future prospects. Any changes therein may affect the
Opinion and, although Macquarie reserves the right to change or withdraw its
Opinion in such event, we disclaim any obligation to advise any person of any
change that may come to our attention or to update our Opinion after today. Any
reference to the Opinion or the engagement of Macquarie by TriStar is expressly
prohibited without the express written consent of Macquarie, provided, however
that TriStar may refer to and include a copy of this Opinion in the Arrangement
Circular and the court proceeding in connection with the Arrangement.
Macquarie believes that the analyses and factors considered in arriving at this
Opinion must be considered as a whole and are not amenable to partial analyses
or summary description and that selecting portions of the analyses and the factors
considered, without considering all factors and analyses together, could create a
misleading view of the process employed and the conclusions reached. Any
attempt to do so could lead to undue emphasis on any particular factor or
analysis. In arriving at the Opinion, Macquarie has not attributed any particular
weight to any specific analyses or factor but rather based the Opinion on a
number of qualitative and quantitative factors deemed appropriate by
Macquarie based on Macquarie’s experience rending such opinions.
In its analyses and in connection with the preparation of this Opinion, Macquarie
made numerous assumptions with respect to industry performance, general
business, market and economic conditions and other matters, many of which are
beyond the control of any party involved in the Arrangement. While in the opinion
of Macquarie, the assumptions used in preparing this Opinion are reasonable in the
current circumstances, some or all of these assumptions may prove to be incorrect.
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CONCLUSION
Based upon and subject to the foregoing and such other matters as Macquarie
considers relevant, it is Macquarie’s opinion that, as of the date hereof, the
consideration to be received by TriStar Shareholders under the Arrangement is fair,
from a financial point of view, to the TriStar Shareholders.
The Opinion is not, and is not intended to be, a recommendation to the holders of
TriStar Shares as to how to vote at the TriStar Meeting. The Opinion has been
provided solely for the use of the TriStar Board for the purposes of considering the
Arrangement and may not be used or relied upon by any other person or for any
other purpose without the express prior written consent of Macquarie.
Yours sincerely,
(signed) "Macquarie Capital Markets Canada Ltd."
Macquarie Capital Markets Canada Ltd.
Investment & Corporate Banking
2200, 333 – 7th Avenue SW
Calgary, Alberta T2P 2Z1
Tel : (403) 515-1500
August 4, 2009
TriStar Oil & Gas Ltd.
800, 425 – 1st Street SW
Calgary, Alberta
T2P 3L8
To the Board of Directors of TriStar Oil & Gas Ltd.:
BMO Nesbitt Burns Inc. (together with its affiliates, “BMO Capital Markets” or “we”, “our” or
“us”) understands that TriStar Oil & Gas Ltd. (the “Company”) is contemplating a business
combination (the “Transaction”) with Petrobank Energy and Resources Ltd. (“Petrobank”) and a
newly created company, PetroBakken Energy Ltd. (“PetroBakken”), pursuant to which, among
other things, the holders (“Shareholders”) of common shares of the Company (“Common
Shares”) will receive, at the election or deemed election of the Shareholder, for each Common
Share held, $14.75 in cash, 0.5350 of a common share of PetroBakken (“PetroBakken Share”),
or a combination thereof, subject to pro ration based on the aggregate maximum cash and share
consideration payable (the “Consideration”). We also understand that the Transaction is
proposed to be effected by way of a court-approved plan of arrangement (the “Arrangement”)
under the Business Corporations Act (Alberta) and certain other transactions.
The terms and conditions of the Transaction will be summarized in an information circular (the
“Information Circular”) to be mailed by the Company to Shareholders in connection with a
special meeting of Shareholders to be held to consider and, if deemed advisable, approve the
Transaction. The implementation of the Transaction will be conditional upon, among other
things, (i) the approval of the Arrangement by at least 66 2/3% of the votes cast by shareholders
at such special meeting, and (ii) approval of the Arrangement by the Court of the Queen’s Bench
of Alberta.
The terms and conditions of, and other matters relating to, the Transaction are set forth in an
arrangement agreement to be dated August 4, 2009 and entered into among the Company and
Petrobank as such agreement may be amended, restated and superseded (the “Arrangement
Agreement”).
BMO Capital Markets has been retained to provide financial advice to the Company and the
board of directors (the “Board of Directors”) of the Company, including our opinion (the
“Opinion”) as to the fairness, from a financial point of view, of the Consideration to be received
by Shareholders pursuant to the Transaction.
Engagement of BMO Capital Markets
BMO Capital Markets was initially contacted regarding a potential advisory assignment in June
2009. BMO Capital Markets was formally engaged by the Company on June 19, 2009 as
reflected in a letter agreement dated that date (the “Engagement Agreement”).
Pursuant to the terms of the Engagement Agreement, BMO Capital Markets has agreed to
provide the Company and the Board of Directors with various advisory services in connection
with the Transaction, including, among other things, the provision of the Opinion.
BMO Capital Markets will receive a fee for its services, including the delivery of the Opinion.
In addition, BMO Capital Markets is to be reimbursed for its reasonable out-of-pocket expenses
and is to be indemnified by the Company in certain circumstances, as described in the indemnity
that forms part of the Engagement Agreement.
Credentials of BMO Capital Markets
BMO Capital Markets is one of Canada’s largest investment banking firms, with operations in
all facets of corporate and government finance, mergers and acquisitions, equity and fixed
income sales and trading, investment research and investment management. BMO Capital
Markets has been a financial advisor in a significant number of transactions throughout North
America involving public and private companies, income funds and royalty trusts in various
industry sectors and has extensive experience in preparing fairness opinions.
The opinion expressed herein represents the opinion of BMO Capital Markets, the form and
content of which have been approved for release by a committee of its directors and officers,
who are collectively experienced in merger and acquisition, divestiture, restructuring, valuation,
fairness opinion and capital market matters.
Independence of BMO Capital Markets
BMO Capital Markets is not an associated or affiliated entity or issuer insider (as such terms are
defined in the Securities Act (Ontario) or the rules or policies promulgated thereunder) of the
Company, Petrobank, PetroBakken, or any of their respective subsidiaries, associates or affiliates
(collectively, the “Interested Parties”) and is not an advisor to any person or entity other than the
Company and the Board of Directors with respect to the matters set forth herein and described in
the Engagement Agreement.
Neither BMO Capital Markets, nor its associated or affiliated entities has provided any financial
advisory services or participated in any financings involving the Interested Parties within the
past two years, other than (i) acting as a financial advisor pursuant to the Engagement
Agreement; (ii) acting as financial advisor to the Company in connection with its acquisition of
certain southeast Saskatchewan and Montana assets from Talisman Energy Canada and Fortuna
(US) L.P., which closed on June 1, 2009; (iii) acting as financial advisor to the Company in
connection with its merger with Real Resources Inc. which closed on August 16, 2007; (iv)
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acting as an underwriter to the Company in connection with three separate equity financings that
closed on January 11, 2008, December 18, 2008 and March 24, 2009, respectively; (vi) acting as
a current lender to the Company and a proposed lender to PetroBakken following completion of
the Transaction; (vii) providing ongoing commodity trading services to the Company; and (iv)
providing ongoing cash management services to the Company.
Other than as set forth above, there are no understandings, agreements or commitments between
BMO Capital Markets and any of the Interested Parties with respect to any future business
dealings. BMO Capital Markets or its associated or affiliated entities may, however, in the
normal course of its business, provide financial advisory, investment banking or banking
services to the Interested Parties from time to time. In addition, in the ordinary course of
business, BMO Capital Markets may actively trade the securities of the Interested Parties for its
own account and for the accounts of BMO Capital Markets customers and accordingly has or
may, at any time, hold a long or short position in such securities and has or may, from time to
time, execute transactions in respect of such securities for which it has or may receive
compensation. As an investment dealer, BMO Capital Markets conducts research on securities
and may, in the ordinary course of its business, provide research reports and investment advice
to its clients on investment matters, including with respect to the Interested Parties and the
Transaction.
Scope of Review
In connection with rendering the Opinion, we have reviewed and relied upon, or carried out,
among other things, the following:
a) a draft of the Arrangement Agreement dated August 4, 2009;
b) a technical presentation on July 10, 2009 prepared and delivered on behalf of Petrobank;
c) the evaluation report, effective December 31, 2008, of Sproule Associates Limited
regarding certain of the petroleum and natural gas reserves of the Company;
d) the evaluation report, effective March 31, 2009, of GLJ Petroleum Consultants Ltd.
regarding certain of the petroleum and natural gas reserves of Talisman Energy Canada
and Fortuna (US) L.P. acquired by the Company on June 1, 2009;
e) the evaluation report, effective December 31, 2008, of Sproule Associates Limited
regarding certain of the petroleum and natural gas reserves of Petrobank;
f) internal management forecasts prepared by or on behalf of the Company;
g) internal management forecasts prepared by or on behalf of Petrobank (including
information related to PetroBakken);
h) certain other internal information prepared by or on behalf of the Company, concerning
the business, operations, assets, liabilities and prospects of the Company;
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i) certain other internal information prepared by or on behalf of Petrobank, concerning the
business, operations, assets, liabilities and prospects of Petrobank;
j) discussions with the management of the Company concerning the Company’s current
business plan, its financial condition and its future business prospects;
k) discussions with management of Petrobank concerning Petrobank’s current business
plan, its financial condition and its future business prospects;
l) public information relating to the business, financial condition and trading history of the
Company, Petrobank and other selected public issuers we considered relevant;
m) information with respect to selected precedent transactions we considered relevant;
n) representations as to certain factual matters and the completeness and accuracy of the
information upon which the Opinion is based, provided by senior officers of the
Company as reflected in a management representation letter dated the date on which such
representations were given and received by us; and
o) such other information, investigations, analyses and discussions (including discussions
with the management of the Company, the management of Petrobank, the Company’s
external legal and tax counsel, and other third parties) as we considered necessary or
appropriate in the circumstances.
BMO Capital Markets has not, to the best of its knowledge, been denied access by the Company
to any information under their control requested by BMO Capital Markets.
Assumptions and Limitations
We have not been asked to prepare and have not prepared a formal valuation or appraisal of the
Company, Petrobank, PetroBakken, or any of their respective securities or assets, and our
opinion should not be construed as such. We have, however, conducted such analyses as we
considered necessary in the circumstances to render this Opinion. BMO Capital Markets was
similarly not engaged to review any legal, tax or accounting aspects of the Transaction.
With your approval and agreement, we have relied upon the completeness, accuracy and fair
presentation of all financial information, business plans, forecasts and other information, data,
advice, opinions and representations obtained by us from public sources or provided to us by or
on behalf of the Company, or any of its subsidiaries, associates or affiliates or their respective
directors, officers, associates, affiliates, consultants, advisors and representatives, relating to the
Interested Parties and the Transaction, or otherwise obtained by us pursuant to our engagement.
We have assumed that all such information was complete and accurate and did not omit to state
any material fact or any fact necessary to be stated to make that information not misleading. Our
opinion is conditional upon such completeness, accuracy, fair presentation and non-omission of
facts. Subject to the exercise of professional judgment, we have not attempted to verify
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independently the completeness, accuracy or fair presentation of any such information, data,
advice, opinions and representations.
With respect to forecasts, projections, estimates and/or budgets provided to BMO Capital
Markets and used in its analyses, we note that projecting future results of any company is
inherently subject to uncertainty. We have assumed, however, that such forecasts, projections,
estimates and/or budgets were prepared using the assumptions identified therein, which, in the
opinion of the management of the Company, are (or were at the time and continue to be)
reasonable in the circumstances.
Senior officers of the Company have represented to BMO Capital Markets in a certificate
delivered as of the date hereof, among other things, that (i) the information, data, advice,
opinions, representations and other material (financial and otherwise) (collectively, the
“Information”) provided by or on behalf of the Company or any of its subsidiaries, associates or
affiliates or their respective directors, officers, associates, affiliates, consultants, advisors and
representatives, either orally or in writing, to BMO Capital Markets or obtained by BMO Capital
Markets from the System for Electronic Document Analysis and Retrieval (SEDAR) relating to
the Company, or its subsidiaries, associates or affiliates or the Transaction or any other
transactions, for the purpose of preparing the Opinion, was, at the date such Information was
provided to BMO Capital Markets, and is, as of the date hereof, complete, true and correct in all
material respects, and did not and does not contain any untrue statement of a material fact in
respect of the Company or its subsidiaries, associates or affiliates or the Transaction or any other
transactions and did not and does not omit to state a material fact in respect of the Company or
its subsidiaries, associates or affiliates or the Transaction or any other transactions necessary to
make the Information or any statement contained therein not misleading in light of the
circumstances under which the Information was provided or any statement was made; and that
(ii) since the dates on which the Information was provided to BMO Capital Markets, except as
disclosed in writing to BMO Capital Markets, there has been no material change, financial or
otherwise, in the financial condition, assets, liabilities (contingent or otherwise), business,
operations or prospects of the Company, or any of its subsidiaries, associates or affiliates and no
change has occurred in the Information or any part thereof which would have or which would
reasonably be expected to have a material effect on the Opinion.
In preparing the Opinion, we have made several assumptions, including that all of the conditions
required to implement the Transaction will be met and that the information relating to the
Interested Parties and the Transaction is accurate in all material respects. We also made
numerous assumptions with respect to industry performance, general business, market and
economic conditions and other matters, many of which are beyond the control of the Interested
Parties. While in our opinion such assumptions are appropriate in the circumstances, certain of
such assumptions may prove incorrect.
With respect to all legal and tax matters relating to the Transaction and the implementation
thereof, we have relied upon the advice, opinions and representations provided to us by the
Company’s external legal and tax counsel and have relied upon the completeness and accuracy
of such advice, opinions and representations, including the validity and efficacy of the
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procedures being followed to implement the Transaction, and do not express any opinion
thereon. We do not express any opinion with respect to the tax consequences to the Company or
any of the Shareholders that may arise as a result of the Transaction and have assumed that there
will be no material negative tax consequences to the Company, its subsidiaries or Shareholders
as a result of the Transaction.
The Opinion is rendered as at the date hereof and on the basis of securities markets, economic
and general business and financial conditions prevailing as at the date hereof and the conditions
and prospects, financial and otherwise, of the Company, as they are reflected in the Information
and as they were represented to us in our discussions with the management of the Company.
The Opinion is provided to the Board of Directors for its exclusive use only and may not be
relied upon by any other person. Except as contemplated herein, the Opinion is not to be
reproduced, disseminated, disclosed, quoted from or referred to (in whole or in part) without our
prior written consent. BMO Capital Markets consents to the inclusion of the Opinion in its
entirety and a summary thereof (in a form acceptable to BMO Capital Markets) in the
Information Circular.
BMO Capital Markets disclaims any undertaking or obligation to advise any person of any
change in any fact or matter affecting the Opinion which may come or be brought to the attention
of BMO Capital Markets after the date hereof. Without limiting the foregoing, in the event that
there is any material change in any fact or matter affecting the Opinion after the date hereof,
BMO Capital Markets reserves the right to change, modify or withdraw the Opinion.
The preparation of the Opinion is a complex process and is not necessarily capable of being
partially analyzed or summarized. BMO Capital Markets believes that its analyses must be
considered as a whole and that selecting portions of the analyses or the factors considered by it,
without considering all factors and analyses together, could create an incomplete view of the
process underlying the Opinion. The Opinion should be read in its entirety.
The Opinion is not and should not be construed as a recommendation to any Shareholder as to
whether to vote their Common Shares in favour of approving the Transaction. BMO Capital
Markets is not expressing any opinion as to the value of the Consideration, if and when issued
pursuant to or in connection with the Transaction, or the prices at which PetroBakken Shares will
trade after completion of the Transaction.
-6-
Conclusion
Based upon and subject to the foregoing, it is our opinion, as of the date hereof, that the
Consideration to be received by Shareholders pursuant to the Transaction is fair, from a financial
point of view, to Shareholders.
Yours truly,
BMO NESBITT BURNS INC.
_________________________
-7-
APPENDIX "E"
INFORMATION CONCERNING PETROBAKKEN
E-1
TABLE OF CONTENTS
NOTICE TO READER .................................................................................................................................................... 3
PETROBAKKEN ENERGY LTD................................................................................................................................... 3
DESCRIPTION OF THE BUSINESS ............................................................................................................................. 4
OIL AND GAS PRINCIPAL PROPERTIES................................................................................................................... 4
GENERAL DESCRIPTION OF THE BUSINESS.......................................................................................................... 4
STATEMENT OF RESERVES DATA ........................................................................................................................... 6
OTHER OIL AND GAS INFORMATION.................................................................................................................... 16
SELECTED OPERATIONAL INFORMATION .......................................................................................................... 21
SELECTED FINANCIAL INFORMATION AND MANAGEMENT’S DISCUSSION AND ANALYSIS............... 22
CONSOLIDATED CAPITALIZATION ....................................................................................................................... 25
DESCRIPTION OF SHARE CAPITAL ........................................................................................................................ 25
MARKET FOR SECURITIES....................................................................................................................................... 26
DIVIDENDS .................................................................................................................................................................. 26
PRIOR SALES ............................................................................................................................................................... 26
PRINCIPAL SECURITYHOLDERS............................................................................................................................. 26
DIRECTORS AND EXECUTIVE OFFICERS ............................................................................................................. 27
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS ........................................................................ 30
PETROBAKKEN COMMITTEES................................................................................................................................ 31
CORPORATE CEASE TRADE ORDERS AND BANKRUPTCIES........................................................................... 31
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS ....................................................................... 33
SHARE BASED COMPENSATION PLANS ............................................................................................................... 34
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS ............................................. 39
MATERIAL CONTRACTS........................................................................................................................................... 39
PROMOTER .................................................................................................................................................................. 40
RISK FACTORS ............................................................................................................................................................ 40
INTERESTS OF EXPERTS........................................................................................................................................... 46
LEGAL PROCEEDINGS .............................................................................................................................................. 46
AUDITORS, REGISTRAR AND TRANSFER AGENT .............................................................................................. 46
DOCUMENTS INCORPORATED BY REFERENCE ................................................................................................. 46
SCHEDULE A – FINANCIAL INFORMATION ......................................................................................................... 47
E-2
NOTICE TO READER
As at the date hereof, PetroBakken has not carried on any active business other than the entering into of
the Arrangement Agreement. Pursuant to the Arrangement Agreement, PetroBakken will acquire all of
the issued and outstanding securities of TriStar coincident with the Arrangement becoming effective.
Unless the context otherwise requires, the disclosure in this Appendix “E” assumes that the acquisition of
the Petrobank Assets pursuant to the Petrobank Reorganization and the acquisition of TriStar pursuant to
the Arrangement are completed by PetroBakken.
Capitalized words, phrases and abbreviations used in this Appendix “E” but not defined herein shall
have the same meanings ascribed to such words, phrases and abbreviations as in the Glossary of Terms
contained in the Information Circular to which this Appendix “E” is attached.
PETROBAKKEN ENERGY LTD.
General
PetroBakken Energy Ltd. was incorporated under the ABCA on July 30, 2009. PetroBakken has not
carried on any active business since incorporation other than the entering into of the Arrangement
Agreement.
The registered office of PetroBakken is located at Suite 3300, 421 - 7th Avenue SW, Calgary, Alberta,
T2P 4K9, Canada, and its head office is located at 1900, 111 – 5th Avenue SW, Calgary, Alberta, T2P
3Y6.
Toronto Stock Exchange Listing
Upon completion of the Arrangement, PetroBakken will become a “reporting issuer” in certain Canadian
jurisdictions and will become subject to the informational reporting requirements under the securities
laws of such jurisdictions.
PetroBakken has made application for the conditional listing on the TSX of the PetroBakken Class A
Shares, including the PetroBakken Class A Shares be issued in connection with the Arrangement.
Listing will be subject to PetroBakken fulfilling all of the requirements of the TSX, which requirements
are expected to be met on the Effective Date or as soon as reasonably practicable thereafter. Conditional
listing approval has not yet been obtained and there can be no assurance that the PetroBakken Class A
Shares will be listed on the TSX or any other stock exchange.
Corporate Structure
The following table provides the name, the percentage of voting securities owned (directly or indirectly)
by PetroBakken, the nature of the entity and the jurisdiction of incorporation or formation of
PetroBakken’s subsidiaries, either direct or indirect, as at the date hereof.
Name of Subsidiary
PetroBakken Production Ltd.
PetroBakken Resources Ltd.
PetroBakken Production Partnership
PetroBakken Partnership
Percentage of voting
securities
(directly or indirectly)
100%
100%
100%
100%
E-3
Nature of Entity
Corporation
Corporation
Partnership
Partnership
Jurisdiction of
Incorporation /
Formation
Alberta
Alberta
Alberta
Alberta
DESCRIPTION OF THE BUSINESS
Business Objectives
Following the completion of the Arrangement, PetroBakken will be engaged in the exploration for, and
the acquisition, development and production of, oil and natural gas reserves in Western Canada.
PetroBakken intends to target significant production and reserves growth through an internally-funded
capital program underpinned by strong cash flows which will also allow us to provide an attractive
dividend yield to our shareholders.
Following completion of the Arrangement, PetroBakken plans to divest a package of Alberta-based assets
consisting of approximately 9,500 boepd (44% light oil, 56% natural gas), and 40.1 mmboe of proved
plus probable reserves to further enhance the focus of PetroBakken on southeast Saskatchewan light oil
resource plays. Proceeds from the disposition are expected be used to further solidify the PetroBakken
balance sheet.
OIL AND GAS PRINCIPAL PROPERTIES
For a description of the oil and gas properties to be held by PetroBakken upon completion of the
Arrangement, see “Overview of the Business and Principal Properties – Canadian Business Unit
Overview” in the Petrobank AIF, which disclosure in incorporated by reference in this Appendix “E”, and
Appendix “F”- Information Concerning TriStar.
GENERAL DESCRIPTION OF THE BUSINESS
As at the date hereof, PetroBakken has not carried on any active business other than the entering into of
the Arrangement Agreement. Pursuant to the Arrangement Agreement, PetroBakken will acquire all of
the issued and outstanding securities of TriStar. Prior to the completion of the Arrangement, PetroBakken
will directly or indirectly acquire the Petrobank Assets pursuant to the Petrobank Reorganization.
Pursuant to the Petrobank Reorganization, in consideration for the contribution by Petrobank of the
Petrobank Assets and $400 million in cash to PetroBakken, PetroBakken is expected to issue an aggregate
of approximately 109,800,000 PetroBakken Shares to Petrobank.
For a description of the development of Petrobank’s business, insofar as it relates to the Petrobank Assets,
for the three financial years ended prior to the date of this Information Circular, see “Three-Year History
of the Business” in the Petrobank AIF, which information is incorporated by reference in this Appendix
“E” only to the extent such information relates to the Petrobank Assets. For a description of TriStar’s
business for the three financial years ended prior to the date of this Information Circular, see Appendix
“F” – Information Concerning TriStar.
Competition
The oil and natural gas industry is competitive in all its phases. PetroBakken competes with its peers in
the search for, and the acquisition of, oil and natural gas properties and in the marketing of oil and natural
gas. PetroBakken’s competitors include resource companies that have greater financial resources, staff
and facilities than those of PetroBakken. Competitive factors in the distribution and marketing of oil and
natural gas include price, methods of recovery and reliability of delivery. PetroBakken believes that its
competitive position is equivalent to that of other oil and gas issuers of similar size and at a similar stage
of development.
E-4
Seasonal Factors
The exploration for and development of oil and natural gas reserves is dependent on access to areas where
production is to be conducted. Seasonal weather variations, including freeze-up and break-up, affect
access in certain circumstances.
Employees
As at the date of this Information Circular, PetroBakken had no employees. After giving effect to the
Arrangement, it is expected that PetroBakken will have approximately 250 employees at its office in
Calgary, Alberta.
Specialized Skill and Knowledge
PetroBakken believes its success is dependent on the performance of its management and key employees,
many of whom have specialized knowledge and skills relating to oil and gas operations. PetroBakken
believes that it has adequate personnel with the specialized skills required to successfully carry out its
operations.
Environmental, Safety and Social Responsibility
Central to PetroBakkens’s values is our commitment to the protection of people, the environment and the
communities where we operate. This commitment from each of our employees drives our planning and
actions. Employee health and safety are a shared responsibility of both PetroBakken and our employees.
PetroBakken ensures procedures, processes and training are in place, and that employees use these tools
responsibly. As a team we manage safe operations.
Our Bakken field is operated by some of the most experienced individuals in the industry. All employees
are keenly aware of the importance of safe operations and possess in-depth skills to effectively manage
worker and environment protection. While we are extremely active implementing our development plans,
every employee is mindful of our values to be good stewards of land, air, water, wildlife and people.
We recognize that our operations have an impact on the environment, and we attempt to minimize this
impact by following best practices. To ensure sustainability, we must respect our natural environment
and ensure our operations are carefully managed. Our employees are our local representatives in the
communities in which we operate, and it is our desire to be a welcomed neighbour. We encourage our
people to engage with the community and create awareness of our operations. We believe in treating all
communities and their members with respect. We want to hear from community members and our
website hosts this opportunity, along with toll free numbers, to promote open dialogue about our
operations in their local areas.
Environmental Regulation
The oil and natural gas industry is currently subject to environmental regulations pursuant to a variety of
provincial and federal legislation. Compliance with such legislation can require significant expenditures
or result in operational restrictions. Breach of such requirements may result in suspension or revocation of
necessary licenses and authorizations, civil liability for pollution damage and the imposition of material
fines and penalties, all of which might have a significant negative impact on earnings and overall
competitiveness. For risk factors associated with Environmental Regulation, see “Risk Factors –
Environmental” in this Appendix “E” and “General – Environmental, Safety and Social Responsibility –
E-5
Canadian Business Unit”, in the Petrobank AIF, which disclosure is incorporated by reference in this
Appendix “E”.
Industry Conditions
For a description of the industry conditions applicable to PetroBakken and its business, see “Industry
Conditions” in the Petrobank AIF, which is incorporated by reference in this Appendix “E”.
STATEMENT OF RESERVES DATA
Disclosure of Reserves Data
The reserves data set forth herein is based upon the Petrobank Sproule Report and the TriStar Sproule
Report. The Petrobank Sproule Report is dated effective December 31, 2008 and relates only to the
Petrobank Assets, all of which will be transferred to PetroBakken pursuant to the Petrobank
Reorganization. The TriStar Sproule Report is dated effective December 31, 2008. The reserves data
contained herein summarizes the oil, liquids, and natural gas reserves of the Petrobank Assets and TriStar,
as at December 31, 2008, and the net present values of future net revenue for these reserves using forecast
prices and costs. The reserves data complies with the requirements of NI 51-101. Certain additional
information not required by NI 51-101 has been included herein to provide readers with further
information regarding their properties. Petrobank engaged Sproule to provide evaluations of proved,
probable and possible reserves associated with the Petrobank Assets. TriStar engaged Sproule to provide
evaluations of TriStar’s proved and probable reserves associated with TriStar’s assets. Disclosure herein
is made in respect of the proved and probable reserves of the Petrobank Assets and TriStar.
All of the reserves associated with the Petrobank Assets and TriStar’s assets are in Canada (specifically,
in the provinces of Saskatchewan, Alberta, British Columbia, and Manitoba).
In preparing the Petrobank Sproule Report and the TriStar Sproule Report, basic information was
provided to the Sproule by Petrobank and TriStar, which included land data, well information, geological
information, reservoir studies, estimates of on-stream dates, contract information, current hydrocarbon
product prices, operating cost data, capital budget forecasts, financial data and future operating plans.
Other engineering, geological or economic data required to conduct the evaluations and upon which the
reports are based, was obtained from public records, other operators and from Sproule’s non-confidential
files. The extent and character of ownership and the accuracy of all factual data supplied for the
Petrobank Sproule Report and the TriStar Sproule Report, from all sources, was accepted by Sproule as
represented.
The tables and information contained herein, show the estimated share of the combined crude oil, natural
gas and NGL reserves associated with the Petrobank Assets and TriStar’s assets as of December 31, 2008
and the present value of estimated future net revenue for these reserves, after provision for Alberta gas
cost allowance, using forecast prices and costs as indicated.
All evaluations and reviews of future net cash flow are stated prior to any provision for interest
costs or general and administrative costs and after the deduction of estimated future capital
expenditures for wells to which reserves have been assigned and future site restoration and
reclamation costs for wells in Canada to which reserves have been assigned. It should not be
assumed that the estimated future net cash flow shown below is representative of the fair market
value of PetroBakken’s properties. There is no assurance that such price and cost assumptions will
be attained and variances could be material. The recovery and reserve estimates of crude oil, NGL
and natural gas reserves provided herein are estimates only and there is no guarantee that the
E-6
estimated reserves will be recovered. Actual crude oil, NGL and natural gas reserves may be
greater than or less than the estimates provided herein.
The reserves data contained herein is based on Sproule’s price forecasts, as of December 31, 2008
unless otherwise indicated.
Significant Factors or Uncertainties Affecting Reserves Data
There are numerous uncertainties inherent in estimating quantities of proved reserves, including many
factors beyond the control of PetroBakken. The reserve data included herein represents estimates only.
In general, estimates of economically recoverable oil and natural gas reserves and the future net cash
flows therefrom are based upon a number of variable factors and assumptions, such as historical
production from the properties, the assumed effects of regulation by governmental agencies and future
operating costs, all of which may vary considerably from actual results. All such estimates are to some
degree speculative, and classifications of reserves are only attempts to define the degree of speculation
involved. For those reasons, estimates of the economically recoverable oil and natural gas reserves
attributable to any particular group of properties, classification of such reserves based on risk of recovery
and estimates of future net revenues expected therefrom, prepared by different engineers or by the same
engineers at different times, may vary substantially. The actual production, revenues, taxes and
development and operating expenditures of PetroBakken with respect to these reserves will vary from
such estimates, and such variances could be material.
Estimates with respect to proved reserves that may be developed and produced in the future are often
based upon volumetric calculations and upon analogy to similar types of reserves rather than actual
production history. Estimates based on these methods are generally less reliable than those based on
actual production history. Subsequent evaluation of the same reserves based upon production history will
result in variations, which may be substantial, in the estimated reserves.
Consistent with the securities disclosure legislation and policies of Canada, PetroBakken has used
forecast prices and costs in calculating reserve quantities included herein. Actual future net cash flows
also will be affected by other factors such as actual production levels, supply and demand for oil and
natural gas, curtailments or increases in consumption by oil and natural gas purchasers, changes in
governmental regulation or taxation and the impact of inflation on costs.
E-7
SUMMARY OF OIL AND GAS RESERVES
FORECAST PRICES AND COSTS
AS OF DECEMBER 31, 2008
LIGHT AND
MEDIUM OIL
RESERVES
CATEGORY
Proved
Developed
Producing
Developed
Non-Producing
Undeveloped
Total Proved
Probable
Total Proved Plus
Probable
COALBED
METHANE
NATURAL GAS (1)
NATURAL GAS
LIQUIDS
SULPHUR
Gross
Net
Gross
Net
Gross
Net
Gross
Net
Gross
Net
(Mbbl)
(Mbbl)
(MMcf)
(MMcf)
(MMcf)
(MMcf)
(Mbbl)
(Mbbl)
(Mlt)
(Mlt)
41,687
37,144
405
375
73,036
62,955
3,196
2,798
4
3
682
24,557
66,927
613
21,773
59,531
749
1,154
711
1,086
12,589
38,003
123,629
9,978
31,058
103,990
698
1,507
5,401
590
1,262
4,649
1
5
1
4
37,739
33,268
405
382
62,609
52,180
2,568
2,182
4
3
104,665
92,799
1,559
1,468
186,237
156,169
7,969
6,831
9
7
Notes:
(1) Includes associated, non-associated, and solution gas.
* Table may not add due to rounding.
E-8
NET PRESENT VALUES OF FUTURE NET REVENUE
FORECAST PRICES AND COSTS
AS OF DECEMBER 31, 2008
BEFORE INCOME TAXES DISCOUNTED AT
(%/year)
RESERVES CATEGORY
Proved
Developed Producing
Developed Non-Producing
Undeveloped
Total Proved
0
(CDN M$)
5
(CDN M$)
10
(CDN M$)
15
(CDN M$)
FUTURE NET
VALUE (1)
20
(CDN M$)
10%/year
($/BOE)
2,582,707
82,411
1,065,158
3,730,275
2,007,493
55,848
732,100
2,795,442
1,658,333
39,973
526,380
2,224,686
1,425,514
29,515
389,020
1,844,049
1,259,268
22,150
291,896
1,573,313
32.84
13.95
18.58
27.23
Probable
2,671,381
1,557,369
1,043,623
760,786
585,138
23.61
Total Proved Plus Probable
6,401,658
4,352,810
3,268,310
2,604,835
2,158,451
25.96
RESERVES CATEGORY
0
(CDN M$)
AFTER INCOME TAXES DISCOUNTED AT
(%/year)
5
10
15
(CDN M$)
(CDN M$)
(CDN M$)
20
(CDN M$)
Proved
Developed Producing
Developed Non-Producing
Undeveloped
Total Proved
2,306,222
59,846
753,462
3,119,529
1,817,945
39,096
497,419
2,354,460
1,519,276
26,666
338,989
1,884,931
1,318,412
18,475
233,359
1,570,247
1,173,753
12,718
158,972
1,345,443
Probable
1,942,504
1,122,664
743,833
534,974
405,225
Total Proved Plus Probable
5,062,035
3,477,124
2,628,763
2,105,221
1,750,667
Notes:
(1) Unit values are based on net reserve volumes and future net revenue before income taxes.
* Table may not add due to rounding.
E-9
ADDITIONAL INFORMATION CONCERNING
TOTAL FUTURE NET REVENUE (UNDISCOUNTED)
FORECAST PRICES AND COSTS
AS OF DECEMBER 31, 2008
RESERVES
CATEGORY
REVENUE
ROYALTIES
(CDN M$)
(CDN M$)
FUTURE
NET
REVENUE
SASKATCHEWAN
WELL
BEFORE
OPERATING DEVELOPMENT
CORPORATE ABANDONMENT INCOME
COSTS
COSTS
CAPITAL TAX
COSTS
TAXES
(CDN M$)
(CDN M$)
(CDN M$)
FUTURE
INCOME
TAXES
FUTURE NET
REVENUE
AFTER
INCOME
TAXES
(CDN M$)
(CDN M$)
(CDN M$)
(CDN M$)
Total Proved
7,110,563
868,049
1,645,249
675,666
105,404
85,712
3,730,275
610,746
3,119,529
Total Proved
Plus Probable
11,872,364
1,474,326
2,791,513
920,498
174,939
109,214
6,401,657
1,339,623
5,062,035
Note:
* Table may not add due to rounding.
NET PRESENT VALUE OF FUTURE NET REVENUE
BY PRODUCTION GROUP
FORECAST PRICES AND COSTS
AS OF DECEMBER 31, 2008
RESERVES CATEGORY
Total Proved
Total Proved Plus Probable
PRODUCTION GROUP
Light and Medium Crude Oil (2)
Coalbed Methane
Natural Gas (3)
FUTURE NET
REVENUE BEFORE
INCOME TAXES
(Discounted at
10%/year)
(CDN M$)
2,013,907
2,900
207,885
Light and Medium Crude Oil (2)
Coalbed Methane
Natural Gas (3)
2,959,650
4,000
304,649
Notes:
(1) Unit values are based on net reserve volumes.
(2) Including solution gas and associated by-products.
(3) Including associated by-products.
* Table may not add due to rounding.
E-10
FUTURE NET REVENUE
UNIT VALUE BEFORE
INCOME TAXES (1)
(Discounted at 10%/year)
(CDN$/BOE)
29.22
15.85
15.63
27.65
16.19
16.36
PRICING AND INFLATION RATE ASSUMPTIONS
FORECAST PRICES AND COSTS
AS OF DECEMBER 31, 2008
Evaluator
Year
Sproule
2008
2009
2010
2011
2012
2013
Thereafter
West Texas
Intermediate
Crude Oil at
Cushing
Oklahoma
$US/bbl
Inflation
Rates
%/Year
Exchange
Rate
$US/$Cdn
99.59
53.73
63.41
69.53
79.59
92.01
1
2
2
2
2
2
0.94
0.80
0.85
0.85
0.90
0.95
Light,
Sweet
Crude Oil
40o API
at
Edmonton
$Cdn/bbl
Alberta Natural Gas
Liquids
Medium
Crude
Oil
29.3 o
API
at
Cromer
$Cdn/bbl
Natural Gas
AECO
Gas Price
$Cdn/mmbtu
Edmonton
Butane
$Cdn/bbl
Edmonton
Pentanes
Plus
$Cdn/bbl
8.15
6.82
7.56
7.84
8.38
9.20
75.10
51.15
54.25
59.59
64.53
70.79
104.70
66.93
74.54
81.88
88.66
97.27
102.85
93.05
65.35
58.16
72.78
66.23
79.95
72.76
86.57
79.65
94.97
87.38
Various escalation rates
RECONCILIATION OF COMPANY GROSS RESERVES
BY PRINCIPAL PRODUCT TYPE
(FORECAST PRICES AND COSTS)
FACTORS
Light and Medium Oil
Gross
Proved
Gross
Gross
Plus
Proved
Probable
Probable
(Mbbl)
(Mbbl)
(Mbbl)
Natural Gas(1)
Coalbed Methane
Gross
Proved
(MMcf)
Gross
Probable
(MMcf)
Gross
Proved
Plus
Probable
(MMcf)
Gross
Proved
(MMcf)
Gross
Probable
(MMcf)
Natural Gas Liquids
Gross
Proved
Plus
Probable
(MMcf)
Gross
Proved
(Mbbl)
Gross
Probable
(Mbbl)
Gross
Proved
Plus
Probable
(Mbbl)
December 31, 2007
Extensions
Technical
Revisions
Discoveries
Acquisitions
Dispositions
Production
31,664
27,187
20,645
14,095
52,308
41,282
-
-
-
97,835
15,246
48,707
7,870
146,541
23,116
3,236
1,595
1,593
754
4,830
2,349
3,899
15,051
(330)
(10,544)
(3,526)
6,720
(194)
-
372
21,770
(524)
(10,544)
1,264
(110)
405
-
1,669
(110)
5,961
217
21,364
(951)
(16,041)
(2,787)
39
9,184
(405)
-
3,174
256
30,548
(1,356)
(16,041)
11
1,169
(14)
(597)
(224)
449
(4)
-
(213)
1,618
(19)
597
December 31, 2008
66,927
37,739
104,665
1,154
405
1,559
123,629
62,609
186,237
5,400
2,568
7,968
Notes:
(1) Includes associated, non-associated, and solution gas.
* Table may not add due to rounding.
E-11
Undeveloped Reserves
The following discussion generally describes the basis on which PetroBakken attributes proved and
probable undeveloped reserves and their anticipated plans for developing those undeveloped reserves.
Proved Undeveloped Reserves (Forecast Prices and Costs)
The following table sets out the volume of proved undeveloped reserves over the most recent three
financial years in respect of the Petrobank Assets and TriStar and the amount of reserves first attributed in
each of those years.
NATURAL GAS (1)
Gross (MMcf)
First
Attributed Booked
LIGHT AND MEDIUM OIL
Gross (Mbbl)
RESERVES
CATEGORY
Proved Undeveloped
Prior to 2006
2006
2007
2008
First Attributed
200
1,072
10,530
18,763
Booked
200
1,272
11,196
24,557
19,435
4,143
13,637
12,193
19,435
14,867
27,966
38,753
NATURAL GAS LIQUIDS (2)
Gross (Mbbl)
First
Attributed
Booked
50
70
755
1,076
50
90
846
1,506
Notes:
(1) Includes coalbed methane, associated, non-associated, and solution gas.
(2) Probable undeveloped amounts include heavy oil in 2006.
* Table may not add due to rounding.
Proved undeveloped reserves are generally those reserves related to infill wells that have not yet been
drilled, or wells further away from gathering systems requiring relatively high capital to bring on
production.
Probable Undeveloped Reserves (Forecast Prices and Costs)
The following table sets out the volume of probable undeveloped reserves over the most recent three
financial years in respect of the Petrobank Assets and TriStar and the amount of reserves first attributed in
each of those years.
NATURAL GAS (1)
Gross (MMcf)
First
Attributed Booked
LIGHT AND MEDIUM OIL
Gross (Mbbl)
RESERVES
CATEGORY
Probable Undeveloped
Prior to 2006
2006
2007
2008
First Attributed
1,693
12,546
13,544
Booked
246
1,939
12,881
19,706
493
3,974
24,271
8,069
15,855
7,172
28,629
24,111
NATURAL GAS LIQUIDS (2)
Gross (Mbbl)
First
Attributed
Booked
1
119
1,035
655
52
143
1,075
1,061
Notes:
(1) Includes coalbed methane, associated, non-associated, and solution gas.
(2) Probable undeveloped amounts include heavy oil in 2006.
* Table may not add due to rounding.
Probable undeveloped reserves are generally those reserves tested or indicated by analogy to be
productive, infill drilling locations and lands contiguous to production. This also includes the probable
undeveloped reserves from the proved undeveloped locations.
E-12
Development
PetroBakken plans to pursue the development of the majority of its proven and probable undeveloped
reserves within the next two years through ordinary course capital expenditures. However, PetroBakken
may choose to delay development depending on a number of circumstances, including the existence of
higher priority expenditures and prevailing commodity prices and cash flow. Future development costs
are expected to be financed through cash flow from operations and drawdowns on PetroBakken’s credit
facilities.
FUTURE DEVELOPMENT COSTS (1)(2)
FORECAST PRICES AND COSTS
AS OF DECEMBER 31, 2008
FORECAST
PRICES AND COSTS
YEAR
2009
2010
2011
2012
2013
Thereafter
Total undiscounted
Total Proved Reserves
(CDN M$)
407,318
241,222
21,186
2,652
2,486
803
Total Proved Plus Probable
Reserves
(CDN M$)
532,581
344,554
30,363
4,641
4,515
3,847
675,666
920,498
Notes:
(1)
The table sets forth development costs deducted in the estimation of PetroBakken’s future net
revenue attributable to the reserve categories noted.
(2) Future development costs are expected to be funded by internally generated cash flow, and from a
combination of equity financing and debt, the costs of which are not expected to have an effect on
the reserves or future net revenue.
* Table may not add due to rounding.
E-13
2009 Production Estimates
The following table sets out the volume of PetroBakken’s production estimated for the year ended
December 31, 2009 for the purposes of the calculation of estimated future net revenue from gross proved
and gross proved plus probable reserves in the TriStar Sproule Report and the Petrobank Sproule Report.
RESERVES CATEGORY
Total Proved
Total Proved Plus Probable
LIGHT AND
MEDIUM OIL
Gross
(bbl/d)
COALBED
METHANE
Gross
(Mcf/d)
NATURAL GAS (1)
Gross
(Mcf/d)
NATURAL
GAS LIQUIDS
Gross
(bbl/d)
OIL
EQUIVALENT
Gross
(BOE/d)
33,661
37,886
136
153
50,175
56,543
2,639
2,949
44,685
50,284
Notes:
(1) Includes associated, non-associated, and solution gas.
* Table may not add due to rounding.
Material Changes to Reserves Subsequent to December 31, 2008
The following tables set forth certain reserves information relating to the acquisitions completed by
TriStar subsequent to December 31, 2008. See “Description of the Business of TriStar – Recent
Developments” in Appendix “F” hereto.
PetroBakken Gross Reserves, Forecast Prices(1)(2)(3)(4)
TriStar
Acquired
Assets
(MBOE)
9,797
14,632
21,078
TriStar
Acquired
Partnership
(MBOE)
406
937
1,793
TriStar
(MBOE)
Petrobank
Assets
(MBOE)
Pro Forma Total
PetroBakken
(MBOE)
Developed Producing
30,623
26,501
67,327
Total Proved
52,659
40,465
108,693
Proved + Probable (2P)
84,397
59,536
166,804
Notes:
(1)
The information relating to TriStar and Petrobank Assets is presented as at December 31, 2008.
(2)
The TriStar Acquired Assets and TriStar Acquired Partnership were acquired by TriStar effective April 1, 2009 and
effective February 1, 2009, respectively. The information relating to the TriStar Acquired Assets is effective as at
December 31, 2008 and mechanically updated to March 31, 2009 and the information relating to TriStar Acquired
Partnership is presented as at January 31, 2009.
(3)
The reserves information with respect to the TriStar Acquired Assets was prepared using GLJ’s January 1, 2009 price
forecast. The reserves information with respect to the TriStar Acquired Partnership was prepared using Sproule’s
January 31, 2009 price forecast. All other reserves information was prepared using Sproule’s December 31, 2008 price
forecast.
(4)
Gross Reserves means PetroBakken’s working interest reserves before calculation of royalties, and before
consideration of PetroBakken’s royalty interests.
E-14
Net Present Value, Before Tax, Discounted at 10%, Forecast Prices (millions) (1)(2)(3)
TriStar
Acquired
Assets
($)
Developed Producing
Total Proved
Proved + Probable (2P)
242
372
502
TriStar
Acquired
Partnership
($)
12
16
33
TriStar
($)
784
1,156
1,778
Petrobank
Assets
($)
875
1,068
1,490
Pro Forma
Total
PetroBakken
($)
1,913
2,612
3,803
Notes:
(1)
(2)
(3)
The information relating to TriStar and the Petrobank Assets is presented as at December 31, 2008.
The TriStar Acquired Assets and TriStar Acquired Partnership were acquired by TriStar effective April 1, 2009 and
effective February 1, 2009, respectively. The information relating to the TriStar Acquired Assets is effective as at
December 31, 2008 and mechanically updated to March 31, 2009 and the information relating to TriStar Acquired
Partnership is presented as at January 31, 2009.
The reserves information with respect to the TriStar Acquired Assets was prepared using GLJ’s January 1, 2009 price
forecast. The reserves information relating to the TriStar Acquired Partnership was prepared using Sproule’s January
31, 2009 price forecast. All other reserves information was prepared using Sproule’s December 31, 2008 price
forecast.
Net Present Value, After Tax, Discounted at 10%, Forecast Prices (millions)(1)(2)(3)
TriStar
Acquired
Assets
($)
Developed Producing
Total Proved
Proved + Probable (2P)
TriStar
Acquired
Partnership
($)
176
269
364
10
12
25
TriStar
($)
698
946
1,390
Petrobank
Assets
($)
822
939
1,238
Pro Forma
Total
PetroBakken
($)
1,706
2,166
3,017
Notes:
(1)
(2)
(3)
The information relating to TriStar and Petrobank Assets is presented as at December 31, 2008.
The TriStar Acquired Assets and TriStar Acquired Partnership were acquired by TriStar effective April 1, 2009 and
effective February 1, 2009, respectively. The information relating to the TriStar Acquired Assets is effective as at
December 31, 2008 and mechanically updated to March 31, 2009 and the information relating to TriStar Acquired
Partnership is presented as at January 31, 2009.
The reserves information with respect to the TriStar Acquired Assets was prepared using GLJ’s January 1, 2009 price
forecast. The reserves information relating to the TriStar Acquired Partnership was prepared using Sproule’s January
31, 2009 price forecast. All other reserves information was prepared using Sproule’s December 31, 2008 price
forecast.
E-15
Acres of Net Undeveloped Land(1)(2)(3)
TriStar Acquired
Assets
TriStar Acquired
Partnership
TriStar
Petrobank
Assets
Pro Forma Total
PetroBakken
273,960
6,005
757,455
464,000
1,501,420
Notes:
(1)
(2)
(3)
The information relating to TriStar and the Petrobank Assets is presented as at December 31, 2008.
The TriStar Acquired Assets and TriStar Acquired Partnership were acquired by TriStar effective April 1, 2009 and
effective February 1, 2009, respectively.
The information relating to the TriStar Acquired Assets is presented as at March 31, 2009 and the information relating
to TriStar Acquired Partnership is presented as at January 31, 2009.
Additional information with respect to the acquisition of the TriStar Acquired Assets is set forth in
Appendix “F” to this Information Circular under the headings “The Acquisition”, “Recent Developments”
and “Information Concerning the TriStar Acquired Assets”.
OTHER OIL AND GAS INFORMATION
The following information includes all of the oil and gas assets owned by TriStar and comprising the
Petrobank Assets as at December 31, 2008, but does not include any oil and gas assets acquired by TriStar
subsequent to December 31, 2008. See “Description of the Business of TriStar – Recent Developments”
in Appendix “F” hereto.
Marketing
The majority of PetroBakken’s production is sold to a large international marketing company.
Sales as % of consolidated revenues
2008
2007
Crude oil
Trafigura
60%
49%
Production
The following table sets forth PetroBakken’s conventional average daily production volumes, by major
producing region and on a consolidated basis, for the three and twelve month periods ended
December 31, 2008.
Saskatchewan
Alberta
British Columbia
Manitoba
Total PetroBakken
Lt/Med Oil and NGL (bbl)(1)
2008
Q4 2008
Average
25,896
32,669
4,690
4,343
80
76
240
385
30,906
37,473
Gas (Mcf)
2008
Q4 2008
Average
3,511
4,379
38,300
33,874
3,008
2,985
44,819
41,238
Total (BOE)
2008
Q4 2008
Average
26,481
33,399
11,073
9,989
582
573
240
385
38,376
44,346
Note:
(1)
NGL have been included with light/medium oil, as they are not considered to be material.
E-16
Oil and Gas Wells
The following table summarizes Petrobank’s interests, by region and on a consolidated basis, as at
December 31, 2008, in oil and natural gas wells which are producing or which are considered capable of
production. All wells considered capable of production have been standing for a period of less than one
year, are within economic distance of transportation facilities and are classified as proved developed nonproducing reserves in the Petrobank Sproule Report and TriStar Sproule Report. All of PetroBakken’s
properties are located onshore.
Producing
Natural Gas
Gross
Net
1
1
544
387
29
22
574
410
Oil
Area
Saskatchewan
Alberta
British Columbia
Manitoba
Total PetroBakken
Gross
1,140
404
9
1,553
Net
842
304
9
1,155
Oil
Gross
214
288
7
509
Non-Producing
Natural Gas
Net
Gross
Net
150
2
250
101
2
7
407
105
2
76
2
80
Land Holdings
The land holdings of PetroBakken, including those that are undeveloped, by region and on a consolidated
basis, as at December 31, 2008 are set forth in the following table (in 000s of acres unless otherwise
noted).
Undeveloped (1)
Developed
Area
Saskatchewan
Alberta
British Columbia
Manitoba
Total PetroBakken
Note:
(1)
Gross
518
356
39
2
915
Net
409
236
28
2
675
Gross
598
664
142
65
1,469
Net
509
554
101
57
1,221
Total
Gross
1,116
1,020
181
67
2,384
Net
918
790
129
59
1,896
Avg.
WI%
82
77
71
88
80
Does not include undeveloped lands acquired by TriStar pursuant to the acquisitions of the TriStar Acquired Assets or
the TriStar Acquired Partnership.
Provincial governments in Canada grant rights to explore for and produce oil and natural gas under leases,
licenses and permits, which may be continued, indefinitely by producing under the lease. Accordingly, to
preserve this acreage PetroBakken is committed to bring wells on production.
PetroBakken expects that rights to explore, develop and exploit 228,521 net acres of its undeveloped land
in Canada will expire by December 31, 2009.
Forward Contracts and Future Commitments
For particulars of the forward contracts and future commitments of PetroBakken associated with the
Petrobank Assets, see Note 11, “Financial Instruments and Financial Risk Management”, and Note 13,
“Commitments and Contingencies” to the audited financial statements of the Petrobank Assets as at and
for the year ended December 31, 2008, and Note “5”, “Financial Instruments and Financial Risk
Management” and Note 7, “Commitments and Contingencies” to the unaudited interim financial
statements of the Petrobank Assets as at and for the three and six month periods ended June 30, 2009,
which financial statements included as Schedule A to this Appendix “E”.
E-17
For particulars of the forward contracts and future commitments of PetroBakken associated with TriStar,
see Note 13, “Financial Instruments” to the audited consolidated financial statements of TriStar as at and
for the year ended December 31, 2008 and Note 11, “Financial Instruments” to the consolidated interim
financial statements of TriStar as at and for the three and six month periods ended June 30, 2009, which
financial statements are incorporated by reference in this Information Circular.
Additional Information Concerning Abandonment and Reclamation Costs
Abandonment and reclamation costs were estimated for all legal obligations associated with the
retirement of long-lived tangible assets such as wells, facilities and plants based on market prices or on
the best information available where no market price was available. For obligations in Canada, the
estimated costs are then inflated at two percent over time until the actual retirement is expected to occur.
As at December 31, 2008, PetroBakken expected to incur future abandonment and reclamation costs in
respect of 2,377 net wells in Canada.
The total abandonment and reclamation costs net of salvage values of all PetroBakken’s operations, on a
consolidated basis, are estimated to be $141.4 million on an undiscounted basis and $26.1 million
discounted at 10 percent. In the next three financial years PetroBakken anticipates that approximately
$3.5 million on an undiscounted basis and $2.6 million discounted at 10 percent will be incurred on
abandonment and reclamation costs.
The calculation of future net revenue in the future prices and costs tables contained herein have excluded
$75.2 million on an undiscounted basis and $7.2 million discounted at 10 percent from PetroBakken’s
estimates, as these calculations do not reflect any costs for abandonment and reclamation for facilities and
wells for which no proved reserves have been attributed.
Tax Horizon
PetroBakken’s tax pools shelter it from paying current cash income taxes. Based on the Petrobank
Sproule Report and TriStar Sproule Report, and PetroBakken’s exploration and development plans,
PetroBakken does not expect to pay income tax in Canada until 2012 or later.
Capital Expenditures
The following table summarizes capital expenditures in respect of the Petrobank Assets and TriStar for
the year ended December 31, 2008.
(000s)
Drilling and completions
Total
$ 552,725
Facilities
136,642
Land
222,315
Seismic
5,833
Other (1)
21,053
Total capital expenditures
938,568
Note:
(1) Includes capitalized salaries and office furniture.
E-18
Costs Incurred
The following table summarizes the property acquisition, exploration and development costs incurred in
respect of the Petrobank Assets and TriStar for the year ended December 31, 2008.
Acquisition Costs (1)
Proved
Unproved (2)
779
350
Total (MM$)
Notes:
(1)
(2)
Exploration
59
Development
704
Pursuant to NI 51-101, “proved properties” are all properties to which proved reserves have been specifically attributed
and “unproved properties” are properties to which no reserves have been specifically attributed.
Includes $130 million of land acquisition costs incurred by Petrobank in 2008, primarily for lands acquired in southeast
Saskatchewan.
Exploration and Development
The following table summarizes the gross and net exploratory and development wells in which
PetroBakken and its subsidiaries participated during the year ended December 31, 2008.
Exploration
Gross
Oil
Natural Gas
Service Wells
Successful
Dry
Total
Success Rate
18.0
5.0
2.0
25.0
6.0
31.0
81%
Net
Development
Gross
Net
Gross
Net
14.5
4.0
1.7
20.2
5.4
25.6
79%
437.0
3.0
9.0
449.0
5.0
454.0
99%
455.0
8.0
11.0
474.0
11.0
485.0
98%
328.2
6.0
7.4
341.6
10.4
352.0
97%
313.7
2.0
5.7
321.4
5.0
326.4
98%
Total
PetroBakken and its subsidiaries’ exploration and development plans are discussed under the heading
“Business of PetroBakken”.
Production History
The following table shows PetroBakken and its subsidiaries’ average working interest production
volumes before deduction of royalties payable to others and average netbacks received for each of the last
four fiscal quarters by product type.
Year Ended
Three Months Ended
Mar 31, 2008
June 30, 2008
Sept 30, 2008
Dec 31, 2008
Dec 31, 2008
(1)
Average daily production
Light / medium oil and NGL (bbl/d)
Natural gas (Mcf/d)
Total PetroBakken (boe/d)
Note:
(1)
24,960
50,165
33,321
29,434
44,492
36,849
31,680
43,436
38,919
37,473
41,237
44,346
30,906
44,819
38,376
NGL have been included with light/medium oil as they are not considered to be material. NGL represent approximately
six percent of PetroBakken’s Canadian total proved plus probable reserves.
E-19
Netback by Product
Light/Medium Crude Oil and NGL Netback ($ per bbl)
Three Months Ended
Mar 31, 2008
Average price received (1)
Royalties
Operating costs (2)
Netback (3)
Notes:
(1)
(2)
(3)
89.87
14.31
9.60
65.96
June 30, 2008
114.12
16.37
9.19
88.56
Sept 30, 2008
111.57
17.08
8.94
85.55
Year Ended
Dec 31, 2008
57.13
10.07
9.05
38.01
Dec 31, 2008
91.23
14.22
9.16
67.85
Net of transportation expenses.
Operating costs are expenses incurred in the operation of producing properties and include items such as field staff
salaries, power, fuel, chemicals, repairs and maintenance, property taxes, processing and treating fees, overhead fees
and other costs.
Excludes hedging activities.
Natural Gas Netback ($ per Mcf)
Year Ended
Three Months Ended
Mar 31, 2008
Average price received
Royalties
Operating costs (2)
Netback
Notes:
(1)
(2)
(1)
7.60
2.12
1.46
4.02
June 30, 2008
9.74
2.75
1.47
5.52
Sept 30, 2008
8.61
2.57
1.56
4.48
Dec 31, 2008
6.85
1.41
1.53
3.91
Dec 31, 2008
8.20
2.22
1.50
4.48
Net of transportation expenses.
Operating costs are expenses incurred in the operation of producing properties and include items such as field staff
salaries, power, fuel, chemicals, repairs and maintenance, property taxes, processing and treating fees, overhead fees
and other costs.
E-20
SELECTED OPERATIONAL INFORMATION
The following is a summary of selected operational information for PetroBakken on a pro forma basis
following the completion of the Petrobank Reorganization and the Arrangement, for the periods indicated.
The following is a summary only and must be read in conjunction with the documents incorporated by
reference in this Information Circular and the information contained in Appendix “F” – Information
Concerning TriStar.
Pro Forma
Six Months Ended
June 30, 2009
Average Daily Production
Light and medium crude oil and natural gas liquids (Bbls/d)
Natural gas (Mcf/d)
Total (Boe/d)
34,566
41,400
41,466
Pro Forma
Year Ended
December 31, 2008
30,906
44,819
38,376
Pro Forma as at
December 31, 2008
Total Proved Reserves (1)
Light and medium crude oil (Mbbls)
Natural gas liquids (Mbbls)
Natural gas (MMcf)
Total (Mboe)
81,872
5,620
127,205
108,693
Total Proved Plus Probable Reserves (1)
Light and medium crude oil (Mbbls)
Natural gas liquids (Mbbls)
Natural gas (MMcf)
Total (MBoe)
126,509
8,377
191,499
166,803
Net Undeveloped Land Holdings as at December 31, 2008 (000's of acres) (2)
Note:
(1)
(2)
1,501,420
Reserves for TriStar have been (a) evaluated by Sproule in the TriStar Sproule Report effective December 31, 2008
using December 31, 2008 forecast pricing, (b) evaluated by Sproule in the TriStar Sproule Acquisition Report effective
January 31, 2009 using Sproule’s January 31, 2009 forecast pricing, and (c) evaluated by GLJ in the TriStar GLJ
Report effective December 31, 2008 and mechanically updated to March 31, 2009 to reflect production from January
1, 2009 to the acquisition effective date of April 1, 2009 using GLJ’s January 1, 2009 forecast pricing. Reserves for
the Petrobank Assets have been evaluated by Sproule in the Petrobank Sproule Report effective December 31, 2008
using December 31, 2008 forecast pricing. Reserves presented are gross reserves as defined in NI 51-101, using
forecast price and cost assumptions.
Includes undeveloped lands acquired by TriStar pursuant to the acquisitions of the TriStar Acquired Assets as at April
l, 2009 and the TriStar Acquired Partnership as at February 1,2009.
E-21
SELECTED FINANCIAL INFORMATION AND MANAGEMENT’S DISCUSSION AND
ANALYSIS
Financial Statements
Included in Schedule A to this Appendix “E” are the following financial statements of the Petrobank
Assets prior to the Petrobank Reorganization and the Arrangement:
(a)
a balance sheet as at December 31, 2008 and December 31, 2007;
(b)
statements of operations, comprehensive income, retained earnings and net investment and cash
flow for the years ended December 31, 2008, December 31, 2007 and December 31, 2006;
(c)
a balance sheet as at June 30, 2009; and
(d)
statements of operations, comprehensive income, retained earnings and net investment and cash
flow for the three and six month periods ended June 30, 2009 and 2008.
An audited balance sheet of PetroBakken as at July 30, 2009 is also included in Schedule A to this
Appendix “E”.
The following pro forma consolidated financial statements are included as Appendix “G” to this
Information Circular, such pro forma consolidated financial statements take into account PetroBakken’s
acquisition of TriStar pursuant to the Arrangement:
(a)
a pro forma consolidated balance sheet as at June 30, 2009;
(b)
a pro forma statement consolidated of operations for the year ended December 31, 2008 that gives
effect to the Arrangement as if it had been completed on January 1, 2008; and
(c)
a pro forma consolidated statement of operations for six month period from January 1, 2009 to
June 30, 2009 that gives effect to the Arrangement as if it had been completed on January 1,
2008.
PetroBakken’s activities relate to crude oil and natural gas exploration and development. PetroBakken
follows the full cost method of accounting for petroleum and natural gas operations whereby all costs of
exploring and developing oil and natural gas properties and related reserves are capitalized. Such
capitalized costs include land acquisitions, geological and geophysical expenditures, lease rentals on nonparticipating properties, expenditures of drilling both productive and non-productive wells, production
equipment, asset retirement costs and the portion of general and administrative expenses directly
attributable to exploration and development activities.
Management’s Discussion and Analysis
Included as Schedule A to this Appendix “E” is the following management’s discussion and analysis in
respect of the Petrobank Assets:
(a)
management’s discussion and analysis of the financial condition and results of operations of the
Petrobank Assets for the year ended December 31, 2008; and
(b)
management’s discussion and analysis of the financial condition and results of operations of the
Petrobank Assets for the three and six month periods ended June 30, 2009.
E-22
For management’s discussion and analysis of PetroBakken in respect of TriStar, see TriStar’s
management’s discussion and analysis for the years ended December 31, 2008 and 2007 and TriStar’s
management’s discussion and analysis for the three and six month periods ended June 30, 2009, each of
which are incorporated by reference in this Information Circular.
Summary Financial Information
The following is a summary of selected financial information for PetroBakken on a pro forma basis
following the completion of the Petrobank Reorganization and the Arrangement, for the periods indicated.
The following is a summary only and must be read in conjunction with the financial statements included
or incorporated by reference in this Information Circular and the information contained in Appendix “E” “Information Concerning PetroBakken”, Appendix “F” - Information Concerning TriStar and
Appendix “G” – Pro Forma Financial Statements.
Pro Forma
Six Months Ended
June 30, 2009
($000s)
Pro Forma
Year Ended
December 31, 2008
($000s)
Oil and natural gas
Royalties
Interest income
Gain (loss) on risk management contracts
379,619
(52,222)
81
(22,067)
305,411
1,198,961
(189,861)
536
67,489
1,077,125
Production and transportation
General and administration
Depletion, depreciation and accretion
Interest
Acquisition related costs
Stock-based compensation
74,556
15,760
245,219
13,171
13,566
362,272
172,088
22,226
475,494
28,029
29,825
18,109
745,771
(56,861)
331,354
(10,569)
(10,569)
(5,673)
100,829
95,156
(46,292)
236,198
Revenues
Expenses
Income (loss) before taxes
Taxes
Current taxes
Future income taxes (recovery)
Net income (loss)
Liquidity and Capital Resources
PetroBakken has obtained commitments for a $1.05 billion credit facility from a syndicate of banks. The
PetroBakken facility is comprised of a $900 million oil and gas reserve-based revolving facility, and a
six-month $150 million short-term non-revolving credit facility which will be extinguished upon the sale
of the proposed disposition of PetroBakken’s Alberta assets. The revolving facility is expected to have
terms ending in September 2010, extendable by the lenders for an additional year. If the lenders were to
not extend the term, the drawn amount would be due in September 2011. The syndicate of lenders will
assess the borrowing base semi-annually. PetroBakken will not be subject to restrictive financial
covenants under this credit facility.
E-23
Upon completion of the Arrangement, PetroBakken expects to have approximately $950 million drawn on
the credit facility. All proceeds from the Alberta asset disposition will decrease the amount drawn, and
after which the $150 million short-term credit facility will terminate. After the sale of the Alberta assets,
the debt to annualized earnings before interest, taxes, depletion, depreciation and accretion and other noncash items is expected to be below one times.
In addition to the credit facility noted above, other possible sources of funds available to PetroBakken
include the following:
●
Funds flow from operations.
●
Monetization of risk management contracts.
●
Issuance of additional PetroBakken Class A Shares.
●
Issuance of subordinated or convertible debt.
●
Sale of additional producing or non-producing assets to raise funds in the short term. Incremental
cash resources generated as a result would be reduced by any resulting decreases in future cash
flows and any required debt payments.
●
A forward sale of a portion of future production.
PetroBakken expects to satisfy ongoing working capital requirements with funds flow from operations,
cash and available credit.
Crude oil and natural gas process and exchange rates may change significantly due to factors not
controllable by PetroBakken. All of PetroBakken’s expenditures are subject to the effects of inflation and
prices received for the products sold that are not readily adjustable to cover any increase in expenses
resulting from inflation. PetroBakken has no control over government intervention or taxation levels in
the oil and gas industry.
PetroBakken intends to review its asset retirement obligations on a quarterly basis. Provision is made for
such obligations by way of charges against income via both accretion and depletion expense.
PetroBakken intends to maintain an insurance program consistent with industry practice to protect against
losses due to accidental destruction of assets, well blowouts, pollution and other business interruptions.
PetroBakken believes it is in substantial compliance, in all material respects, with current environmental
legislation and regularly works with governmental environmental agencies to maintain this level of
compliance.
Although PetroBakken has no set hedging policy, management of PetroBakken may use financial
instruments to reduce risk in certain situations. For particulars of the hedging commitments of
PetroBakken expected to be outstanding upon completion of the Arrangement, see “Future Contracts and
Future Commitments” in this Appendix “E”.
E-24
CONSOLIDATED CAPITALIZATION
The following table sets forth the consolidated capitalization of PetroBakken as at June 30, 2009 and as at
the same date after giving effect to the Petrobank Reorganization and the Arrangement.
Designation
PetroBakken Shares
Bank debt
Authorized
Unlimited
Outstanding as at June 30,
2009 prior to giving effect to
the Petrobank
Reorganization and the
Arrangement
$1 (1 Petrobakken Class B
Share)
$nil
Outstanding as at June 30,
2009 after giving effect to the
Petrobank Reorganization
and the Arrangement (1)
$2,568,111,000
(171,849,046
PetroBakken Shares)
$881,239,000 (2)
Notes:
(1)
(2)
Assumes: (i) the issuance of 61,762,500 Petrobank Class A Shares pursuant to the Arrangement at a deemed issue price
of $27.57 per PetroBakken Class A Share; and (ii) the issue of 286,545 PetroBakken Class A Shares will be issued to
the Financial Advisors at a deemed issue price of $27.57 per Petrobank Class A Share.
PetroBakken has obtained commitments for a $1.05 billion credit facility from a syndicate of banks.
DESCRIPTION OF SHARE CAPITAL
The authorized capital of PetroBakken consists of an unlimited number of PetroBakken Class A Shares
without nominal or par value, an unlimited number of Class B Shares (“PetroBakken Class B Shares”)
without nominal or par value and an unlimited number of Preferred Shares (“PetroBakken Preferred
Shares”) without nominal or par value.
PetroBakken Class A Shares
Holders of PetroBakken Class A Shares are entitled to one vote per share at meetings of shareholders of
PetroBakken Class A Shares, to receive dividends if, as and when declared by the board of directors of
PetroBakken with respect to the PetroBakken Class A Shares and to receive pro rata the remaining
property and assets of PetroBakken upon its liquidation, dissolution or winding up, subject to the rights of
shares having priority over the PetroBakken Class A Shares.
PetroBakken Class B Shares
Holders of PetroBakken Class B Shares are entitled to one vote per share at meetings of shareholders of
PetroBakken Class B Shares, to receive dividends if, as and when declared by the board of directors of
PetroBakken with respect to the PetroBakken Class B Shares and to receive pro rata the remaining
property and assets of PetroBakken upon its liquidation, dissolution or winding up, subject to the rights of
shares having priority over the PetroBakken Class B Shares. Each issued PetroBakken Class B Share may
at any time be converted, at the option of the holder, into one PetroBakken Class A Share. With respect
to any request for shareholder approval of a relocation of PetroBakken’s head office, each holder of
PetroBakken Class B Shares shall be entitled to two (2) votes in respect of each PetroBakken Class B
Share held in respect of such approval.
E-25
PetroBakken Preferred Shares
PetroBakken Preferred Shares may at any time and from time to time be issued in one or more series.
The board of directors of PetroBakken may from time to time before the issue thereof fix the number of
shares in, and determine the designation, rights, privileges, restrictions and conditions attaching to the
shares of, each series of PetroBakken Preferred Shares. The PetroBakken Preferred Shares shall be
entitled to priority over the PetroBakken Class A Shares and the PetroBakken Class B Shares and all
other shares ranking junior to the PetroBakken Preferred Shares with respect to the payment of dividends
and the distribution of assets of PetroBakken in the event of any liquidation, dissolution or winding up of
PetroBakken or other distribution of assets of PetroBakken among its shareholders for the purpose of
winding up its affairs. The PetroBakken Preferred Shares of each series shall rank on a parity with the
PetroBakken Preferred Shares of every other series with respect to priority in the payment of dividends
and in the distribution of assets of PetroBakken in the event of any liquidation, dissolution or winding up
of PetroBakken or other distribution of assets of PetroBakken among its shareholders for the purpose of
winding up its affairs.
MARKET FOR SECURITIES
There is currently no market for the PetroBakken Class A Shares. PetroBakken has made application for
the conditional listing on the TSX of the PetroBakken Class A Shares to be issued in connection with the
Arrangement. Listing will be subject to PetroBakken fulfilling all of the requirements of the TSX, which
requirements are expected to be met on the Effective Date or as soon as reasonably practicable thereafter.
Conditional listing approval has not yet been obtained and there can be no assurance that the PetroBakken
Class A Shares will be listed on the TSX or any other stock exchange.
DIVIDENDS
PetroBakken intends to adopt a dividend policy in respect of the PetroBakken Class A Shares initially
targeting payments of $0.96 per share per annum, payable monthly, with the first dividend expected to be
paid in November 2009 to shareholders of record on October 30, 2009. This dividend policy will allow
PetroBakken shareholders to benefit in PetroBakken’s industry leading high netback production on a
monthly basis.
PRIOR SALES
Since the date of its formation, PetroBakken has issued one PetroBakken Class B Share to Petrobank, at a
price of $1.00 per share. Prior to the completion of the Arrangement, pursuant to the Petrobank
Reorganization, in consideration for the contribution by Petrobank of the Petrobank Assets and $400
million in cash to PetroBakken, PetroBakken is expected to issue an aggregate of approximately
109,800,000 PetroBakken Shares to Petrobank.
PRINCIPAL SECURITYHOLDERS
As of the date hereof, Petrobank holds one PetroBakken Class B Share, being all of the issued and
outstanding PetroBakken Class B Shares. As of the date hereof, there are no PetroBakken Class A Shares
or PetroBakken Preferred Shares outstanding. Pursuant to the Petrobank Reorganization, PetroBakken is
expected to issue an aggregate of approximately 109,800,000 PetroBakken Shares to Petrobank in
consideration of the contribution by Petrobank to PetroBakken of the Petrobank Assets and $400 million
in cash such that, upon completion of the Petrobank Reorganization and the Arrangement, Petrobank will
own approximately 64% of the outstanding PetroBakken Shares.
E-26
DIRECTORS AND EXECUTIVE OFFICERS
As PetroBakken is in its formative stage, currently its Board of Directors consists of officers of
Petrobank. As of the date of this Information Circular, the current directors and executive officers of
PetroBakken are as follows: Andrew D. Grasby, Director; Andrea Hatzinikolas, Director; Corey C.
Ruttan, Senior Vice President, Chief Financial Officer and Director; R. Gregg Smith, President, Chief
Operating Officer and Director; and John D. Wright, Chairman, Chief Executive Officer and Director, all
such directors and officers were appointed on July 30, 2009. Immediately prior to completion of the
Arrangement, the PetroBakken Board of Directors will be re-constituted and executive officers appointed.
As such, each current director is expected to hold their office, as applicable, until the PetroBakken Board
is reconstituted immediately prior to completion of the Arrangement, or until the next annual meeting, or
until their successor is duly elected or appointed, unless their office is earlier vacated in accordance with
the PetroBakken’s By-Laws.
The following table provides the names, cities of residence and the principal occupation during the
previous five years of those individuals anticipated to serve as directors and executive officers of
PetroBakken, effective immediately prior to the completion of the Arrangement.
Anticipated Position
with PetroBakken
Director
Principal Occupation During
Previous Five Years
Mr. Brown is a Chartered Accountant
with over 20 years experience in the
capital markets. Mr. Brown was a
Senior
Managing
Director
at
Raymond
James
Ltd.
(and
predecessor companies) from 1995 to
2005 and previously was Executive
Vice President at the Alberta Stock
Exchange. Mr. Brown has been a
director of Petrobank since March 18,
2005.
Andrea Hatzinikolas
Calgary, Alberta
Canada
Corporate Secretary
Ms. Hatzinikolas has been the
Assistant Corporate Secretary and
General Counsel of Petrobank since
August 2008. From February 2007 to
August 2008 Ms. Hatzinikolas was
General Counsel of Petrobank. From
2003 to 2007, Ms. Hatzinikolas was
an associate at a national law firm.
Martin Hislop(2)
Calgary, Alberta
Canada
Director
Mr. Hislop is a Chartered Accountant
and has more than 30 years’
experience in all aspects of financing
and managing private and public oil
and gas corporations, partnerships
and trusts. Mr. Hislop has been a
Director of TriStar since November
2005
and
an
independent
businessman since June 2005. From
1996 to June 2005, Mr. Hislop was
the Chief Executive Officer of APF
Energy Trust.
Name and Residence
Ian Brown(1)
Calgary, Alberta
Canada
E-27
Anticipated Position
with PetroBakken
Principal Occupation During
Previous Five Years
Peter Hawkes
Calgary, Alberta
Canada
Vice President, Exploration
Mr. Hawkes was appointed Vice
President Exploration, Canadian
Business Unit of Petrobank in
November 2008. Mr. Hawkes joined
Petrobank in November 2005 as
Senior Geologist and was promoted
to Exploration Manager in July 2007.
From May 2004 to July 2005 Mr.
Hawkes was a Senior Geologist at
Southpoint Resources Ltd.
Brett Herman(2)
Calgary, Alberta
Canada
Director
Mr. Herman has been the President
and Chief Executive Officer of
TriStar since August 2006, and from
January 2006 until August 2006 was
TriStar’s President and Chief
Operating Officer. From September
2003 to January 2006, Mr. Herman
was the Vice President, Finance and
Chief Financial Officer of StarPoint
Energy Ltd.
Rene LaPrade
Calgary, Alberta
Canada
Senior Vice President, Operations
Mr. LaPrade is a Professional
Engineer with 30 years of experience
in the oil and gas industry. Since
April 18, 2008, Mr. LaPrade has been
the Vice President, Operations of
Petrobank. Mr. LaPrade was the
President and Chief Executive Officer
of Mirage Energy Ltd. from October
2006 to February 2008. Prior thereto,
Vice President, Operations of
Petrobank from July 2002 until
September 2006.
Craig Lothian(2)
Regina, Saskatchewan
Canada
Director
Mr. Lothian has in excess of sixteen
years experience in the oil and natural
gas industry. Mr. Lothian is the
President and Chief Executive Officer
of Keystone Royalty Corp. (a land
and royalty company), and Executive
Chair of Villanova Resources Inc. (an
exploration
&
development
company). Mr. Lothian also serves
on the Board of Directors of
Enterprise Saskatchewan.
Name and Residence
E-28
Name and Residence
Kenneth McKinnon(1)
Calgary, Alberta
Canada
Richard Press
Calgary, Alberta
Canada
Corey C. Ruttan(1)
Calgary, Alberta
Canada
Anticipated Position
with PetroBakken
Director
Principal Occupation During
Previous Five Years
Mr. McKinnon has been a director of
Petrobank since March 2000. Mr.
McKinnon holds the position of Vice
President Legal and General Counsel
of Critical Mass Inc., a website design
and digital marketing company.
Vice President, Land and Contracts
Mr. Press has been the Vice President
Land and Contracts of Petrobank
since January 2005 with over 20 years
of oil and gas industry experience.
Mr. Press joined Petrobank in May
2003 as Senior Landman and was
promoted to Land Manager in July
2004. Prior thereto, Mr. Press was a
Senior Landman with Talisman
Energy Inc. from June 2001 to May
2003 and was Land Manager of
Petromet Resources Limited from
September 1999 to May 2001.
Executive Vice President and Chief
Financial Officer and Director
Since November 2008, Mr. Ruttan
has been Petrobank’s Senior Vice
President and Chief Financial Officer.
From May 2007 to November 2008,
Mr. Ruttan served as Petrobank’s
Vice President Finance and Chief
Financial Officer. Mr. Ruttan was
Vice President Finance of Petrobank
from May 2006 to May 2007 and
Director of Corporate Finance and
Investor Relations from July 2003 to
May 2006. Mr. Ruttan is also the
Vice President, Finance and Chief
Financial Officer of Petrominerales
Ltd.
Doreen Scheidt
Calgary, Alberta
Canada
Controller
Ms. Scheidt has been the Corporate
Controller of Petrobank since
December 2001.
R. Gregg Smith
Calgary, Alberta
Canada
President and Chief Operating Officer
Mr. Smith has been the Senior Vice
President and Chief Operating
Officer, Canada of Petrobank since
November 2008. Mr. Smith was the
Vice President, Canada of Petrobank
from March 2003 to November 2008.
E-29
Name and Residence
Dan Themig(1)
Calgary, Alberta
Canada
John D. Wright(1)
Calgary, Alberta
Canada
Anticipated Position
with PetroBakken
Director
Principal Occupation During
Previous Five Years
Since September 2002, Mr. Themig
has been the President of Packers Plus
Energy Services headquartered in
Calgary, Alberta, Canada.
Mr.
Themig has served in various
engineering and technical positions in
the U.S. and Canada and has been
involved in advanced horizontal and
multilateral projects worldwide. He
has a B.Sc. in Engineering from the
University of Illinois and an MBA
from Oklahoma State University. Mr.
Themig is a registered professional
engineer.
Chairman and Chief Executive Officer
and Director
Mr. Wright has been President, Chief
Executive Officer and a Director of
Petrobank since March 2000. Mr.
Wright is also the President and Chief
Executive Officer of Petrominerales
Ltd.
Notes:
(1)
(2)
Petrobank nominee to the Board of Directors of PetroBakken.
TriStar nominee to the Board of Directors of PetroBakken.
Petrobank anticipates the appointment of one (1) additional director, to be a Petrobank nominee, to the
Board of Directors of PetroBakken, effective immediately prior to closing of the Arrangement. The
Board of Directors of PetroBakken does not currently have an audit committee, compensation committee
or reserves committee. Such committees will be formed upon completion of the Arrangement. See
“PetroBakken Committees”.
Following the completion of the Arrangement, it is anticipated that the PetroBakken officers and
directors, as a group, will hold, directly or indirectly, or exercise control or direction over less than 1% of
the outstanding PetroBakken Shares.
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS
There exists no indebtedness of the directors or executive officers of PetroBakken, or any of their
associates, to PetroBakken, nor is any indebtedness of the directors or executive officers to another entity
the subject of a guarantee, support agreement, letter of credit or other similar arrangement or
understanding provided by PetroBakken.
E-30
PETROBAKKEN COMMITTEES
Upon completion of the Arrangement, it is intended that the PetroBakken Board will establish an Audit
Committee, Reserves Committee and Compensation Committee. It is anticipated that all of the
committees of the PetroBakken Board will operate under written mandates.
Audit Committee
The primary function of the Audit Committee will be to assist the PetroBakken Board in fulfilling its
responsibilities by reviewing: the financial reports and other financial information provided by
PetroBaken to any regulatory body or the public; PetroBakken’s systems of internal controls regarding
preparation of those financial statements and related disclosures that management and the Board have
established; and PetroBakken’s auditing, accounting and financial reporting processes generally. All
members of the Audit Committee will be independent and financially literate within the meaning of
Multilateral Instrument 52-110 – Audit Committees of the Canadian Securities Administrators.
Reserves Committee
The primary function of the Reserves Committee will be to assist the PetroBakken Board in the selection,
engagement and instruction of an independent reserves evaluator for PetroBakken ensuring there is a
process in place to provide all relevant reserves data to the independent reserves evaluator and monitoring
the preparation of the independent reserves evaluation of PetroBakken in accordance with National
Instrument 51-101 – Standard of Oil and Gas Disclosure for Oil and Gas Activities of the Canadian
Securities Administrators.
Compensation Committee
The purpose of the Compensation Committee will be to assist the PetroBakken Board in fulfilling its
responsibility by reviewing and evaluating matters relating compensation of the directors, officers and
employees of PetroBakken in the context of the budget and business plan of PetroBakken.
CORPORATE CEASE TRADE ORDERS AND BANKRUPTCIES
Corporate Cease Trade Orders
Rene LaPrade
On April 30, 2008, a management cease trade order (“MCTO”) was issued by the ASC in respect of
Sahara Energy Ltd. (“Sahara”), a reporting issuer listed on the TSX Venture Exchange. The MCTO was
issued against Sahara for failure to file annual audited financial statements for the year ended
December 31, 2007 (the “Unfiled Statements”). The MCTO prohibited certain directors and officers of
Sahara, including Mr. Rene LaPrade (a director of Sahara), from trading in securities of Sahara until two
business days following the filing of the Unfiled Statements with the ASC or until the MCTO was
revoked. The MCTO expired on June 17, 2008.
On January 8, 2009, Mr. Rene LaPrade entered into a settlement agreement with the ASC in respect of an
insider trading violation relating to a February 6, 2008 trade. Mr. LaPrade cooperated fully with the ASC
in resolving the matter. Mr. LaPrade paid $10,000 in settlement of the allegations against him and costs
of the investigation in the amount of $500. As part of the settlement agreement, until January 8, 2010,
Mr. LaPrade has agreed to cease trading in securities (subject to certain exceptions) and to refrain from
acting as a director of any issuer.
E-31
Corey C. Ruttan
Mr. Corey C. Ruttan entered into a settlement agreement with the Alberta Securities Commission
(“ASC”) on May 3, 2002 in respect of an insider trading violation relating to a May 17, 2000 trade. Mr.
Ruttan cooperated completely in resolving the matter with the regulators. The settlement resulted in Mr.
Ruttan paying an administrative penalty of $10,000, representing a return of profits, and the costs of the
proceeding in the amount of $3,925. For a period of one year, Mr. Ruttan agreed to cease trading in
securities and to not act as a director or officer of a public company. These restrictions expired on
May 3, 2003. Mr. Ruttan is a Chartered Accountant in good standing.
John D. Wright
Mr. John D. Wright is a director of Talon International Energy Ltd. (“Talon”), a reporting issuer listed on
the TSX Venture Exchange. A cease trade order (the “ASC Order”) was issued on May 7, 2008 against
Talon by the ASC for the delayed filing of Talon’s audited annual financial statements and management’s
discussion and analysis for the year ended December 31, 2007 (“Annual Filings”). The Annual Filings
were filed by Talon on SEDAR on May 8, 2008. As a result of the Order, the TSX Venture Exchange
suspended trading in Talon’s shares on May 7, 2008. In addition, on June 4, 2009 the British Columbia
Securities Commission (“BCSC”) issued a cease trade order (the “BCSC Order”) against Talon for the
failure of Talon to file its audited annual financial statements and management’s discussion and analysis
for the year ended December 31, 2008 and its unaudited interim financial statements and management’s
discussion and analysis for the three months ended March 31, 2009.
Talon made application to the ASC for a revocation of the Order and in conjunction with Talon’s
application for revocation of the ASC Order, the ASC reviewed Talon’s financial statements and
management’s discussion and analysis for the periods ending March 31, 2008, June 30, 2008 and the year
ended December 31, 2007 (collectively, the “Reviewed Financial Statements”), and provided Talon
with comments in respect of such Reviewed Financial Statements. Talon is currently working to revise
the Reviewed Financial Statements to address the comments of the ASC and intends to re-file the
Reviewed Financial Statements on SEDAR.
On July 23, 2009, Talon announced that it entered into a letter agreement with Fifth Avenue Diversified
Inc. (“Fifth Avenue”), pursuant to which Talon and Fifth Avenue will continue into the Province of
Alberta and amalgamate to form a new company (“Amalco”) under the ABCA. The transaction will
constitute a reverse takeover pursuant to the TSX Venture Exchange Policy 5.2 and all of the outstanding
Talon securities and Fifth Avenue securities will be exchanged for securities of Amalco. Talon will apply
for the partial or full revocation of the ASC Order and the BCSC Order, and the revocation of such orders
is a condition to the proposed transaction between Talon and Fifth Avenue.
Except as otherwise disclosed herein, to the knowledge of management of PetroBakken, no proposed
director or executive officer of PetroBakken is, or within the ten (10) years before the date of this
information circular has been, a director, chief executive officer or chief financial officer of any other
issuer that:
(a) was the subject of a cease trade or similar order or an order that denied the other issuer access to any
exemptions under Canadian securities legislation that lasted for a period of more than thirty (30)
consecutive days that was issued while the director or executive officer was acting in the capacity as
director, chief executive officer or chief financial officer; or
(b) was subject to a cease trade order or an order that denied the relevant issuer access to any exemption
under securities legislation that lasted for a period of more than thirty (30) consecutive days that was
E-32
issued after the director or executive officer ceased to be a director, chief executive officer or chief
financial officer and which resulted from an event that occurred while the director or executive officer
was acting in the capacity as director, chief executive officer or chief financial officer.
Bankruptcies and Insolvencies
To the knowledge of management of PetroBakken, no proposed director or executive officer of
PetroBakken:
(a) is, at the date of this information circular or has been within the ten (10) years before the date of this
information circular, a director or executive officer of any company that, while that person was acting
in that capacity or within a year of that person ceasing to act in that capacity, became bankrupt, made
a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted
any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or
trustee appointed to hold its assets; or
(b) has, within the ten (10) years before the date of this information circular, become bankrupt, made a
proposal under any legislation relating to bankruptcy or insolvency, or was subject to or instituted any
proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or
trustee appointed to hold the assets of the director, officer or shareholder.
Penalties and Sanctions
To the knowledge of management of PetroBakken, no proposed director or executive officer of
PetroBakken has:
(a) been subject to any penalties or sanctions imposed by a court relating to Canadian securities
legislation or by a Canadian securities regulatory authority or has entered into a settlement agreement
with the Canadian securities regulatory authority; or
(b) been subject to any other penalties or sanctions imposed by a court or regulatory body that would
likely be considered important to a reasonable investor in making an investment decision.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
To date, PetroBakken has not carried on any active business and has not completed a fiscal year of
operations. No compensation has been paid by PetroBakken to its executive officers or directors and
none will be paid until after the Arrangement is completed. Following the completion of the
Arrangement, it is anticipated that the executive officers of PetroBakken will be paid salaries comparable
to the salaries paid at other oil and gas companies of similar size and character.
As at the date hereof, there are no employment contracts in place between PetroBakken and any of the
executive officers of PetroBakken and there are no provisions for compensation of executive officers of
PetroBakken in the event of termination of employment or change of responsibilities following a change
of control. The board of directors of PetroBakken will consider whether employment contracts should be
entered into with each of the executive officers of PetroBakken following the completion of the
Arrangement.
Initially, each member of the Board of Directors will be paid an annual retainer fee that will be
determined on closing of the Arrangement and will not be paid for attendance at board or committee
meetings; however, they will be entitled to be reimbursed for all reasonable expenses incurred in order to
E-33
attend such meetings. It is anticipated that directors will be additionally compensated for their time and
effort by granting them stock options and deferred PetroBakken Class A Shares pursuant to the
PetroBakken Option Plan, the PetroBakken DCS Plan and the PetroBakken Incentive Plan.
SHARE BASED COMPENSATION PLANS
PetroBakken Option Plan
PetroBakken adopted the PetroBakken Stock Option Plan (the “PetroBakken Option Plan”), effective
August 31, 2009, pursuant to which PetroBakken may grant stock options (“Stock Options”) to
employees or Insiders of PetroBakken or its affiliates or to any other person or company engaged to
provide ongoing management or consulting services for PetroBakken or its affiliates (collectively,
“Service Providers”).
The maximum number of PetroBakken Class A Shares that may be reserved for issuance pursuant to
Stock Options granted under the PetroBakken Option Plan is 10% of the aggregate number of
PetroBakken Shares issued and outstanding, less any PetroBakken Shares reserved for issuance pursuant
to any other share based compensation plans of PetroBakken. As of the date hereof, no Stock Options
have been granted pursuant to the PetroBakken Option Plan.
The purpose of the PetroBakken Option Plan is to secure for PetroBakken and its shareholders the
benefits of incentives inherent in share ownership by Service Providers who, in the judgment of the board
of directors of PetroBakken, will be largely responsible for its future growth and success.
The PetroBakken Option Plan contains provisions that limit issuances to Insiders so that the maximum
number of PetroBakken Class A Shares that may be reserved for issuance to Insiders pursuant to Stock
Options granted under the PetroBakken Option Plan (and any other share compensation arrangement) is
10% of the aggregate number of PetroBakken Class A Shares issued and outstanding. The maximum
number of PetroBakken Class A Shares that may be issued to Insiders under the PetroBakken Option Plan
and any other share compensation arrangement within a one year period is 10% of the aggregate
PetroBakken Shares issued and outstanding, less any PetroBakken Shares reserved for issuance pursuant
to any other share based compensation plans of PetroBakken; provided that, the maximum number of
PetroBakken Class A Shares that may be issued to any one Insider or such Insider’s associates under the
PetroBakken Option Plan within a one year period is 5% of the aggregate number of PetroBakken Shares
issued and outstanding. In addition, not greater than 5% of the issued and outstanding PetroBakken
Shares may be available for issuance to any one person under the PetroBakken Option Plan. For the
purposes of the PetroBakken Option Plan, a “share compensation arrangement” means any stock option,
PetroBakken Option Plan, employee stock purchase plan or any other compensation or incentive
mechanism involving the issuance or potential issuance of PetroBakken Class A Shares, including a share
purchase from treasury which is financially assisted by PetroBakken by way of a loan, guarantee or
otherwise.
The exercise price of Stock Options granted under the PetroBakken Option Plan will be fixed by the
board of directors at the time of grant, provided that, such exercise price may not be less than the market
price of the PetroBakken Class A Shares on the date of the grant. For the purposes of the PetroBakken
Option Plan, the market price means the volume weighted average trading price of the PetroBakken Class
A Shares on the TSX for the five (5) trading days prior to the date of the grant (or such other stock
exchange in Canada if not then listed and posted for trading on the TSX) and if the PetroBakken Class A
Shares are not listed and posted for trading on any stock exchange in Canada, the board of directors will
determine the market price. No PetroBakken Class A Shares will be issued upon the exercise of Stock
Options until the full purchase price is received.
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Stock Options granted under the PetroBakken Option Plan will vest as determined by the Board of
directors and will be exercisable for a period generally not exceeding five (5) or seven (7) years, as
determined by the board of directors, but in any event the option period shall not exceed ten (10) years
from the date of grant. The PetroBakken Option Plan provides that subject to the rules and regulations of
the TSX and any other applicable laws, the board of directors may at any time authorize PetroBakken to
loan money to a Service Provider on such terms and conditions as the board of directors in its sole
discretion may determine, to assist such Service Provider to exercise an option held.
The PetroBakken Option Plan also includes provision for a cashless option exercise right (the “Put
Right”). Under the Put Right, optionholders can request that PetroBakken purchase for cash all or any
part of their Stock Options at a price being the difference between the current market price of the
PetroBakken Class A Shares, or a lower price as the board of directors may determine, and the exercise
price of each option. Upon acceptance of the Put Right by PetroBakken, PetroBakken will deliver a
cheque to the exercising optionholder within three (3) business days of receipt of notice exercising this
Put Right.
All benefits, rights and options accruing to any participant of the PetroBakken Option Plan in accordance
with the terms and conditions of the PetroBakken Option Plan shall not be transferable or assignable.
During the lifetime of a Service Provider, all benefits, rights and options may only be exercised by the
Service Provider.
If PetroBakken amalgamates, consolidates with or merges with or into another unrelated company, any
PetroBakken Class A Shares receivable on the exercise of an option (whether vested or not) shall be
converted into the securities, property or cash which the optionee would have received upon such
amalgamation, consolidation or merger if the optionee had exercised his or her option (whether vested or
not) immediately prior to the record date applicable to such amalgamation, consolidation or merger, and
the option price shall be adjusted appropriately by the Board of directors and such adjustment shall be
binding for all purposes of the PetroBakken Option Plan. If a bona fide offer (the “Offer”) for
PetroBakken Class A Shares is made to the optionee or to shareholders of PetroBakken generally, which
Offer, if accepted in whole or part, would result in the offeror exercising control over PetroBakken, then
PetroBakken must notify each optionee holding an option of the Offer, with full particulars thereof;
whereupon, such option (whether vested or not) may be exercised in whole or in part by the optionee in
order that the optionee tenders the PetroBakken Class A Shares received upon such exercise (the
“Optioned Shares”) pursuant to the Offer. If: (a) the Offer is withdrawn by the offeror; or (b) the
optionee does not tender the Optioned Shares pursuant to the Offer; or (c) all of the Optioned Shares
tendered by the optionee pursuant to the Offer are not taken up and paid for by the offeror in respect
thereof; then the Optioned Shares or, in the case of subsection (c) above, the Optioned Shares that are not
taken up and paid for, shall be returned by the Optionee to PetroBakken and reinstated as authorized but
unissued PetroBakken Class A Shares and the terms of the option shall again apply to the option. If any
Optioned Shares are returned to PetroBakken, PetroBakken shall refund the exercise price to the optionee
for such Optioned Shares. In no event shall the Optionee be entitled to sell the Optioned Shares otherwise
than pursuant to the Offer.
In the event of the death of a participant, all vested and unvested Stock Options held by such participant at
the date of death shall be exercisable for six (6) months after the date of death or prior to the expiration of
the period during which the option may be exercised, whichever is sooner. If a participant ceases to be
employed by (or to be a director or officer of) PetroBakken for cause, no Stock Options may be exercised
following the date on which such participant ceases to be so employed or ceases to be a director or
officer, as the case may be. If a participant voluntarily ceases employment with PetroBakken or
voluntarily ceases to be a director or officer of PetroBakken, then any vested option held by such
participant at the effective date thereof shall be exercisable only for seven (7) days after such date, or
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prior to the expiration of the period during which the option may be exercised, whichever is sooner. If a
participant ceases to be employed by or to be a director or officer of PetroBakken by way of termination
without cause, then any vested option held by such participant at the effective date thereof shall be
exercisable for three (3) months after such date or prior to the expiration of the period during which the
option may be exercised, whichever is sooner.
The board of directors has the right to amend, modify or terminate the PetroBakken Option Plan at any
time if and when it is advisable in the absolute discretion of the Board. Such right of the Board includes
the ability to amend, modify or terminate the following provisions without shareholder or optionee
approvals: (a) those persons to whom Stock Options may be granted; (b) general terms of the Stock
Options including but not limited to vesting, change to the option period and the manner of exercising
Stock Options; (c) exercise of Stock Options upon termination of employment or death; (d) exercise of
Stock Options in the event of a takeover bid, amalgamation, consolidation, merger or similar transaction
and adjustment in PetroBakken Class A Shares as a result of such events; (e) financial assistance to
optionees; (f) general limits on the size of Stock Option grants to certain individuals, including Insiders;
(f) transferability or assignability of Stock Options; and (g) the terms, conditions and exercise of the Put
Right.
The PetroBakken Option Plan contains a provision for a Blackout Expiration Period which allows for the
term of an option to be extended, if applicable, to include a Blackout Expiration Period. A Blackout
Period means, pursuant to the policies of PetroBakken, routinely scheduled periods of time and nonroutinely schedule periods of time as notified by PetroBakken, during which participants of the
PetroBakken Option Plan may not trade in the securities of PetroBakken. A Blackout Expiration Period
means ten (10) days after the end of a Blackout Period if an option period expires during a Blackout
Period or the difference between ten (10) days after the end of the option period expiration date if the
option period expires within ten (10) days after the end of a Blackout Period.
PetroBakken Deferred Common Share Plan
PetroBakken adopted a deferred share plan (the “PetroBakken DCS Plan”) respecting the PetroBakken
Class A Shares, effective August 31, 2009, for the purpose of providing effective incentives for the
directors, officers, employees and service providers (“DCS Plan Participants”) of PetroBakken, and its
affiliates, to promote the success and business of PetroBakken and to reward such DCS Plan Participants
in relation to the long-term performance and growth of PetroBakken by encouraging ownership of
PetroBakken Class A Shares. The PetroBakken DCS Plan provides for the grant of deferred PetroBakken
Class A Shares, which, after a prescribed period of time, vest and entitle the holder to one (1)
PetroBakken Class A Share for each one (1) deferred PetroBakken Class A Share granted.
PetroBakken Class A Shares which a DCS Plan Participant is entitled to receive pursuant to the
PetroBakken DCS Plan will not be issued until the DCS Plan Participant has delivered to PetroBakken an
election in writing that the PetroBakken Class A Shares be issued together with payment to PetroBakken
in the amount of $0.05 for each PetroBakken Class A Share issued. A DCS Plan Participant will not be
entitled to elect to be issued any of the PetroBakken Class A Shares which he or she has been granted
until a period of three (3) years has passed since the date of grant of such PetroBakken Class A Shares or
until the DCS Plan Participant ceases to be a DCS Plan Participant of PetroBakken or its affiliate,
whichever is earlier. Upon a DCS Plan Participant ceasing to be a DCS Plan Participant of PetroBakken
or its affiliate, such DCS Plan Participant shall be required to elect whether he or she will be issued all or
any portion of the PetroBakken Class A Shares which have been granted to him or her (and to deliver
payment for all of such PetroBakken Class A Shares to be issued), such election and payment to be made
within thirty (30) days following the DCS Plan Participant ceasing to be such and delivery of such
PetroBakken Class A Shares to occur the earlier of three (3) years after the date of grant of such
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PetroBakken Class A Shares or one (1) year after the DCS Plan Participant of PetroBakken ceases to be
such. A DCS Plan Participant shall have no right to receive PetroBakken Class A Shares granted to him
or her which have not been issued on the date that is ten (10) years following the date of grant.
The PetroBakken DCS Plan provides that the number of PetroBakken Class A Shares that are issuable to
a DCS Plan Participant pursuant to grants of deferred PetroBakken Class A Shares under the PetroBakken
DCS Plan shall be increased on each date on which a cash dividend is paid to shareholders by an amount
equal to the product of the number of the PetroBakken Class A Shares which remain issuable and the
fraction which has as its numerator the cash dividend paid, expressed as an amount per PetroBakken
Class A Share and which has as its denominator the weighted average trading price of PetroBakken Class
A Shares on the TSX for the ten (10) trading days preceding the record date for such dividend.
The total number of PetroBakken Class A Shares issuable pursuant to the PetroBakken DCS Plan, subject
to adjustment in accordance with the PetroBakken DCS Plan, including adjustments for cash dividends
paid on the PetroBakken Class A Shares, shall not exceed 1,000,000 PetroBakken Class A Shares. As of
the date hereof, there have been no PetroBakken Class A Shares issued pursuant to the DCS Plan.
No PetroBakken Class A Shares may be issued to a DCS Plan Participant under the PetroBakken DCS
Plan if such issuance could result, at any time, in (i) the number of PetroBakken Class A Shares reserved
for issuance pursuant to issuances under the PetroBakken DCS Plan and all other established or proposed
share compensation arrangements in respect of PetroBakken Class A Shares granted to Insiders exceeding
10% of the aggregate issued and outstanding PetroBakken Class A Shares, (ii) the issuance to Insiders of
PetroBakken pursuant to the PetroBakken DCS Plan and all other established or proposed share
compensation arrangements, within a one (1) year period, of a number of PetroBakken Class A Shares
exceeding 10% of the aggregate issued and outstanding PetroBakken Class A Shares, or (iii) the issuance
pursuant to the PetroBakken DCS Plan and all other established or proposed share compensation
arrangements to any one Insider of PetroBakken, or such Insider’s associates, within a one (1) year
period, of a number of PetroBakken Class A Shares exceeding 5% of the aggregate issued and
outstanding PetroBakken Class A Shares.
All benefits, rights and options accruing to any DCS Plan Participant in accordance with the terms and
conditions of the DCS Plan shall not be transferable or assignable.
In the event a change of control of PetroBakken is contemplated or has occurred, PetroBakken Class A
Shares issuable to a DCS Plan Participant under the PetroBakken DCS Plan which have not otherwise
vested in accordance with their terms shall vest and be exercisable at such time as is determined by the
Board, notwithstanding the other terms of the deferred PetroBakken Class A Shares. Further, the Board of
Directors may, in its sole discretion at any time, accelerate or provide for the acceleration of, the vesting
of deferred PetroBakken Class A Shares previously granted.
The Board reserves the right to make amendments and modifications to the PetroBakken Option Plan or
terminate the PetroBakken Option Plan and to amend or modify a DCS Agreement without shareholder
approval.
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PetroBakken Incentive Common Share Plan
PetroBakken adopted an incentive share plan (the “PetroBakken Incentive Plan”) respecting the
PetroBakken A Shares effective August 31, 2009, for the purpose of providing effective incentives for the
directors, officers, service providers and employees (collectively, the “Incentive Plan Participants”) of
PetroBakken and its affiliates, to promote the success and business of PetroBakken and to reward such
Incentive Plan Participants in relation to the long-term performance and growth of PetroBakken by
encouraging ownership of PetroBakken Class A Shares. Compensation is payable pursuant to the
PetroBakken Incentive Plan in the form of incentive shares (“Incentives”). Under the PetroBakken
Incentive Plan, the board of directors of PetroBakken may grant Incentives to such Incentive Plan
Participants as it chooses in such numbers as it chooses. The Incentives vest over time and, upon vesting,
each one (1) Incentive is entitled to redeemed for one (1) PetroBakken Class A Share.
PetroBakken Class A Shares which a Incentive Plan Participant is entitled to receive pursuant to the
PetroBakken Incentive Plan will not be issued until such Incentives have vested and the Incentive Plan
Participant has delivered to PetroBakken an election in writing that the PetroBakken Class A Shares
underlying the Incentives be issued together with payment to PetroBakken in the amount of $0.05 for
each PetroBakken Class A Share issued. An Incentive Plan Participant shall have no right to receive
PetroBakken Class A Shares underlying Incentives granted to him or her which have not been issued on
the date that is ten (10) years following the date of grant.
The PetroBakken Incentive Plan provides that the number of PetroBakken Class A Shares issuable to a
Incentive Plan Participant with respect to the vested Incentives held by such Incentive Plan Participant
shall be increased on each date on which a cash dividend is paid to shareholders of PetroBakken by an
amount equal to the product of the number of the vested PetroBakken Class A Shares held by the
Incentive Plan Participant and the fraction which has as its numerator the cash dividend paid, expressed as
an amount per PetroBakken Class A Share and which has as its denominator the weighted average trading
price of PetroBakken Class A Shares on the TSX for the ten (10) trading days preceding the record date
for such dividend.
The total number of PetroBakken Class A Shares issuable pursuant to the PetroBakken Incentive Plan,
subject to adjustment in accordance with the PetroBakken Incentive Plan, including adjustments for cash
dividends paid on the PetroBakken Class A Shares, shall not exceed 4,000,000 PetroBakken Class A
Shares. As of the date hereof, there have been no Incentives granted, and no PetroBakken Class A Shares
issued, pursuant to the Incentive Plan.
No PetroBakken Class A Shares may be issued to a Incentive Plan Participant under the PetroBakken
Incentive Plan if such issuance could result, at any time, in (i) the number of PetroBakken Class A Shares
reserved for issuance pursuant to issuances under the PetroBakken Incentive Plan and all other established
or proposed share compensation arrangements in respect of PetroBakken Class A Shares granted to
Insiders exceeding 10% of the aggregate issued and outstanding PetroBakken Class A Shares, (ii) the
issuance to Insiders of PetroBakken pursuant to the PetroBakken Incentive Plan and all other established
or proposed share compensation arrangements, within a one (1) year period, of a number of PetroBakken
Class A Shares exceeding 10% of the aggregate issued and outstanding PetroBakken Class A Shares, or
(iii) the issuance pursuant to the PetroBakken Incentive Plan and all other established or proposed share
compensation arrangements to any one Insider of PetroBakken, or such Insider’s associates, within a one
(1) year period, of a number of PetroBakken Class A Shares exceeding 5% of the aggregate issued and
outstanding PetroBakken Class A Shares. The Board reserves the right to make amendments and
modifications to the PetroBakken Incentive Plan or terminate the PetroBakken Incentive Plan and to
amend or modify a Incentive Agreement between PetroBakken and the Incentive Plan Participant without
shareholder approval.
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Incentives granted to Incentive Plan Participants under the PetroBakken Incentive Plan are non-assignable
unless the prior written consent of PetroBakken has been obtained. An Incentive Plan Participant may
offer to dispose of his or her unvested Incentives to PetroBakken for cash in an amount not to exceed the
fair market value and PetroBakken has the right, but not the obligation, to accept the Incentive Plan
Participant’s offer. Fair market value is to be determined by the PetroBakken board of directors in such
case, but cannot exceed the five day weighted average trading price of the Shares on the TSX.
In the event of the resignation, retirement or death of a Incentive Plan Participant, or the termination of
the employment of a Incentive Plan Participant, whether with or without cause or reasonable notice, prior
to the vesting of an Incentive, such Incentive shall immediately cease and terminate and thereafter shall
be of no further force or effect whatsoever.
The board of directors of PetroBakken may amend the PetroBakken Incentive Plan or any outstanding
Incentives in any manner or discontinue it at any time without the approval of the shareholders of
PetroBakken except that: (i) the consent of the applicable Incentive Plan Participants must be obtained for
any amendment that would adversely affect such Incentive Plan Participant’s outstanding Incentives, and
(ii) the approval of the shareholders of PetroBakken must be obtained for any amendment that would have
the effect of increasing the number of Incentives that may be granted under the PetroBakken Incentive
Plan, increasing the number of PetroBakken Class A Shares that may be reserved for issuance under the
PetroBakken Incentive Plan, or permitting transferability of Incentives.
The PetroBakken Incentive Plan provides that appropriate adjustments in the number of PetroBakken
Class A Shares issuable on the vesting of an Incentive shall be made by the board of directors of
PetroBakken to give effect to relevant changes to the issued or authorized capital of PetroBakken.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Except as disclosed herein, none of the directors or officers of PetroBakken and no associate or affiliate of
any of them, has or has had any material interest in any transaction or any proposed transaction which
materially affects PetroBakken or any of its affiliates.
There are potential conflicts of interest to which the directors and officers of PetroBakken will be subject
in connection with the operations of PetroBakken. In particular, certain of the directors and officers of
PetroBakken are involved in managerial or director positions with other oil and gas companies whose
operations may, from time to time, be in direct competition with those of PetroBakken or with entities
which may, from time to time, provide financing to, or make equity investments in, competitors of
PetroBakken. Conflicts, if any, will be subject to the procedures and remedies available under the ABCA.
The ABCA provides that in the event that a director has an interest in a contract or proposed contract or
agreement, the director shall disclose his interest in such contract or agreement and shall refrain from
voting on any matter in respect of such contract or agreement unless otherwise provided by the ABCA.
MATERIAL CONTRACTS
The only material contracts entered into, or to be entered into coincident with the Arrangement, by
PetroBakken since incorporation, other than contracts in the ordinary course of business, is the
Arrangement Agreement. A copy of the Arrangement Agreement is set forth at Appendix C to this
Information Circular and a copy may also be inspected at the head office of PetroBakken at 1900, 111 5th Avenue S.W., Calgary, Alberta, T2P 3Y6, or at the offices of at the offices of McCarthy Tétrault LLP
at Suite 3300, 421 - 7th Avenue S.W., Calgary, Alberta, T2P 4K9, during normal business hours from the
date of this Information Circular until 30 days following the completion of the Arrangement.
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PROMOTER
Petrobank may be considered a promoter of PetroBakken as it took the initiative to form PetroBakken.
Pursuant to the Petrobank Reorganization, Petrobank will receive PetroBakken Class A Shares and
PetroBakken Class B Shares in exchange for the contribution by Petrobank to PetroBakken of the
Petrobank Assets and $400 million in cash. Upon completion of the Petrobank Reorganization and the
Arrangement, Petrobank will own approximately 64% of the outstanding PetroBakken Shares.
RISK FACTORS
Investing in securities of PetroBakken involves inherent risks. The risks described below are not the only
ones facing PetroBakken. Additional risks not presently known to PetroBakken or that PetroBakken
currently deems immaterial may also impair PetroBakken’s business operations. If any of the following
risks actually occur, PetroBakken’s business, financial condition and operating results could be materially
and adversely affected.
An investment in PetroBakken may be considered speculative due to the nature of PetroBakken’s
involvement in the exploration for, and the acquisition, development, production and marketing of, oil
and natural gas and its current stage of development. Oil and gas operations involve many risks, which
even a combination of experience and knowledge, and careful evaluation may not be able to overcome.
There is no assurance that further commercial quantities of oil and natural gas will be discovered or
acquired by PetroBakken.
Nature of the Business
An investment in PetroBakken should be considered speculative due to the nature of PetroBakken’s
involvement in the exploration for, and the acquisition, development and production of, oil and natural
gas in Canada. Oil and gas operations involve many risks, which even a combination of experience and
knowledge and careful evaluation may not be able to overcome. There is no assurance that further
commercial quantities of oil and natural gas will be discovered or acquired by PetroBakken.
Commodity Price Volatility
Both oil and natural gas prices are unstable and are subject to fluctuation. Any material decline in prices
could result in a reduction of PetroBakken’s net production revenue and overall value and could result in
ceiling test write-downs. The economics of producing from some wells may change as a result of lower
prices, which could result in a reduction in the volumes of PetroBakken’s reserves. PetroBakken might
also elect not to produce from certain wells at lower prices. All of these factors could result in a material
decrease in PetroBakken’s net production revenue causing a reduction in its oil and gas acquisition and
development activities. A substantial material decline in prices from historical average prices may result
in a reduced borrowing base under credit facilities available to PetroBakken and possibly require that a
portion of PetroBakken’s bank debt be repaid.
From time to time PetroBakken may enter into agreements to receive fixed prices on its oil and natural
gas production to offset the risk of revenue losses if commodity prices decline, known as hedging,
however, if commodity prices increase beyond the levels set in such agreements, PetroBakken will not
benefit from such increases and PetroBakken may nevertheless be obligated to pay royalties on such
higher prices, even though not received by it, after giving effect to such agreements. PetroBakken could
also be subject to margin requirements associated with certain hedging instruments.
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Financial Resources
PetroBakken’s cash flow from operations may not be sufficient to fund its ongoing activities and
implement its business plans. From time to time PetroBakken may enter into transactions to acquire
assets or the shares of other companies. These transactions along with PetroBakken’s ongoing operations
may be financed partially or wholly with debt, which may increase PetroBakken’s debt levels above
industry standards. Depending on future exploration and development plans, PetroBakken may require
additional financing, which may not be available or, if available, may not be available on favourable
terms. Failure to obtain such financing on a timely basis could cause PetroBakken to forfeit or forego
various opportunities. Credit markets throughout the world have tightened recently which could limit
PetroBakken’s ability to access incremental debt.
Reserves
PetroBakken’s future reserves and production and, therefore, cash flows are highly dependent upon
success in exploiting PetroBakken’s current reserves base and acquiring or discovering additional
reserves. Without reserves additions through exploration, acquisition or development activities,
PetroBakken’s reserves and production will decline over time. Exploring for, developing or acquiring
reserves is capital intensive. To the extent cash flows from operations are insufficient to fund
PetroBakken’s capital expenditures and external sources of capital become limited or unavailable,
PetroBakken’s ability to make the necessary capital investments to maintain oil and natural gas reserves
will be impaired. Costs to find and develop or acquire additional reserves also depend on success rates,
which vary over time.
Reliance on Third Party Operators and Key Personnel
To the extent that PetroBakken is not the operator of its properties, it will be dependent upon other
guarantors or third parties operations for the timing of activities and will be largely unable to control the
activities of such operators. In addition, PetroBakken’s success depends, to a significant extent, upon
management and key employees. The loss of key employees could have a negative effect on
PetroBakken. Attracting and retaining additional key personnel will assist in the expansion of
PetroBakken’s business. PetroBakken faces significant competition for skilled personnel. There is no
assurance that PetroBakken will successfully attract and retain personnel required to continue to expand
its business and to successfully execute its business strategy.
Strong Competition
The oil and natural gas industry is intensely competitive. Competition is particularly intense in the
acquisition of prospective oil and natural gas properties and oil and gas reserves. PetroBakken’s
competitive position depends on its geological, geophysical and engineering expertise, its financial
resources, its ability to develop its properties and its ability to select, acquire and develop proved reserves.
PetroBakken competes with a substantial number of other companies having larger technical staffs and
greater financial and operational resources. Many such companies not only engage in the acquisition,
exploration, development and production of oil and natural gas reserves, but also carry on refining
operations and market refined products. PetroBakken also competes with major and independent oil and
natural gas companies and other industries supplying energy and fuel in the marketing and sale of oil and
natural gas to transporters, distributors and end users, including industrial, commercial and individual
consumers. PetroBakken also competes with other oil and natural gas companies in attempting to secure
drilling rigs and other equipment necessary for drilling and completion of wells. Such equipment may be
in short supply from time to time. In addition, equipment and other materials necessary to construct
production and transmission facilities may be in short supply from time to time. Finally, companies not
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previously investing in oil and natural gas may choose to acquire reserves to establish a firm supply or
simply as an investment. Such companies will also provide competition for PetroBakken.
PetroBakken’s Oil and Natural Gas Production Could Vary Significantly From Reported Reserves
PetroBakken’s reserve evaluations have been prepared in accordance with National Instrument 51-101
“Standards of Disclosure for Oil and Gas Activities”. There are numerous uncertainties inherent in
estimating quantities of reserves and cash flows to be derived therefrom, including many factors that are
beyond the control of PetroBakken. The reserves information set forth in this Information Circular
represent estimates only. The reserves from PetroBakken’s properties have been independently evaluated
by Sproule and GLJ in their respective reports. These evaluations include a number of assumptions
relating to factors such as initial production rates, production decline rates, ultimate recovery of reserves,
timing and amount of capital expenditures, marketability of production, future prices of oil and natural
gas, operating costs and royalties and other government levies that may be imposed over the producing
life of the reserves. These assumptions were based on price forecasts in use at the date the relevant
evaluations were prepared and many of these assumptions are subject to change and are beyond the
control of PetroBakken. Actual production and cash flows derived therefrom will vary from these
evaluations, and such variations could be material. These evaluations are based, in part, on the assumed
success of exploitation activities intended to be undertaken in future years. The reserves and estimated
cash flows to be derived therefrom contained in such evaluations will be reduced to the extent that such
exploitation activities do not achieve the level of success assumed in the evaluations.
Canadian GAAP requires that management apply certain accounting policies and make certain estimates
and assumptions, which affect reported amounts in the consolidated financial statements of PetroBakken.
The accounting policies may result in non-cash charges to net income and write-downs of net assets in the
financial statements. Such non-cash charges and write-downs may be viewed unfavourably by the market
and result in an inability to borrow funds and/or may result in a decline in the trading price of
PetroBakken’s shares.
Under Canadian GAAP, the net amounts at which petroleum and natural gas costs on a property or project
basis are carried are subject to a ceiling-test, which is based upon estimated future net cash flow from
reserves. The carrying value is assessed to be recoverable when the sum of the undiscounted cash flows
expected from the production of proved reserves, the lower of cost and market of unproved properties and
the cost of major development projects exceeds the carrying value. When the carrying value is not
assessed to be recoverable, an impairment loss is recognized to the extent that the carrying value of assets
exceeds the sum of the discounted cash flows expected from the production of proved and probable
reserves, the lower of cost and market of unproved properties and the cost of major development projects.
A decline in the net value of oil and natural gas properties could cause capitalized costs to exceed the cost
ceiling, resulting in a charge against earnings.
PetroBakken Might Encounter Operating Hazards
Oil and natural gas exploration, development and production operations are subject to all the risks and
hazards typically associated with such operations, including hazards such as fire, explosion, blowouts,
and oil spills, each of which could result in substantial damage to oil and natural gas wells, production
facilities, other property and the environment or in personal injury. In accordance with industry practice,
PetroBakken is not fully insured against all of these risks, nor are all such risks insurable. Although
PetroBakken maintains liability insurance in an amount that it considers adequate and consistent with
industry practice, the nature of these risks is such that liabilities could exceed policy limits, in which
event PetroBakken could incur significant costs that could have a materially adverse effect upon its
financial condition. Oil and natural gas production operations are also subject to all the risks typically
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associated with such operations, including premature decline of reservoirs and the invasion of water into
producing formations.
Assessments of Value of Acquisitions
Acquisitions of crude oil and natural gas issuers and crude oil and natural gas assets are typically based on
engineering and economic assessments made by independent engineers and PetroBakken’s own
assessments. These assessments both will include a series of assumptions regarding such factors as
recoverability and marketability of crude oil and natural gas, future prices of crude oil and natural gas and
operating costs, future capital expenditures and royalties and other government levies which will be
imposed over the producing life of the reserves. Many of these factors are subject to change and are
beyond PetroBakken’s control. In particular, the prices of and markets for oil and natural gas products
may change from those anticipated at the time of making such assessment. In addition, all such
assessments involve a measure of geologic and engineering uncertainty that could result in lower
production and reserves than anticipated. Initial assessments of acquisitions may be based on reports by a
firm of independent engineers that are not the same as the firm that PetroBakken uses for its year-end
reserve evaluations. Because each of these firms may have different evaluation methods and approaches,
these initial assessments may differ significantly from the assessments of the firm used by PetroBakken.
Any such instance may affect the return on and value of the PetroBakken Class A Shares.
Environmental
All phases of the oil and natural gas business present environmental risks and hazards and are subject to
environmental regulation pursuant to a variety of international conventions and state and municipal laws
and regulations. Environmental legislation provides for, among other things, restrictions and prohibitions
on spills and releases or emissions of various substances produced in association with oil and gas
operations. The legislation also requires that wells and facility sites be operated, maintained, abandoned
and reclaimed to the satisfaction of applicable regulatory authorities. Compliance with such legislation
can require significant expenditures and a breach may result in the imposition of fines and penalties, some
of which may be material. Environmental legislation is evolving in a manner expected to result in stricter
standards and enforcement, larger fines and liability and potentially increased capital expenditures and
operating costs. The discharge of oil, natural gas or other pollutants into the air, soil or water may give
rise to liabilities to foreign governments and third parties and may require PetroBakken to incur costs to
remedy such discharge. No assurance can be given that environmental laws will not result in a
curtailment of production or a material increase in the costs of production, development or exploration
activities or otherwise adversely affect PetroBakken’s financial condition, results of operations or
prospects. Although it is not expected that the costs of complying with environmental legislation or
dealing with environmental civil liabilities, as they are known today, will have a material adverse effect
on PetroBakken’s financial condition or results of operations, no assurance can be made that the costs of
complying with future environmental legislation will not have a material effect.
Political and Regulatory
The oil and gas industry in general is subject to extensive government policies and regulations, which
result in additional cost and risk for industry participants. Environmental concerns relating to the oil and
gas industry’s operating practices are expected to increasingly influence government regulation and
consumption patterns which favour cleaner burning fuels such as gas. PetroBakken is uncertain as to the
amount of operating and capital expenses that will be required to comply with enhanced environmental
regulation in the future.
E-43
Permits, Licenses and Leases
Significant parts of PetroBakken’s operations require permits, licenses and leases from various
governmental authorities and landowners. There can be no assurance that PetroBakken will be able to
obtain all necessary permits, licenses and leases that may be required to carry out exploration and
development at its projects. If the present permits, licenses and leases are terminated or withdrawn, such
event could have an adversely negative effect of PetroBakken’s operations.
Title to Properties
Although title reviews are done according to industry standards prior to the purchase of most oil and
natural gas producing properties or the commencement of drilling wells, such reviews do not guarantee or
certify that an unforeseen defect in the chain of title will not arise to defeat the claim of PetroBakken
which could result in a reduction of the revenue received by PetroBakken.
Conflicts of Interest
There are potential conflicts of interest to which the directors, officers and principal shareholders of
PetroBakken will be subject to in connection with the operations of PetroBakken. Some of the directors,
officers and principal shareholders are or may become engaged in other oil and gas interests on their own
behalf and on behalf of other companies, and situations may arise where the directors and officers will be
in direct competition with PetroBakken. Conflicts, if any, will be subject to the procedures and remedies
under the ABCA. The directors and officers of PetroBakken may not devote their time on a full-time
basis to the affairs of PetroBakken.
Substantial Capital Requirements; Liquidity
PetroBakken anticipates that it will make substantial capital expenditures for the acquisition, exploration,
development and production of oil and natural gas reserves in the future. If PetroBakken’s revenues or
reserves decline, PetroBakken may have limited ability to expend the capital necessary to undertake or
complete future drilling programs. There can be no assurance that debt or equity financing, or cash
generated by operations will be available or sufficient to meet these requirements or for other corporate
purposes, or if debt or equity financing is available, that it will be on terms acceptable to PetroBakken.
Moreover, future activities may require PetroBakken to alter its capitalization significantly. The inability
of PetroBakken to access sufficient capital for its operations could have a material adverse effect to
PetroBakken’s financial condition, results of operations or prospects.
Market for PetroBakken Class A Shares
There is currently no market for the PetroBakken Class A Shares and there can be no assurance that an
active market for PetroBakken Class A Shares will develop or be sustained after the date hereof or that
holders of PetroBakken Class A Shares will be able to sell them if they desire to do so. Additionally, at
the Effective Time, PetroBakken will not be registered with the United States Securities and Exchange
Commission and the PetroBakken Class A Shares will not be listed on a United States national securities
exchange or traded in the over-the-counter market. Such circumstance will severely limit the ability of
holders of PetroBakken Class A Shares resident in the United States to publicly trade, resell or otherwise
transfer their PetroBakken Class A Shares by means other than the TSX.
E-44
Price Volatility of Publicly Traded Securities
In recent years, the securities markets in Canada and the United States have experienced a high level of
price and volume volatility, and the market price of securities of many companies have experienced wide
fluctuations in price which have not necessarily been related to the operating performance, underlying
asset values or prospects of such companies. There can be no assurance that continual fluctuations in
price will not occur. It is likely that the market price for the PetroBakken Class A Shares will be subject
to market trends generally, notwithstanding the financial and operational performance of the respective
companies.
Dilution
PetroBakken may make future acquisitions or enter into financings or other transactions involving the
issuance of securities of PetroBakken which may be dilutive.
Aboriginal Claims
Aboriginal people have claimed aboriginal title and rights to resources and various properties in western
Canada. Such claims, in relation to any of PetroBakken’s lands, if successful, could have an adverse
effect on its operations.
Failure to Realize the Anticipated Benefits of the Petrobank Reorganization and the Arrangement
TriStar, PetroBakken and Petrobank are proposing to complete the Arrangement to strengthen the position
of each entity in the oil and natural gas industry and to create the opportunity to realize certain benefits
including, among other things, those set forth in this Information Circular under “The Arrangement Reasons for the Arrangement”. Achieving the benefits of the Petrobank Reorganization and the
Arrangement depends in part on the ability of the combined entity to effectively consolidate function and
integrate operations, procedures and personnel in a timely and efficient manner in addition to a number of
other factors, including those risk factors set forth in this Information Circular, may adversely affect the
ability to achieve the anticipated benefits of the Petrobank Reorganization and the Arrangement. The
integration process may result in the loss of key employees and the disruption of ongoing business,
customer and employee relationships that may adversely affect the ability of PetroBakken to achieve the
anticipated benefits of the Petrobank Reorganization and the Arrangement.
Changes in Legislation
It is possible that the Canadian federal and provincial government or regulatory authorities could choose
to change the Canadian federal income tax laws, royalty regimes, environmental laws or other laws
applicable to oil and gas companies and that any such changes could materially adversely affect
PetroBakken and the PetroBakken shareholders and the market value of the PetroBakken Class A Shares.
Royalty Regime
The Alberta provincial government has implemented changes to its royalty structure, which changes, as
well as the potential for additional future changes and corresponding changes in the royalty regimes
applicable in other provinces, have created uncertainty surrounding the ability to accurately estimate
future royalties, resulting in additional volatility and uncertainty in the oil and gas market. Increases to
royalty rates in jurisdictions in which PetroBakken operates may negatively impact PetroBakken’s results
from operations and its ability to economically develop existing reserves or add new reserves.
E-45
Dividend Policy
PetroBakken intends to adopt a dividend policy initially targeting payments of $0.96 per share per annum,
payable monthly, with the first dividend expected to be paid in November 2009 to shareholders of record
on October 30, 2009. Payment of dividends on the PetroBakken Class A Shares is within the discretion of
PetroBakken’s board of directors. Future dividends will be dependent upon PetroBakken’s future
earnings, its acquisition capital requirements, financial state, and other relevant factors and may be
reduced or suspended. There can be no assurance that PetroBakken will be able to effect or maintain its
proposed dividend payment of $0.96 per share per annum.
Other
For a description of additional risk factors that may to PetroBakken and its business upon completion of
the Arrangement, see Appendix “F”- Information Concerning TriStar.
INTERESTS OF EXPERTS
As of the date hereof, the directors, officers and associates of Sproule do not beneficially own any
PetroBakken Class A Shares, PetroBakken Class B Shares or PetroBakken Preferred Shares.
LEGAL PROCEEDINGS
As of the date hereof, there are no outstanding legal proceedings material to PetroBakken to which
PetroBakken or any of its assets are subject, nor are there any such proceedings known to be
contemplated.
AUDITORS, REGISTRAR AND TRANSFER AGENT
The auditors of PetroBakken are Deloitte & Touche LLP, Chartered Accountants, Calgary, Alberta.
Deloitte & Touche LLP is independent within the meaning of the Rules of Professional Conduct of the
Institute of Chartered Accountants of Alberta.
Olympia Trust Company, at its principal offices in Calgary, Alberta will be the registrar and transfer
agent for the PetroBakken Class A Shares.
DOCUMENTS INCORPORATED BY REFERENCE
Information has been incorporated by reference in this Appendix “E” from documents filed by Petrobank
with securities commissions or similar authorities in Canada. Copies of the documents incorporated
herein by reference concerning Petrobank may be obtained on request without charge from the VicePresident, Finance and Chief Financial Officer of Petrobank at Suite 1900, 111 – 5th Avenue S.W.,
Calgary, Alberta, T2P 3Y6, Telephone: (403) 750-4400, Fax: (403) 266-5794. In addition, copies of the
documents incorporated herein by reference may be obtained from the securities commissions or similar
authorities in Canada through the SEDAR website at www.sedar.com.
E-46
SCHEDULE A – FINANCIAL INFORMATION
Index to Financial Statements – Petrobank Assets
1.
audited balance sheet as at December 31, 2008 and December 31, 2007;
2.
audited statements of operations, comprehensive income, retained earnings and net investment
and cash flow for the years ended December 31, 2008, December 31, 2007 and December 31,
2006;
3.
unaudited balance sheet as at June 30, 2009; and
4.
unaudited statements of operations, comprehensive income, retained earnings and net investment
and cash flow for the three and six month periods ended June 30, 2009 and 2008.
Index to Financial Statements – PetroBakken
1.
audited balance sheet as at July 30, 2009.
Index to Management’s Discussion and Analysis
1.
management’s discussion and analysis of the financial condition and results of operations of
Petrobank for the year ended December 31, 2008; and
2.
management’s discussion and analysis of the financial condition and results of operations of
Petrobank for the three and six month periods ended June 30, 2009.
E-47
AUDITORS' REPORT
To the Directors of Petrobank Energy and Resources Ltd.:
We have audited the balance sheets of Petrobank Energy and Resources Ltd.’s Canadian Business Unit
(the “CBU”) as at December 31, 2008 and 2007 and the statements of operations, comprehensive income,
retained earnings and net investment and cash flow for the years ended December 31, 2008, 2007 and 2006.
These financial statements are the responsibility of the CBU’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation.
In our opinion, these financial statements presents fairly, in all material respects, the financial position of
Petrobank Energy and Resources Ltd.’s Canadian Business Unit as at December 31, 2008 and 2007 and the
results of its operations and its cash flows for the years ended December 31, 2008, 2007 and 2006 in
accordance with Canadian generally accepted accounting principles.
Calgary, Alberta
August 31, 2009
“signed”
Deloitte & Touche LLP
Chartered Accountants
1
PETROBANK ENERGY AND RESOURCES LTD.’S CANADIAN BUSINESS UNIT
BALANCE SHEETS
(Thousands of Canadian dollars)
(See Note 1: Basis of Presentation)
As at December 31,
Assets
Current assets
Cash and cash equivalents
Accounts receivable
Prepaid expenses
Risk management asset (Note 11)
Future income tax asset (Note 9)
$
Capital assets (Note 4)
Goodwill (Note 5)
Total assets
1,200,961
35,052
$ 1,318,090
$
Liabilities and Equity
Current liabilities
Accounts payable and accrued liabilities
Risk management liability (Note 11)
Future income tax liability (Note 9)
$
$
Bank debt (Note 6)
Obligations under gas sale contract (Note 7)
Asset retirement obligations (Note 8)
Future income tax liabilities (Note 9)
2007
2008
868
45,104
3,201
32,904
82,077
172,895
9,860
182,755
$
1,074
31,620
802
1,473
34,969
409,109
444,078
94,595
4,950
99,545
315,162
3,170
11,170
157,499
669,756
19,752
3,997
6,774
28,139
158,207
421,951
226,383
648,334
$ 1,318,090
245,837
40,034
285,871
444,078
Commitments and contingencies (Note 13)
Equity
Net investment by Petrobank Energy and Resources Ltd.
Retained earnings
Total liabilities and equity
$
Subsequent events (Note 6 and 11)
See accompanying notes to these financial statements.
2
PETROBANK ENERGY AND RESOURCES LTD.’S CANADIAN BUSINESS UNIT
STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME, RETAINED EARNINGS
AND NET INVESTMENT
(Thousands of Canadian dollars)
(See Note 1: Basis of Presentation)
Years ended December 31,
Revenues
Oil and natural gas
$
Royalties
Gain (loss) on risk management contracts (Note11)
Interest income
Expenses
Production
Transportation
General and administrative
Stock-based compensation
Interest
Depletion, depreciation and accretion
Income before future income taxes
2007
2008
$ 129,997
(9,718)
(4,950)
2,832
118,161
585,800
(65,252)
33,046
536
554,130
2006
$
49,835
(7,047)
423
43,211
56,983
21,212
10,512
10,831
9,542
187,372
296,452
16,360
4,834
4,846
3,473
2,307
48,137
79,957
7,736
439
3,981
1,526
3,562
16,200
33,444
257,678
38,204
9,767
Future income taxes (Note 9)
Net and comprehensive income
$
71,329
186,349
$
6,885
31,319
$
3,997
5,770
Retained earnings, beginning of year
Retained earnings, end of year
$
$
40,034
226,383
$
$
8,715
40,034
$
$
2,945
8,715
$
245,837
176,114
$
61,630
184,207
$
1,051
60,579
$
421,951
$
245,837
$
61,630
Net investment by Petrobank Energy and
Resources Ltd., beginning of year
By Petrobank Energy and Resources Ltd.
Net investment by Petrobank Energy and
Resources Ltd., end of year
See accompanying notes to these financial statements.
3
PETROBANK ENERGY AND RESOURCES LTD.’S CANADIAN BUSINESS UNIT
STATEMENTS OF CASH FLOW
(Thousands of Canadian dollars)
(See Note 1: Basis of Presentation)
Years ended December 31,
Operating Activities
Net income
Depletion, depreciation and accretion
Future income taxes
Unrealized (gain) loss on risk management
contracts
Stock-based compensation
Amortization of deferred financing costs
Amortization of discount on subordinated notes
Asset retirement obligations settled
2008
2007
$ 186,349
187,372
71,329
$ 31,319
48,137
6,885
Changes in non-cash working capital (Note 12)
Financing Activities
Net investment by (to) Petrobank Energy and
Resources Ltd.
Issuance (repayment) of bank debt
Repayment of subordinated notes
Financing costs relating to bank debt
Amortization of obligations under gas sale
contract
Investing Activities
Expenditures on capital assets
Acquisitions (Note 5)
Changes in non-cash working capital (Note 12)
Net change in cash and cash equivalents
2006
$
5,770
16,200
3,997
(37,854)
10,831
449
(1,848)
416,628
13,171
429,799
4,950
3,473
496
(1,035)
94,225
(6,044)
88,181
1,526
713
880
(431)
28,655
4,211
32,866
(75,726)
251,651
(698)
181,766
(11,772)
-
59,053
31,772
(49,924)
(1,457)
(827)
174,400
(827)
169,167
(827)
38,617
(545,833)
(94,540)
35,968
(604,405)
(206)
(303,687)
44,894
(258,793)
(1,445)
(88,033)
5,953
(82,080)
(10,597)
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$
1,074
868
$
2,519
1,074
$
13,116
2,519
Cash and cash equivalents consist of:
Cash
Cash equivalents
$
$
868
-
$
$
340
734
$
$
2,474
45
Other cash flow information:
Cash interest paid
Cash interest received
$
$
8,403
233
$
$
1,721
2,728
$
$
2,818
325
See accompanying notes to these financial statements.
4
PETROBANK ENERGY AND RESOURCES LTD.’S CANADIAN BUSINESS UNIT
NOTES TO THE FINANCIAL STATEMENTS
As at December 31, 2008 and 2007, and for the years ended December 31, 2008, 2007 and 2006.
(All tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
Note 1 – Basis of Presentation
Petrobank Energy and Resources Ltd. (the “Company” or “Petrobank”), is a public company listed on the
Toronto Stock Exchange and incorporated under the Business Corporations Act (Alberta). Petrobank is
engaged in the exploration for and development and production of oil and natural gas in the Western
Canadian Sedimentary Basin and the countries of Colombia and Peru. Petrobank operates through three
business units. The Canadian Business Unit (“CBU”) has conventional oil and gas operations in the
Western Canadian Sedimentary Basin focused in southeast Saskatchewan, central and northwest Alberta
and northeast British Columbia. The Latin American Business Unit, with exploration and development
operations in Colombia and Peru, is comprised of a public company listed on the Toronto Stock
Exchange, Petrominerales Ltd., the majority of which is owned by Petrobank. The Heavy Oil Business
Unit has oil sands and heavy oil leases in northern Alberta and Saskatchewan, and operates the
Whitesands project at Conklin, Alberta which is field-demonstrating Petrobank's patented THAITM heavy
oil recovery process.
Petrobank has incorporated a 100% wholly-owned subsidiary, PetroBakken Energy Ltd. (“PetroBakken”),
which will be capitalized with the CBU assets and obligations along with $400 million of cash. In return,
Petrobank will receive 109.8 million common shares of PetroBakken. PetroBakken will then acquire all
of the issued and outstanding common shares of TriStar Oil and Gas Ltd. (“TriStar”) through a plan of
arrangement, which would give TriStar shareholders $600 million in cash, less amounts paid upon the
exercise of options by TriStar option holders which is expected to be approximately $20 million, and
approximately 61.8 million common shares of PetroBakken. After the transaction, Petrobank will own
approximately 64% of PetroBakken. The proposed transaction with TriStar and listing of PetroBakken
would occur on or about October 1, 2009.
These financial statements have been prepared to present the financial position, results of operations and
cash flows for the CBU.
Subsequent to the carve-out of Petrobank’s CBU and the completion of the transaction with TriStar, the
management of PetroBakken will determine all operating, investing and financing activities applicable to
the CBU. Accordingly, the amounts recorded in these financial statements may not be indicative of the
amounts that will result in future periods.
Petrobank’s CBU has distinct operating staff and capital budgets. Petrobank also has shared services such
as accounting, human resources, information technology, land administration and corporate compliance.
Historically, Petrobank has maintained accounting records necessary to support its consolidated financial
statements but not specifically for the CBU or its other business units. While the amounts applicable to the
CBU for certain revenues, expenses, assets and liabilities can be derived directly from the accounting
records of Petrobank, it has been necessary to allocate certain items in the manner described below.
Presentation of the Balance Sheets
For purposes of the CBU balance sheets all assets and liabilities, except for future income taxes, have been
derived directly from the accounting records of Petrobank. Future income taxes are prepared on a legal
entity basis and as such it is not possible to specifically identify only those activities that relate to the
CBU, as some corporate Petrobank activities are also included within the legal entity tax filings.
Management has separated the future income tax assets and liabilities directly attributable to the CBU on a
reasonable basis based on best estimates for the purposes of these financial statements.
5
The Petrobank convertible debentures are considered a corporate activity and as such, have been excluded
from the balance sheets and any related interest excluded from the statement of operations. Proceeds from
the convertible debentures ultimately invested in the CBU are reflected as net investment by Petrobank on
the balance sheets.
Acquisitions which were funded through the issuance of Petrobank common shares are also reflected
within the net investment by Petrobank on the balance sheets.
Presentation of the Statement of Operations
The oil and natural gas revenues, royalties, gain (loss) on risk management contracts, production
expenses, transportation expenses, and depletion, depreciation and accretion are specifically allocated to
the CBU operations in Petrobank’s accounting records, and as such, the amounts included in these
financial statements have been derived directly from Petrobank’s accounting records.
Interest income and interest expense are allocated based on the fact that the CBU bank accounts can be
specifically identified and allocated to these assets, and the assumption that the Canadian credit facility is
primarily secured by the CBU assets and as such, the amount of interest income and expense related to
these bank accounts and credit facility have been derived directly from Petrobank’s accounting records.
General and administrative and stock-based compensation expenses have been derived directly from
Petrobank’s accounting records for the costs attributable to the CBU operations.
Future income taxes are prepared on a legal entity basis and as such it is not possible to specifically
identify only those activities that relate to the CBU, as some corporate Petrobank activities are also
included within the legal entity tax filings. Management has separated the future income tax assets and
liabilities attributable to the CBU on a reasonable basis based on best estimates for the purposes of these
financial statements.
Presentation of the Statements of Cash Flow
As discussed above, the cash balances of the CBU can be specifically identified and as such we have
prepared the statements of cash flow to represent the annual change.
Note 2 – Significant Accounting Policies
These financial statements are presented in accordance with Canadian generally accepted accounting
principles (“GAAP”) as at December 31, 2008 and 2007, and for the years ended December 31, 2008,
2007 and 2006.
Measurement Uncertainty
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as at the date of the balance sheets as well as the reported amounts of
revenues, expenses, and cash flows during the periods presented. Such estimates relate primarily to
unsettled transactions and events as of the date of the financial statements. Actual results could differ
materially from estimated amounts.
Amounts recorded for depletion, depreciation and accretion costs and amounts used for ceiling test and
goodwill impairment calculations are based on estimates of oil and natural gas reserves and future costs
required to develop those reserves. Stock-based compensation is based upon expected volatility and
option life estimates. Asset retirement obligations are based on estimates of abandonment costs, timing of
abandonment, inflation and interest rates. The provision for income taxes is based on judgements in
applying income tax law and estimates on the timing, likelihood and reversal of temporary differences
between the accounting and tax bases of assets and liabilities. These estimates are subject to measurement
6
uncertainty and changes in these estimates could materially impact the financial statements of future
periods.
Capital Assets
All costs related to the acquisition, exploration and development of oil and natural gas properties are
capitalized. Such costs include land and lease acquisition costs, annual charges on non-producing
properties, geological and geophysical costs, costs of drilling and equipping productive and nonproductive wells, and carrying costs.
Gains and losses are not recognized upon disposition of oil and natural gas properties unless crediting the
proceeds against accumulated costs would result in a change in the rate of depletion of more than 20%.
Capitalized costs are accumulated in cost centres on a country-by-country basis and are depreciated and
depleted using the unit-of-production method based upon estimated proved reserves before royalties, as
determined by independent engineers. Costs subject to depletion include estimated costs to develop
proved reserves and exclude estimated salvage value. Reserve and production volumes of oil and natural
gas are converted to common units on the equivalency basis of six Mcf to one barrel, reflecting the
approximate relative energy content. Costs relating to undeveloped properties are excluded from the
depletion base until it is determined whether or not proved reserves exist or if impairment of such costs
has occurred. These unproved properties are assessed at least annually to determine whether impairment
has occurred.
Depreciation of corporate and other fixed assets is calculated using the straight-line method over the
estimated life of the asset.
A limit is placed on the carrying value of the net capitalized costs in each cost centre in order to test
impairment. Management is required to perform this impairment test at least annually. An impairment loss
may be indicated when the carrying value of a cost centre exceeds the estimated undiscounted future net
cash flows associated with the cost centre’s proved reserves. If there is indication of an impairment loss,
the costs carried on the balance sheet in excess of the discounted future net cash flows associated with the
cost centre’s proved plus probable reserves are charged to depletion, depreciation and accretion on the
statement of operations. Reserves are determined pursuant to National Instrument 51-101, Standards of
Disclosure for Oil and Gas Activities.
Indirect general and administrative overhead costs are not capitalized.
Goodwill
Goodwill has been recorded at cost and is not amortized. Goodwill is tested for impairment at least
annually or whenever events or circumstances indicate that goodwill is impaired. The test is based on
estimated future net cash flows. If goodwill is impaired the carrying value is reduced to the estimated fair
value and an impairment loss is recorded in net income. No impairment to goodwill has been recorded to
date.
Asset Retirement Obligations
The estimated fair value of future retirement obligations associated with capital assets is recognized as a
liability in the period in which they are incurred, normally when the asset is purchased or developed. The
liability is based on the estimated costs to abandon and reclaim the net ownership interest in all wells and
facilities and the estimated timing of the costs to be incurred in future periods. This estimate is evaluated
on a periodic basis and any adjustment to the estimate is applied prospectively. The change in net present
value of the future retirement obligations due to the passage of time is expensed as accretion. The asset
retirement cost, which is the fair value of the asset retirement obligations at the inception of the assets, is
capitalized as part of the cost of the related long-lived asset and amortized using the unit-of production
method. Actual retirement obligations settled during the period reduce the asset retirement liability.
7
Financial Instruments
All financial assets and liabilities are recognized on the balance sheet when the CBU becomes a party to
the contractual provisions of the instrument and are initially recognized at fair value. Subsequent
measurement of the financial instruments is based on their classification. Each financial instrument is
classified into one of the following categories: financial assets and financial liabilities held for trading;
loans or receivables; financial assets held to maturity; financial assets available for sale; and other
financial liabilities. The classification depends on the characteristics and the purpose for which the
financial instruments were acquired. Except in very limited circumstances, the classification of financial
instruments is not subsequently changed. Financial instruments carried at fair value on our balance sheet
include cash and cash equivalents and risk management contracts. Realized and unrealized gains and
losses on financial assets and liabilities carried at fair value are recognized in net income in the periods
such gains and losses arise. Transaction costs related to these financial assets and liabilities are included
in net income when incurred. Financial instruments carried at cost or amortized cost include accounts
receivable, accounts payable and accrued liabilities, bank debt and obligations under gas sale contract.
Transaction costs are included in net income when incurred for these types of financial instruments except
for bank debt. Transaction costs related to bank debt are included with the initial fair value and the
instrument is carried at amortized cost using the effective interest rate method. When bank debt is nil
these costs are recorded as other assets. Gains and losses on financial assets and liabilities carried at cost
or amortized cost are recognized in net income when these assets or liabilities settle.
Derivatives
The CBU may use derivative financial instruments to manage fluctuations in commodity prices, foreign
currency exchange rates and interest rates. These derivative instruments are recorded at fair value at the
balance sheet date and any changes in fair value are recorded in net income during the period of change
unless the requirements for hedge accounting are met.
Joint Operations
Oil and natural gas operations are conducted jointly with others and accordingly these financial
statements reflect only the CBU’s proportionate interest in such activities.
Revenue Recognition
Revenues from the sale of crude oil, natural gas and natural gas liquids are recognized when title passes to
the customer.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (“OCI”). OCI includes
gains and losses resulting from the effective portion of derivatives used as a hedging item in a cash flow
hedge or net investment hedge. Accumulated other comprehensive income (“AOCI”) is a separate
component of equity comprised of the cumulative amounts of OCI. Amounts included in AOCI are
reclassified to income when realized.
Stock-Based Compensation
Petrobank accounts for stock-based compensation using the fair-value method of accounting for stock
options and deferred common shares (collectively referred to as “Rights”) granted to directors, officers,
employees and consultants using the Black-Scholes option-pricing model. Stock-based compensation
expense is recorded for Rights granted, and is calculated as the estimated fair value of the related Rights
at the time of grant, amortized over their vesting period. Petrobank has not incorporated an estimated
forfeiture rate for stock options that will not vest, rather, Petrobank accounts for actual forfeitures as they
8
occur. As mentioned in Note 1, stock-based compensation expenses have been derived directly from
Petrobank’s accounting records for the costs attributable to the CBU operations.
Income Taxes
The liability method of accounting has been followed for income taxes. Under this method, future income
tax assets or liabilities are recorded to reflect any difference between the accounting and tax bases of
assets and liabilities, using substantively enacted income tax rates. The effect on future tax assets and
liabilities of a change in tax rates is recognized in net income in the period in which the change occurs.
Future income tax assets are only recognized to the extent it is more likely than not that sufficient future
taxable income will be available to allow the future income tax asset to be realized.
Risk Management Contracts
The CBU is exposed to market risks resulting from fluctuations in commodity prices, foreign currency
exchange rates and interest rates in the normal course of the CBU’s business. Management may use a
variety of instruments to manage these exposures. For transactions where hedge accounting is not applied,
we account for such instruments using the fair value method by initially recording an asset or liability,
and recognize changes in the fair value of the instruments in income as gains or losses on risk
management contracts. Fair values of financial instruments are determined from third party quotes or
valuations provided by independent third parties. Any realized gains or losses on risk management
contracts are recognized in income in the period they occur.
Management may elect to use hedge accounting when there is a high degree of correlation between the
price movements in the financial instruments and the items designated as being hedged and has
documented the relationship between the instruments and the hedged item as well as its risk management
objective and strategy for undertaking hedge transactions. At December 31, 2008 management had not
designated any of its outstanding financial instruments as hedges.
Cash and Cash Equivalents
Cash and cash equivalents include investments and deposits with a maturity of three months or less when
purchased.
Note 3 – Changes in Accounting Policies
Capital Disclosures
Effective January 1, 2008, management prospectively adopted the Canadian Institute of Chartered
Accountants (“CICA”) Section 1535, Capital Disclosures, issued by the Accounting Standards Board
(“AcSB”). The section establishes standards for disclosing information about capital and how it is
managed. It requires disclosures of management’s objectives, policies and processes for managing capital,
the quantitative data about what management regards as capital, whether management has complied with
any capital requirements and if it has not complied, the consequences of such non-compliance. The only
effect of adopting this standard is disclosures on capital and how it is managed and is included in Note 10.
Financial Instruments Disclosures and Presentation
Effective January 1, 2008, management prospectively adopted Section 3862, Financial Instruments
Disclosures and Section 3863, Financial Instruments Presentations. These new accounting standards
replaced Section 3861, Financial Instruments – Disclosure and Presentation. Section 3862 requires
additional information regarding the significance of financial instruments for the financial position and
performance; and the nature, extent and management of risks arising from financial instruments to which
the CBU is exposed. The additional disclosures required under these standards are included in Note 11.
9
Recent Accounting Pronouncements
In February 2008, the AcSB confirmed the convergence of Canadian GAAP with International Financial
Reporting Standards (“IFRS”) will be effective January 1, 2011. The Company has performed an initial
scoping process and will manage the transition in order to ensure successful implementation within the
required timeframe. The impact on the CBU’s financial statements is not reasonably determinable at this
time. Key information will be disclosed as it becomes available during the transition period.
In February 2008, the AcSB issued Section 3064, Goodwill and Intangible Assets, replacing
Section 3062, Goodwill and Other Intangible Assets and Section 3450, Research and Development
Costs. Various changes have been made to other sections of the CICA Handbook for consistency
purposes. Section 3064 establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented
enterprises. Standards concerning goodwill are unchanged from the standards included in the previous
Section 3062. Effective January 1, 2009, the CBU prospectively adopted this standard and the adoption
did not have a material impact on the results of operations or financial position.
In January 2009, the AcSB issued Section 1582, Business Combinations, which replaces former guidance
on business combinations. The section establishes principles and requirements of the acquisition method
for business combinations and related disclosures, and applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period beginning on or
after January 1, 2011, with earlier application permitted. Effective January 1, 2009, the CBU
prospectively adopted this standard and the adoption did not have a material impact on the results of
operations or financial position.
In January 2009, the AcSB issued Section 1601, Consolidated Financial Statements, and Section 1602,
Non-controlling Interests, which together replace Section 1600, Consolidated Financial Statements.
Section 1601 establishes standards for the preparation of consolidated financial statements and Section
1602 provides guidance on accounting for a non-controlling interest in a subsidiary subsequent to a
business combination. These standards are effective on or after the beginning of the first annual reporting
period beginning on or after January 1, 2011, with earlier application permitted. Effective
January 1, 2009, the CBU prospectively adopted these standards and the adoption did not have a material
impact on the results of operations or financial position.
In January, 2009, the AcSB issued EIC-173, Credit Risk and the Fair Value of Financial Assets and
Financial Liabilities. The EIC provides guidance on how to take into account credit risk of an entity and
counterparty when determining the fair value of financial assets and financial liabilities, including
derivative instruments. Effective January 1, 2009, the CBU retrospectively adopted this EIC and the
adoption did not have a material impact on the results of operations or financial position.
10
Note 4 – Capital Assets
December 31, 2008
Oil and natural gas assets
Other assets
December 31, 2007
Oil and natural gas assets
Other assets
Cost
$ 1,527,573
8,171
$ 1,535,744
Accumulated
Depletion and
Depreciation
$ 329,378
5,405
$ 334,783
Net Book Value
$ 1,198,195
2,766
$ 1,200,961
Cost
551,647
5,586
557,233
Accumulated
Depletion and
Depreciation
$ 142,719
5,405
$ 148,124
Net Book Value
$ 408,928
181
$ 409,109
$
$
At December 31, 2008, oil and natural gas assets included $289.7 million (2007 – $94.1 million) relating
to unproved properties.
An impairment test calculation was performed for the CBU at December 31, 2008 in which the estimated
undiscounted future net cash flows associated with the proved reserves exceeded the carrying amounts. In
determining the undiscounted future net cash flows for the CBU, management utilized benchmark pricing
forecasts. The benchmark prices used in their forecasts at December 31, 2008 are outlined in the
following table:
Year
2009
2010
2011
2012
2013
Thereafter inflation % change
(1)
WTI Crude Oil (1)
(US$/bbl)
53.73
63.41
69.53
79.59
92.01
2%
AECO Natural
Gas (1) ($/Mcf)
6.82
7.56
7.84
8.38
9.20
2%
US$ / C$
0.80
0.85
0.85
0.90
0.95
nil
Actual prices used in the impairment tests were adjusted for crude oil quality differentials, natural gas heat
content, transportation and marketing costs specific to the CBU’s operations.
11
Note 5 – Acquisitions
Peerless Energy Inc.
On January 28, 2008, Petrobank acquired all of the issued and outstanding shares of Peerless Energy Inc.
(“Peerless”) for a total cost of $338.8 million, including Peerless bank debt and working capital
deficiency assumed. Peerless was a publicly traded company with the majority of its properties producing
from the Bakken formation in southeast Saskatchewan. These properties are included in the CBU
financial statements.
This transaction has been accounted for using the purchase method whereby the assets acquired and the
liabilities assumed are recorded at fair values. The following table summarizes the net assets acquired
pursuant to the acquisition:
Net assets acquired
Capital assets
Working capital deficiency
Bank debt
Asset retirement obligations
Goodwill
Future income tax liability
Total net assets acquired
Amount
$ 371,730
(14,358)
(44,007)
(2,631)
26,741
(57,031)
$ 280,444
Consideration paid
Cash
Petrobank shares issued (4,931,204 common shares)
Acquisition costs
Total purchase price
Amount
$
60,462
213,196
6,786
$ 280,444
Rocor Resources Inc.
On October 2, 2008, Petrobank acquired all of the issued and outstanding shares of Rocor Resources Inc.
(“Rocor”) for a total cost of $52.7 million, net of working capital acquired. Rocor was a private company
with properties focused on the Montney formation in northeast British Columbia. These properties are
included in the CBU financial statements.
This transaction has been accounted for using the purchase method whereby the assets acquired and the
liabilities assumed are recorded at fair values. The following table summarizes the net assets acquired
pursuant to the acquisition:
Net assets acquired
Capital assets
Working capital
Asset retirement obligations
Goodwill
Future income tax liability
Total net assets acquired
Amount
$
56,876
1,080
(161)
8,311
(12,333)
$
53,773
Consideration paid
Cash
Petrobank shares issued (699,183 common shares)
Acquisition costs
Total purchase price
Amount
$
26,481
26,481
811
$
53,773
12
Note 6 – Bank Debt
The Company’s secured Canadian credit facility borrowing limit totalled $380 million as at
December 31, 2008, and was increased to $400 million in July 2009. The revolving facility has terms
ending on July 2010, extendable by the lenders for an additional year. If the lenders decide not to extend
the term, the drawn amount becomes due in July 2011. The facility carries floating interest rates at
LIBOR plus a margin, based on a sliding scale ratio of debt to earnings before interest, taxes and non-cash
items related to the CBU operations. The borrowing base under the facility is reviewed semi-annually.
Note 7 – Obligations Under Gas Sale Contract
The Company assumed a physical natural gas sales contract upon the acquisition of Barrington Petroleum
Ltd. in 2001, which relates to the assets of the CBU. The Company recorded a liability for these
obligations at that time, which is being amortized to oil and natural gas revenues over the term of the
related contract and is reflected in these financial statements.
Note 8 – Asset Retirement Obligations
The total future asset retirement obligations were estimated by management based on the CBU’s net
ownership interest in all wells, gathering lines and facilities, estimated costs to reclaim and abandon the
wells and facilities and the estimated timing of the costs to be incurred in future periods.
Changes to asset retirement obligations were as follows:
Asset retirement obligations, beginning of year
Obligations incurred
Obligations acquired
Obligations settled
Accretion expense
Changes in estimated future cash flows
Asset retirement obligations, end of year
$
$
2008
6,774
2,480
2,792
(1,848)
713
259
11,170
$
$
2007
5,720
1,407
(1,035)
476
206
6,774
The obligations have been calculated using an inflation rate of two percent and discounted using a creditadjusted risk free rate of eight percent per annum. Most of these obligations are not expected to be paid
for several years extending up to 45 years in the future and are expected to be funded from general
resources of the CBU at the settlement date. The total undiscounted amount of estimated cash flows
required to settle the obligations at December 31, 2008 is $51.7 million (2007 – $38.3 million) for the
obligations.
13
Note 9 – Future Income Taxes
The provision for future income taxes differs from the amount that would have been expected by applying
expected statutory corporate income tax rates to income before future income taxes. The principal reasons
for this difference are as follows:
Years ended December 31,
Income before future income taxes
Canadian statutory income tax rate
Expected tax expense
Increase (decrease) in income tax provision
resulting from:
Change in estimates, tax rates, and other
differences in CBU financial
statements to legal entity tax returns
Stock-based compensation
Provision for future income taxes
$
2006
9,767
33.01%
$ 3,224
2007
$ 38,204
32.12%
$ 12,271
2008
$ 257,678
29.50%
$ 76,015
(7,881)
3,195
71,329
$
$
(6,502)
1,116
6,885
$
269
504
3,997
The components of the CBU’s future income tax assets and liabilities arising from temporary differences
and loss carry-forwards are as follows:
As at December 31,
Capital assets
Deferred income
Non-capital losses
Asset retirement obligations
Risk management contracts (1)
Obligations under gas sale
contract
2008
Future Income Future Income
Tax Assets
Tax Liabilities
$
$ 124,114
42,081
4,904
2,901
9,860
$
(1)
891
8,696
$
176,055
2007
Future Income
Future Income
Tax Assets
Tax Liabilities
$
$
30,957
1,707
1,473
-
$
1,111
4,291
$
30,957
Recorded as a current future income tax liability in 2008 (2007 – future income tax asset).
The CBU has reflected its future income tax liability net of future tax assets on the balance sheet.
As at December 31, 2008, the CBU had non-capital losses totalling $17.9 million, which expire between
2024 and 2028.
Note 10 – Capital Management
The CBU’s policy is to maintain a strong capital base in order to provide flexibility in the future
development of the business and maintain investor, creditor and market confidence.
The CBU manages its capital structure and makes adjustments to it in light of changes in economic
conditions and the risk characteristics of the underlying assets. The CBU considers its capital structure to
include its net investment from Petrobank, principal bank debt outstanding and working capital (a nonGAAP measure defined as cash and cash equivalents plus accounts receivable, prepaid expenses and risk
management asset less accounts payable and accrued liabilities). In order to maintain or adjust the capital
structure, from time to time Petrobank may increase its net investment in the CBU by issuing common
shares, debt or other securities, selling assets or adjusting its capital spending to manage current and
projected debt levels.
14
As at
Bank debt – principal
Dec. 31, 2008
$ 315,658
Dec. 31, 2007
$
20,000
Working capital deficiency (surplus)
$
90,818
$
61,099
Net investment by Petrobank
$
421,951
$
245,837
The CBU monitors leverage and adjusts its capital structure based on the ratio of bank debt to annualized
earnings before interest, taxes and non-cash items. At December 31, 2008, the ratio of debt to 2008
earnings before interest, taxes and non-cash items was 0.7 times, which is within a range acceptable to
management. The CBU uses the ratio of debt to annualized earnings before interest, taxes and non-cash
items as a key indicator of the CBU’s leverage and to monitor the strength of the balance sheet. In order
to facilitate the management of this ratio, the CBU prepares annual budgets, which are updated as
necessary depending on varying factors including current and forecast commodity prices, changes in
capital structure, execution of the CBU’s business plan and general industry conditions. The annual
budget is approved by the Petrobank Board of Directors and updates are prepared and reviewed as
required.
The Company is in compliance with the covenants on its credit facility agreements. The Company is not
subject to restrictive financial covenants under its credit facility.
Neither the Company nor any of its subsidiaries, including the CBU, has paid or declared any dividends
since the date of incorporation.
Credit markets throughout the world have tightened recently which could limit the CBU’s ability to
access incremental debt. The CBU has positive cash flow from operations and a credit facility with
$64.3 million of available capacity as at December 31, 2008.
Note 11 – Financial Instruments and Financial Risk Management
The CBU has exposure to the following risks from its use of financial instruments: credit risk, liquidity
risk and market risk. This note presents information about the CBU’s exposure to each of these risks and
the objectives, policies and processes for measuring and managing risk. Further quantitative disclosures
are included throughout these financial statements.
The Board of Directors of Petrobank has overall responsibility for the establishment and oversight of the
CBU’s financial risk management framework and monitors risk management activities. The CBU
identifies and analyzes the risks it faces and may utilize financial instruments to mitigate these risks.
Credit Risk
A substantial portion of our accounts receivable are with customers and joint-venture participants in the
oil and natural gas industry and are subject to normal industry credit risks. The carrying amount of
accounts receivable reflects management’s assessment of the credit risk associated with these customers
and participants. The majority of oil production is being sold to two purchasers, while the majority of
natural gas production is sold to an international oil and gas company. To help mitigate the risk associated
with the significant amount of oil production being sold to the larger purchaser, the CBU has arranged for
early payments and or letters of credit. At December 31, 2008, the CBU’s receivables consisted of $37.3
million (2007 – $22.0 million) of receivables from oil and natural gas customers and $7.8 million (2007 –
$9.6 million) of other trade receivables.
Receivables from oil and natural gas marketers are normally collected 25 days after the month following
production. The CBU’s policy to mitigate credit risk associated with these balances is to establish
marketing relationships with large purchasers and, where practical, obtain support in the form of
guarantees or letters of credit. Receivables from joint-venture partners related to capital and operating
15
expenses are generally collected between 45 and 90 days after the month of billing. The CBU historically
has not experienced any collection issues with its oil and natural gas customers or joint interest partners.
The CBU’s accounts receivables are aged as follows:
As at December 31,
Not past due
Past due
Total
$
$
2008
43,413
1,691
45,104
$
$
2007
30,137
1,483
31,620
Cash and cash equivalents consist of cash bank balances and short term deposits maturing in less than
90 days. The CBU manages the credit exposure related to short term investments by selecting counter
parties based on credit ratings and monitors all investments to ensure a stable return, avoiding investment
vehicles with higher risk such as asset backed commercial paper.
The carrying amount of accounts receivable and cash and cash equivalents represent the CBU’s maximum
credit exposure. The CBU had a $0.8 million allowance for doubtful accounts as at December 31, 2008.
For the years ended December 31, 2008 and 2007 the CBU did not provide for any doubtful accounts and
wrote off less than $0.1 million of receivables in both years.
Liquidity Risk
The CBU’s approach to managing liquidity is to ensure, as far as possible, that it will have sufficient
liquidity to meet its liabilities when due, under both normal and unusual conditions without incurring
unacceptable losses or jeopardizing the CBU’s business objectives.
The CBU prepares annual capital expenditure budgets, which are monitored and updated as considered
necessary. Production is monitored regularly to provide current cash flow estimates and the CBU utilizes
authorizations for expenditures on projects to manage capital expenditures. To facilitate the capital
expenditure program, the CBU has a revolving asset based credit facility, as outlined in Note 6, which is
reviewed semi-annually by the lenders.
The following are the contractual maturities of financial liabilities at December 31, 2008:
Financial Liability
Accounts payable and accrued liabilities
Bank debt – principal
Total
< 1 Year
$ 172,895
$ 172,895
1-3 Years
$
315,658
$ 315,658
3-5 Years
$
$
-
Total
$ 172,895
315,658
$ 488,553
Market Risk
Market risk is the risk that changes in market factors, such as foreign exchange rates, commodity prices,
and interest rates will affect the CBU’s cash flows, net income, liquidity or the value of financial
instruments. The objective of market risk management is to mitigate market risk exposures where
considered appropriate and maximize returns.
The CBU may utilize derivative instruments to manage market risk. The Board of Directors of Petrobank
periodically review the results of all risk management activities and all outstanding positions.
Foreign Currency Risk
At December 31, 2008, if the Canadian dollar had depreciated five percent against the United States
dollar with all other variables held constant, net income would have been $1.2 million higher for the year
ended December 31, 2008, due to the period end valuation risk management contracts outstanding.
The CBU had no forward exchange rate contracts in place as at or during the year ended
December 31, 2008.
16
Commodity Price Risk
Changes in commodity prices may significantly impact the results of the CBU’s operations and cash
generated from operating activities, and can also impact the CBU’s borrowing base under its secured
credit facility. Lower commodity prices can also reduce the CBU’s ability to raise capital. Crude oil
prices are impacted by world economic events that dictate the levels of supply and demand. Natural gas
prices in Canada are influenced primarily by North American supply and demand. From time to time the
CBU may attempt to mitigate commodity price risk through the use of financial derivatives. The CBU’s
policy is to only enter into commodity contracts considered appropriate to a maximum of 50% of
forecasted production volumes.
The CBU had the following crude oil price risk management contract outstanding at December 31, 2008:
Term
Jan. 1, 2009 – Dec. 31, 2009
Volume (Bopd)
2,000
Price (US$/bbl)
90.00 floor / 121.00 ceiling
Benchmark
WTI
In August 2009, the CBU entered into the following crude oil price risk management contracts:
Term
Jan. 1, 2010 – Dec. 31, 2010
Jan. 1, 2010 – Dec. 31, 2010
Jan. 1, 2011 – Dec. 31, 2011
Volume (Bopd)
500
500
500
Years ended December 31,
Realized loss on risk management contracts
Unrealized gain (loss) on risk management
contracts
Gain (loss) on risk management contracts
Price (C$/bbl)
75.00 floor / 93.65 ceiling
75.00 floor / 94.15 ceiling
80.00 floor / 95.60 ceiling
Benchmark
WTI
WTI
WTI
$
2008
(4,808)
$
2007
-
$
2006
-
$
37,854
33,046
$
(4,950)
(4,950)
$
-
The unrealized gain (loss) represents the change in fair value of the risk management contracts related to
expected future settlements. The fair value of the remaining risk management asset at December 31, 2008
was $32.9 million (2007 – $5.0 million liability). If crude oil prices had been 10% lower on
December 31, 2008, with all other variables held constant, the change in the fair value of the risk
management contracts would have resulted in net income that was $3.3 million higher for the year then
ended.
Interest Rate Risk
The CBU is exposed to interest rate cash flow risk on floating interest rate bank debt, to the extent it is
drawn, due to fluctuations in market interest rates. The remainder of the CBU’s financial assets and
liabilities are not exposed to interest rate risk. The CBU’s sensitivity to year end interest rates is
immaterial.
The CBU had no interest rate swap or financial contracts in place as at or during the year ended
December 31, 2008.
Long-Term Physical Gas Sale Contract
The CBU is committed to deliver 2,209 GJ per day of natural gas under an escalating price contract which
expires October 31, 2012. The wellhead price under this contract in 2008 was $4.95 per GJ and was
increased to $5.15 per GJ effective January 1, 2009. The CBU applies the expected purchase and sale
exemption to this contract and accordingly does not apply hedge accounting principles to this contract.
17
Fair Value of Financial Instruments
The CBU’s financial instruments include cash and cash equivalents, accounts receivable, risk
management asset, accounts payable and accrued liabilities and bank debt and on the balance sheet. The
carrying value and fair value of these financial instruments at December 31, 2008 is disclosed below by
financial instrument category, as well as any related gain, loss, expense or revenue for the year ended
December 31, 2008:
Financial Instrument
Assets Held For Trading
Cash and cash equivalents (1)
Risk management contracts
Loans and Receivables
Accounts receivable
Other Liabilities
Accounts payable and
accrued liabilities
Bank debt
Obligations under gas sale
contract
(1)
(2)
(3)
(4)
Carrying
Value
868
Fair Value
868
Gain /
(Loss)
Interest
Expense
(2)
Revenue
-
-
32,904
32,904
33,046
-
-
45,104
45,104
-
-
-
172,895
315,162
172,895
315,658
-
3,170
3,348
-
9,542(3)
-
827(4)
The effective yield on cash equivalents at December 31, 2008 was 0.6% (2007 – 4.0%).
Included in gain (loss) on risk management contracts on the statement of operations and retained earnings, and
statement of comprehensive income. The unrealized gain of $37.9 million representing the change in fair value
of the contracts is included on the statement of cash flow.
Included in interest expense on the statement of operations and retained earnings and statement of
comprehensive income. The amortization of deferred financing costs is added back on the statement of cash
flow. The effective yield on bank debt at December 31, 2008 was 3.5% (2007 – 6.4%).
Included in oil and natural gas revenues on the statement of operations and retained earnings and statement of
comprehensive income. The amortization of obligations under gas sale contract is included on the statement of
cash flow.
The risk management contracts are recorded at their fair value based on quoted market prices in the
futures market on the balance sheet date; accordingly, there is no difference between fair value and
carrying value. The fair value of the obligations under gas sale contract is based on the estimated cash
payment necessary to settle the contract at the balance sheet date. Cash payments are calculated based on
discounted cash flow analysis using prevailing market prices at the time. Bank debt is recorded on the
balance sheet net of deferred financing costs which results in a difference between carrying value and the
fair value. Due to the short term nature of: cash and cash equivalents, accounts receivable, and accounts
payable and accrued liabilities their carrying values approximate their fair values.
18
Note 12 – Changes in Non-Cash Working Capital
Years ended December 31,
Change in:
Accounts receivable
Prepaid expenses
Accounts payable and accrued liabilities
2008
Working capital deficiencies acquired (Note 5)
Changes relating to:
Attributable to operating activities
Attributable to investing activities
2006
2007
$ (13,484)
(2,399)
78,300
62,417
(13,278)
$ 49,139
$ (23,536)
(4)
62,390
38,850
$ 38,850
$
3,355
(398)
7,207
10,164
$ 10,164
$ 13,171
$ 35,968
$ (6,044)
$ 44,894
$
$
4,211
5,953
Note 13 – Commitments and Contingencies
The following is a summary of the estimated costs required to fulfill the CBU’s remaining contractual
commitments at December 31, 2008:
2009
Type of Commitment
Bank debt – principal (Note 6)
Office operating leases
3,100
Flow-through expenditures
15,283
Total Commitments
$ 18,383 $
2010
2011
315,658
3,650
3,650
3,650 $ 319,308 $
2012
4,900
4,900 $
2013 Thereafter
Total
315,658
5,100
26,600
47,000
15,283
5,100 $ 26,600 $ 377,941
The development of certain of the CBU assets and the success of its operations are dependent on
obtaining sufficient financing to fund its working capital requirements and future capital expenditure
commitments. The CBU plans to fund these commitments with existing cash balances, funds flow from
operations, available credit, new debt and potentially through the issuance of equity.
The CBU is party to certain legal actions arising in the normal course of business, the outcome of which
cannot be reasonably determined. In the opinion of management, the resolution of these matters will not
have a material effect on the CBU’s financial position or results of operations.
19
PETROBANK ENERGY AND RESOURCES LTD.’S CANADIAN BUSINESS UNIT
BALANCE SHEETS
(Unaudited, thousands of Canadian dollars)
(See Note 1: Basis of Presentation)
As at
Assets
Current assets
Cash and cash equivalents
Accounts receivable
Prepaid expenses
Risk management assets
Capital assets
Goodwill
Total assets
Liabilities and Equity
Current liabilities
Accounts payable and accrued liabilities
Future income tax liabilities
Bank debt (Note 3)
Obligations under gas sale contract and deferred credit
Asset retirement obligations
Future income tax liabilities
June 30, 2009
$
4,550
46,127
3,527
8,697
62,901
Dec. 31, 2008
$
868
45,104
3,201
32,904
82,077
1,199,334
35,052
$ 1,297,287
1,200,961
35,052
$ 1,318,090
$
$
92,041
2,606
94,647
172,895
9,860
182,755
333,190
4,462
11,876
168,650
612,825
315,162
3,170
11,170
157,499
669,756
457,419
512
226,531
684,462
$ 1,297,287
421,951
226,383
648,334
$ 1,318,090
Commitments and contingencies (Note 7)
Equity
Net investment by Petrobank Energy and Resources Ltd.
Accumulated other comprehensive income
Retained earnings
Total liabilities and equity
Subsequent event (Note 5)
See accompanying notes to these financial statements.
1
PETROBANK ENERGY AND RESOURCES LTD.’S CANADIAN BUSINESS UNIT
STATEMENTS OF OPERATIONS, RETAINED EARNINGS AND NET INVESTMENT
(Unaudited, thousands of Canadian dollars)
(See Note 1: Basis of Presentation)
Three months ended
June 30,
2008
2009
Revenues
Oil and natural gas
Royalties
Loss on risk management contracts
Interest income
$ 102,452
(13,195)
(10,220)
51
79,088
Expenses
Production
Transportation
General and administrative
Stock-based compensation
Interest
Depletion, depreciation and accretion
Income before future income taxes
Future income taxes
Net income
Retained earnings, beginning of period
Retained earnings, end of period
Net investment by Petrobank Energy and Resources
Ltd., beginning of period
By (to) Petrobank Energy and Resources Ltd.
Net investment by Petrobank Energy and Resources
Ltd., end of period
Six months ended
June 30,
2008
2009
$ 168,757 $ 197,938
(17,581)
(23,766)
(34,140)
(7,993)
119
81
117,155
166,260
$ 278,180
(26,104)
(36,338)
253
215,991
11,610
1,541
3,479
2,971
2,498
53,309
75,408
13,343
4,283
2,642
3,058
2,249
42,999
68,574
25,146
3,992
6,479
8,935
5,544
112,119
162,215
25,161
8,100
4,949
5,002
4,445
80,449
128,106
3,680
2,512
1,168
48,581
16,258
32,323
4,045
3,897
148
87,885
29,394
58,491
66,202
98,525
$ 226,383
$ 226,531
$ 225,363
$ 226,531
$
$
$ 418,971
38,448
$ 436,119 $ 421,951
(8,043)
35,468
$ 245,837
182,239
$ 457,419
$ 428,076
$ 428,076
$ 457,419
$
$
40,034
98,525
See accompanying notes to these financial statements.
PETROBANK ENERGY AND RESOURCES LTD.’S CANADIAN BUSINESS UNIT
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, thousands of Canadian dollars)
(See Note 1: Basis of Presentation)
Net income
Other comprehensive income:
Unrealized gain on interest rate contracts (Note 5)
Comprehensive income
Three months ended
June 30,
2008
2009
$
1,168 $ 32,323
$
697
1,865
$
32,323
Six months ended
June 30,
2008
2009
$
148 $ 58,491
$
512
660
$
58,941
See accompanying notes to these financial statements.
2
PETROBANK ENERGY AND RESOURCES LTD.’S CANADIAN BUSINESS UNIT
STATEMENTS OF CASH FLOW
(Unaudited, thousands of Canadian dollars)
(See Note 1: Basis of Presentation)
Three months ended
June 30,
2008
2009
Operating Activities
Net income
Depletion, depreciation and accretion
Unrealized loss on risk management contracts
Stock-based compensation
Future income taxes
Amortization of deferred financing costs
Asset retirement obligations settled
$
Changes in non-cash working capital (Note 6)
Financing Activities
Net investment by (to) Petrobank Energy and
Resources Ltd.
Issuance (repayment) of bank debt
Financing costs relating to bank debt
Amortization of obligations under gas sale contract
Investing Activities
Expenditures on capital assets
Acquisition
Changes in non-cash working capital (Note 6)
Net change in cash and cash equivalents
Six months ended
June 30,
2008
2009
1,168 $ 32,323 $
148 $ 58,491
42,999
80,449
53,309
112,119
29,664
30,280
16,392
24,720
3,058
5,002
2,971
8,935
16,258
29,394
2,512
3,897
166
290
97
194
(272)
(585)
(558)
(862)
124,196
203,321
75,891
149,151
(18,939)
(18,997)
(37,963)
(12,969)
105,257
184,324
37,928
136,182
37,718
20,000
(1,508)
(206)
56,004
(11,749)
(27,000)
(477)
(206)
(39,432)
26,533
19,342
(1,508)
(410)
43,957
(36,247)
95,993
(477)
(412)
58,857
(38,901)
(57,439)
(96,340)
(2,408)
(69,711)
(12,711)
(82,422)
(16,597)
(108,925)
(67,532)
(176,457)
3,682
(180,200)
(67,248)
10,994
(236,454)
6,727
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
$
6,958
4,550
$
24,398
7,801 $
868
4,550
$
1,074
7,801
Cash and cash equivalents consist of:
Cash
Cash equivalents
$
$
4,399
151
$
$
7,801 $
- $
4,399
151
$
$
7,801
-
Other cash flow information:
Cash interest paid
Cash interest received
$
$
3,551
9
$
$
2,021 $
56 $
6,411
12
$
$
3,580
158
See accompanying notes to these financial statements.
3
PETROBANK ENERGY AND RESOURCES LTD.’S CANADIAN BUSINESS UNIT
NOTES TO THE FINANCIAL STATEMENTS
As at and for the three and six months ended June 30, 2009 and 2008.
(Unaudited, all tabular amounts are expressed in thousands of Canadian dollars unless otherwise noted)
Note 1 – Basis of Presentation
The interim financial statements for Petrobank Energy and Resources Ltd.'s (“Petrobank”) Canadian
Business Unit (“CBU”) as at and for the three and six months ended June 30, 2009 should be read in
conjunction with the audited financial statements as at and for the year ended December 31, 2008. The
notes to these interim financial statements do not conform in all respects to the note disclosure
requirements of generally accepted accounting policies (“GAAP”) for annual financial statements. These
interim financial statements are prepared using the same accounting policies and methods of computation
as disclosed in the annual financial statements as at and for the year ended December 31, 2008, except for
those disclosed in Note 2 below. The disclosures provided within are incremental to those included with
the annual financial statements.
Petrobank has incorporated a 100% wholly-owned subsidiary, PetroBakken Energy Ltd. (“PetroBakken”),
which will be capitalized with the CBU assets and obligations along with $400 million of cash. In return,
Petrobank will receive 109.8 million common shares of PetroBakken. PetroBakken will then acquire all of
the issued and outstanding common shares of TriStar Oil and Gas Ltd. (“TriStar”) through a plan of
arrangement, which would give TriStar shareholders $600 million in cash, less amounts paid upon the
exercise of options by TriStar option holders which is expected to be approximately $20 million, and
approximately 61.8 million common shares of PetroBakken. After the transaction, Petrobank will own
approximately 64% of PetroBakken. The proposed transaction with TriStar and listing of PetroBakken
would occur on or about October 1, 2009.
These financial statements have been prepared to present the financial position, results of operations and
cash flows for the CBU.
Subsequent to the carve-out of Petrobank’s CBU and the completion of the transaction with TriStar, the
management of PetroBakken will determine all operating, investing and financing activities applicable to
the CBU. Accordingly, the amounts recorded in these financial statements may not be indicative of the
amounts that will result in future periods.
Petrobank’s CBU has distinct operating staff and capital budgets. Petrobank also has shared services such
as accounting, human resources, information technology, land administration and corporate compliance.
Historically, Petrobank has maintained accounting records necessary to support its consolidated financial
statements but not specifically for the CBU or its other business units. While the amounts applicable to the
CBU for certain revenues, expenses, assets and liabilities can be derived directly from the accounting
records of Petrobank, it has been necessary to allocate certain items in the manner described below.
Presentation of the Balance Sheets
For purposes of the CBU balance sheets all assets and liabilities, except for future income taxes, have been
derived directly from the accounting records of Petrobank. Future income taxes are prepared on a legal
entity basis and as such it is not possible to specifically identify only those activities that relate to the
CBU, as some corporate Petrobank activities are also included within the legal entity tax filings.
Management has separated the future income tax assets and liabilities directly attributable to the CBU on a
reasonable basis based on best estimates for the purposes of these financial statements.
The Petrobank convertible debentures are considered a corporate activity and as such, have been excluded
from the balance sheets and any related interest excluded from the statement of operations. Proceeds from
the convertible debentures ultimately invested in the CBU are reflected as net investment by Petrobank on
the balance sheets.
4
Acquisitions which were funded through the issuance of Petrobank common shares are also reflected
within the net investment by Petrobank on the balance sheets.
Presentation of the Statement of Operations
The oil and natural gas revenues, royalties, loss on risk management contracts, production expenses,
transportation expenses, and depletion, depreciation and accretion are specifically allocated to the CBU
operations in Petrobank’s accounting records, and as such, the amounts included in these financial
statements have been derived directly from Petrobank’s accounting records.
Interest income and interest expense are allocated based on the fact that the CBU bank accounts can be
specifically identified and allocated to these assets, and the assumption that the Canadian credit facility is
primarily secured by the CBU assets and as such, the amount of interest income and expense related to
these bank accounts and credit facility have been derived directly from Petrobank’s accounting records.
General and administrative and stock-based compensation expenses have been derived directly from
Petrobank’s accounting records for the costs attributable to the CBU operations.
Future income taxes are prepared on a legal entity basis and as such it is not possible to specifically
identify only those activities that relate to the CBU, as some corporate Petrobank activities are also
included within the legal entity tax filings. Management has separated the future income tax assets and
liabilities attributable to the CBU on a reasonable basis based on best estimates for the purposes of these
financial statements.
Presentation of the Statements of Cash Flow
As discussed above, the cash balances of the CBU can be specifically identified and as such we have
prepared the statements of cash flow to represent the annual change.
Note 2 – Changes in Accounting Policies
On January 1, 2009, management retrospectively adopted the Canadian Institute of Chartered
Accountants (“CICA”) Handbook Section 3064, Goodwill and Intangible Assets issued by the Canadian
Accounting Standards Board (“AcSB”). The new section replaces the previous goodwill and intangible
asset standard and revises the requirement for recognition, measurement, presentation and disclosure of
intangible assets. The adoption of this standard had no impact on these financial statements.
On January 1, 2009, management adopted the CICA’s EIC-173, Credit Risk and the Fair Value of
Financial Assets and Financial Liabilities. The EIC provides guidance on how to take into account credit
risk of an entity and counterparty when determining the fair value of financial assets and financial
liabilities, including derivative instruments. The adoption of this EIC had no impact on these financial
statements.
On January 1, 2009, management adopted CICA Handbook Section 1582, Business Combinations, which
replaces former guidance on business combinations. Under the new standard, the purchase price used in a
business combination is based on the fair value of consideration at the date of exchange. Previously the
purchase price was based on the fair value of the consideration for a reasonable period before and after
the date of acquisition was agreed upon and announced. The new standard generally requires all
acquisition costs be expensed, which were previously capitalized as part of the purchase price. In
addition, the new standard modified the accounting for contingent consideration and negative goodwill.
The adoption of this standard will impact the accounting treatment of future business combinations.
On January 1, 2009, management adopted CICA Handbook Sections 1601, Consolidated Financial
Statements, and 1602, Non-controlling Interests, which replace existing guidance. Section 1601
establishes standards for the preparation of consolidated financial statements and Section 1602 provides
guidance on accounting for a non-controlling interest in a subsidiary subsequent to a business
5
combination. The adoption of these standards did not have a material impact on our results of operations
or financial position.
Recent and Pending Accounting Pronouncements
In June 2009, the CICA issued amendments to CICA Handbook Section 3862, Financial Instruments —
Disclosures. The amendments include enhanced disclosures related to the fair value of financial
instruments and the liquidity risk associated with financial instruments. The amendments will be effective
for annual financial statements for fiscal years ending after September 30, 2009. The amendments are
consistent with recent amendments to financial instrument disclosure standards in International Financial
Reporting Standards (“IFRS”). Management will include these additional disclosures in its annual
financial statements for the year ending December 31, 2009.
The Canadian Accounting Standards Board has confirmed that IFRS will replace Canadian GAAP
effective January 1, 2011, including comparatives for 2010, for Canadian publicly accountable
enterprises. Petrobank has completed its high-level IFRS impact study and established a preliminary
timeline for the execution and completion of the conversion project. The impact of IFRS on the CBU’s
financial statements is not reasonably determinable at this time. Key information will be disclosed as it
becomes available during the transition period.
Note 3 – Bank Debt
Petrobank’s secured Canadian credit facility borrowing limit totals $400 million, of which $335 million
was drawn as at June 30, 2009. As the facility is primarily secured by the CBU assets, all interest related
to these facilities has been included in the CBU statement of operations.
Note 4 – Capital Management
The CBU’s policy is to maintain a strong capital base in order to provide flexibility in the future
development of the business and maintain investor, creditor and market confidence.
The CBU manages its capital structure and makes adjustments to it in light of changes in economic
conditions and the risk characteristics of the underlying assets. The CBU considers its capital structure to
include its net investment from Petrobank, principal bank debt outstanding and working capital (a nonGAAP measure defined as cash and cash equivalents plus accounts receivable, prepaid expenses and risk
management assets less accounts payable and accrued liabilities). In order to maintain or adjust the capital
structure, from time to time Petrobank may increase its net investment in the CBU by issuing common
shares, debt or other securities, selling assets or adjusting its capital spending to manage current and
projected debt levels.
As at
Bank debt – principal
June 30, 2009
$ 335,000
Dec. 31, 2008
$ 315,658
Working capital deficiency
$
29,140
$
90,818
Net investment by Petrobank
$
457,419
$
421,951
The CBU monitors leverage and adjusts its capital structure based on the ratio of bank debt to annualized
earnings before interest, taxes and non-cash items. At June 30, 2009, the ratio of debt to the annualized
second quarter of 2009 earnings before interest, taxes and non-cash items was 1.1 times, which is within a
range acceptable to management. The CBU uses the ratio of debt to annualized earnings before interest,
taxes and non-cash items as a key indicator of the CBU’s leverage and to monitor the strength of the
balance sheet. In order to facilitate the management of this ratio, the CBU prepares annual budgets, which
are updated as necessary depending on varying factors including current and forecast commodity prices,
changes in capital structure, execution of the CBU’s business plan and general industry conditions. The
6
annual budget is approved by the Petrobank Board of Directors and updates are prepared and reviewed as
required.
Petrobank is in compliance with the covenants on its credit facility agreements. Petrobank is not subject
to restrictive financial covenants under its credit facility.
Note 5 – Financial Instruments and Financial Risk Management
The CBU has exposure to the following risks from its use of financial instruments: credit risk, liquidity
risk and market risk. This note presents information about the CBU’s exposure to each of these risks and
the CBU’s objectives, policies and processes for measuring and managing risk. Further quantitative
disclosures are included throughout these financial statements.
The Board of Directors of Petrobank has overall responsibility for the establishment and oversight of the
CBU’s financial risk management framework and monitors risk management activities. The CBU
identifies and analyzes the risks it is faced with and may utilize financial instruments to mitigate these
risks.
Credit Risk
A substantial portion of our accounts receivable are with customers and joint-venture participants in the
oil and natural gas industry and are subject to normal industry credit risks. The carrying amount of
accounts receivable reflects management’s assessment of the credit risk associated with these customers
and participants. The majority of oil production is being sold to two purchasers, while the majority of
natural gas production is sold to an international oil and gas company. To help mitigate the risk associated
with the significant amount of oil production being sold to the larger purchaser, the CBU has arranged for
early payments and or letters of credit. At June 30, 2009, the CBU’s receivables consisted of
$45.3 million (Dec. 31, 2008 – $37.3 million) of receivables from oil and natural gas customers and
$0.8 million (Dec. 31, 2008 – $7.8 million) of other trade receivables.
Receivables from oil and natural gas marketers are normally collected 25 days after the month following
production. The CBU’s policy to mitigate credit risk associated with these balances is to establish
marketing relationships with large purchasers and, where practical, obtain support in the form of
guarantees or letters of credit. Receivables from joint-venture partners related to capital and operating
expenses are generally collected between 45 and 90 days after the month of billing. The CBU historically
has not experienced any collection issues with its oil and natural gas customers or joint interest partners.
Cash and cash equivalents consist of cash bank balances and short term deposits maturing in less than
90 days. The CBU manages the credit exposure related to short term investments by selecting counter
parties based on credit ratings and monitors all investments to ensure a stable return, avoiding investment
vehicles with higher risk such as asset backed commercial paper.
The carrying amount of accounts receivable and cash and cash equivalents represent the CBU’s maximum
credit exposure. The CBU had a $0.8 million allowance for doubtful accounts as at June 30, 2009, and did
not provide for any doubtful accounts nor was it required to write-off any receivables during the six
months ended June 30, 2009.
7
The CBU’s accounts receivables are aged as follows:
As at
Not past due
Past due
Total
June 30, 2009
$
42,874
3,253
$
46,127
Dec. 31, 2008
$
43,413
1,691
$
45,104
Liquidity Risk
The CBU’s approach to managing liquidity is to ensure, as far as possible, that it will have sufficient
liquidity to meet its liabilities when due, under both normal and unusual conditions without incurring
unacceptable losses or jeopardizing the CBU’s business objectives.
The CBU prepares annual capital expenditure budgets, which are monitored and updated as considered
necessary. Production is monitored regularly to provide current cash flow estimates and the CBU utilizes
authorizations for expenditures on projects to manage capital expenditures. To facilitate the capital
expenditure program, the CBU has revolving asset based credit facility, as outlined in Note 3, which is
reviewed semi-annually by the lenders.
The following are the contractual maturities of financial liabilities at June 30, 2009:
Financial Liability
Accounts payable and accrued liabilities
Bank debt – principal
Total
< 1 Year
$ 92,041
$ 92,041
1-3 Years
$
335,000
$ 335,000
3-5 Years
$
$
-
Total
$ 92,041
335,000
$ 427,041
Market Risk
Market risk is the risk that changes in market factors, such as foreign exchange rates, commodity prices,
and interest rates will affect the CBU’s cash flows, net income, liquidity, or the value of financial
instruments. The objective of market risk management is to mitigate market risk exposures where
considered appropriate and maximize returns.
The CBU may utilize derivative instruments to manage market risk. The Board of Directors of Petrobank
periodically review the results of all risk management activities and all outstanding positions.
Foreign Currency Risk
At June 30, 2009, if the Canadian dollar had depreciated five percent against the United States dollar with
all other variables held constant, net income would have been $0.3 million higher for the three and six
months ended June 30, 2009, due to the period end valuation of risk management contracts outstanding.
The CBU had no forward exchange rate contracts in place as at or during the six months ended
June 30, 2009.
Commodity Price Risk
Changes in commodity prices may significantly impact the results of the CBU’s operations and cash
generated from operating activities, and can also impact the CBU’s borrowing base under its secured
credit facility. Lower commodity prices can also reduce the CBU’s ability to raise capital. Crude oil
prices are impacted by world economic events that dictate the levels of supply and demand. Natural gas
prices in Canada are influenced primarily by North American supply and demand. From time to time the
CBU may attempt to mitigate commodity price risk through the use of financial derivatives. The CBU’s
policy is to only enter into commodity contracts considered appropriate to a maximum of 50% of
forecasted production volumes.
8
The CBU had the following crude oil price risk management contract outstanding at June 30, 2009:
Term
Jan. 1, 2009 – Dec. 31, 2009
Volume (Bopd)
Price (US$/bbl)
2,000
90.00 floor / 121.00 ceiling
Benchmark
WTI
In August 2009, the CBU entered into the following crude oil price risk management contracts:
Term
Jan. 1, 2010 – Dec. 31, 2010
Jan. 1, 2010 – Dec. 31, 2010
Jan. 1, 2011 – Dec. 31, 2011
Volume (Bopd)
Price (C$/bbl)
500
75.00 floor / 93.65 ceiling
500
75.00 floor / 94.15 ceiling
500
80.00 floor / 95.60 ceiling
Three months ended
June 30,
2008
2009
Risk management contracts
Realized gain (loss)
Unrealized loss
Loss on risk management contracts
$
$
6,172 $
(16,392)
(10,220) $
Benchmark
WTI
WTI
WTI
Six months ended
June 30,
2008
2009
(4,476) $ 16,727 $
(29,664)
(24,720)
(34,140) $ (7,993) $
(6,058)
(30,280)
(36,338)
The unrealized gain (loss) represents the change in fair value of the risk management contracts related to
expected future settlements. The fair value of the remaining risk management asset at June 30, 2009 was
$8.7 million (December 31, 2008 – $32.9 million), of which $8.2 million related to the crude oil price risk
management contracts. If crude oil prices had been 10% lower on June 30, 2009, with all other variables
held constant, the change in the fair value of the risk management contracts would have resulted in net
income that was $2.1 million higher for the three and six months then ended.
Interest Rate Risk
The CBU is exposed to interest rate cash flow risk on floating interest rate bank debt due to fluctuations
in market interest rates. The remainder of the CBU's financial assets and liabilities are not exposed to
interest rate risk.
The CBU had the following interest rate swap contracts in place at June 30, 2009:
Term
April 2009 – April 2011
April 2009 – April 2012
Notional Principal
$50 million
$50 million
Fixed Annual Rate (%)
1.05%
1.30%
The fair value of the interest rate swaps at June 30, 2009 was $0.5 million. Had interest rates been 1%
higher for the three and six month periods ended June 30, 2009 net income would have decreased by
$0.3 million and $0.6 million, respectively, due to interest charged on the CBU’s floating rate bank debt.
If interest rates had been 1% higher at June 30, 2009, net income would be unchanged and other
comprehensive income would have increased by $2.0 million due to the change in fair value of the
interest rate swaps.
9
Fair Value of Financial Instruments
The CBU’s financial instruments include cash and cash equivalents, accounts receivable, risk
management asset, accounts payable and accrued liabilities and bank debt and on the balance sheet. The
carrying value and fair value of these financial instruments at June 30, 2009 is disclosed below by
financial instrument category, as well as any related gain, loss, expense or revenue for the year to date
period ended June 30, 2009:
Financial Instrument
Assets Held For Trading
Cash and cash equivalents (1)
Risk management contracts
Loans and Receivables
Accounts receivable
Other Liabilities
Accounts payable and
accrued liabilities
Bank debt
Obligations under gas sale
contract and deferred credit
(1)
(2)
(3)
(4)
Carrying
Value
4,550
Fair Value
4,550
Gain /
(Loss)
Interest
Expense
(2)
(7,993)
Revenue
-
-
-
-
-
-
8,697
8,697
46,127
46,127
-
92,041
333,190
92,041
335,000
-
5,544(3)
-
4,462
2,406
-
(44)
410(4)
The effective yield on cash equivalents at June 30, 2009 was 0.2% (December 31, 2008 – 0.6%).
Included in gain (loss) on risk management contracts on the statement of operations and retained earnings, and
statement of comprehensive income. In addition, an unrealized gain of $0.5 million is included in the statement
of comprehensive income related to the interest rate hedges. The unrealized loss of $24.7 million representing
the change in fair value of the contracts is added back on the statement of cash flow.
Included in interest expense on the statement of operations and retained earnings and statement of
comprehensive income. The amortization of deferred financing costs is added back on the statement of cash
flow. The effective yield on bank debt at June 30, 2009 was 2.6% (December 31, 2008 – 3.5%).
Included in oil and natural gas revenues on the statement of operations and retained earnings and statement of
comprehensive income. The amortization of obligations under gas sale contract is included on the statement of
cash flow.
The risk management contracts are recorded at their fair value based on quoted market prices in the
futures market on the balance sheet date; accordingly, there is no difference between fair value and
carrying value. The fair value of the obligations under gas sale contract is based on the estimated cash
payment necessary to settle the contract at the balance sheet date. Cash payments are calculated based on
discounted cash flow analysis using prevailing market prices at the time. Bank debt is recorded on the
balance sheet net of deferred financing costs which results in a difference between carrying value and the
fair value. Due to the short term nature of: cash and cash equivalents, accounts receivable, and accounts
payable and accrued liabilities their carrying values approximate their fair values.
10
Note 6 – Changes in Non-Cash Working Capital
Three months ended
June 30,
2008
2009
Change in:
Accounts receivable
Prepaid expenses
Accounts payable and accrued liabilities
Deferred credit
$
(21,398) $
(580)
(75,126)
1,702
(95,402)
(95,402) $
(10,978) $
(306)
(20,366)
(31,650)
(31,650) $
(1,023) $
(326)
(80,854)
1,702
(80,501)
(80,501) $
(38,337)
(2,295)
46,987
6,355
(14,358)
(8,003)
$
$
(37,963) $
(57,439) $
(18,939) $
(12,711) $
(12,969) $
(67,532) $
(18,997)
10,994
$
Working capital deficiencies acquired
Changes relating to:
Attributable to operating activities
Attributable to investing activities
Six months ended
June 30,
2008
2009
Note 7 – Commitments and Contingencies
The following is a summary of the estimated costs required to fulfill the CBU’s remaining contractual
commitments at June 30, 2009:
Rem. 2009
Type of Commitment
Bank debt – principal (1)
Office operating leases
1,900
Flow-through expenditures
3,600
Total Commitments
$
5,500 $
(1)
2010
2011
335,000
3,700
3,700
3,700 $ 338,700 $
2012
4,900
4,900 $
2013 Thereafter
Total
335,000
5,100
26,600
45,900
3,600
5,100
26,600 $ 384,500
The amount is now due in 2011 resulting from an amended credit facility in July 2009.
11
AUDITORS' REPORT
To the Directors of PetroBakken Energy Ltd.
We have audited the balance sheet of PetroBakken Energy Ltd. (the “Company”) as at July 30, 2009. This
financial statement is the responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable assurance whether the financial
statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, the balance sheet presents fairly, in all material respects, the financial position of the
Company as at July 30, 2009, in accordance with Canadian generally accepted accounting principles.
Calgary, Alberta
August 31, 2009
“signed”
Deloitte & Touche LLP
Chartered Accountants
PETROBAKKEN ENERGY LTD.
BALANCE SHEET
(in Canadian dollars)
As at July 30,
2009
Asset
Current asset
Cash.......................................................................................................................................................................
$1
Shareholder's equity
Common share (Note 1) .......................................................................................................................................
$1
Subsequent events (Note 2)
Signed on behalf of the Board:
(Signed) JOHN D. WRIGHT
Chairman
(Signed) COREY C. RUTTAN
Director
See accompanying notes to the balance sheet.
PETROBAKKEN ENERGY LTD.
NOTES TO THE BALANCE SHEET
As at July 30, 2009
(in Canadian dollars)
Note 1 — FORMATION OF THE COMPANY
PetroBakken Energy Ltd. (the “Company”) was incorporated in Alberta on July 30, 2009. The
Company is a wholly-owned subsidiary of Petrobank Energy and Resources Ltd. (“Petrobank”).
There are an unlimited number of authorized Class A common shares, without nominal or par
value, an unlimited number of Class B common shares without nominal or par value and an
unlimited number of preferred shares without nominal or par value and issuable in series. The
Company issued one Class B common share on July 30, 2009 for cash proceeds of $1.
Note 2 — EVENTS SUBSEQUENT TO JULY 30, 2009
(a)
Carve-Out of Petrobank’s Canadian Business Unit
Petrobank will capitalize PetroBakken with its Canadian Business Unit assets and
obligations and $400 million of cash on or before October 1, 2009. In return, Petrobank will
receive 109.8 million common shares of PetroBakken.
(b)
Acquisition of TriStar Oil and Gas Ltd.
Pursuant to a plan of arrangement agreement dated August 4, 2009, the Company intends to
acquire all of the issued and outstanding common shares of TriStar Oil and Gas Ltd.
(“TriStar”) for $600 million in cash, less amounts paid upon the exercise of options by
TriStar option holders which is expected to be approximately $20 million, and
approximately 61.8 million common shares of the Company. The cash component will be
derived from Petrobank’s $400 million contribution and $200 million from PetroBakken's
committed $1.05 billion credit facility. The completion of the transaction is expected to
occur on or about October 1, 2009 and is subject to TriStar shareholder approval as well as
other customary regulatory, stock exchange, court and other approvals. Petrobank will own
approximately 64% of PetroBakken after the completion of this acquisition.
PETROBANK ENERGY AND RESOURCES LTD.’S CANADIAN BUSINESS UNIT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Summary of Annual Results
Financial ($000s, except where noted)
Oil and natural gas revenue
Funds flow from operations (1)
Net income
Capital expenditures
Total assets
Net debt (1)
Operations
Operating netback ($/boe except where noted) (1) (2)
Oil and NGL revenue ($/bbl) (3)
Natural gas revenue ($/mcf) (3)
Oil, NGL and natural gas revenue (3)
Royalties
Production expenses
Operating netback (4)
Average daily production (2)
Oil and NGL (bbls)
Natural gas (mcf)
Total (boe)
(1)
(2)
(3)
(4)
2008
2007
2006
585,800
416,628
186,349
545,833
1,318,090
406,476
129,997
94,225
31,319
303,687
444,078
81,099
49,835
28,655
5,770
88,033
163,903
52,576
92.80
8.06
86.78
10.03
8.76
67.99
75.64
6.35
62.62
4.86
8.19
49.57
61.18
6.21
44.40
6.28
7.28
30.84
15,369
14,436
17,775
3,579
11,379
5,476
918
12,940
3,075
Non-GAAP measure. See “Non-GAAP Measures” section within Management’s Discussion and Analysis (“MD&A”).
Six mcf of natural gas is equivalent to one barrel of oil equivalent (“boe”).
Net of transportation expenses.
Excludes hedging activities.
The following MD&A is dated August 31, 2009 and should be read in conjunction with the financial
statements and accompanying notes of Petrobank Energy and Resources Ltd.'s (“Petrobank”) Canadian
Business Unit (“CBU”, “we” or “our”) as at December 31, 2008 and 2007 and for the years ended
December 31, 2008, 2007 and 2006. All amounts are in Canadian dollars, unless otherwise stated and all
tabular amounts are in thousands of Canadian dollars, except share amounts or as otherwise noted.
Natural gas volumes have been converted to barrels of oil equivalent (“boe”). Six thousand cubic feet
(“Mcf”) of natural gas is equal to one barrel based on an energy equivalency conversion method primarily
applicable at the burner tip and does not represent a value equivalency at the wellhead. Boes may be
misleading, especially if used in isolation.
Basis of Presentation
Petrobank has incorporated a 100% wholly-owned subsidiary, PetroBakken Energy Ltd. (“PetroBakken”),
which will be capitalized with the CBU assets and obligations along with $400 million of cash. In return,
Petrobank will receive 109.8 million common shares of PetroBakken. PetroBakken will then acquire all
of the issued and outstanding common shares of TriStar Oil and Gas Ltd. (“TriStar”) through a plan of
1
arrangement, which would give TriStar shareholders $600 million in cash, less amounts paid upon the
exercise of options by TriStar option holders which is expected to be approximately $20 million, and
approximately 61.8 million common shares of PetroBakken. After the transaction, Petrobank will own
approximately 64% of PetroBakken. The proposed transaction with TriStar and listing of PetroBakken
would occur on or about October 1, 2009.
Subsequent to the carve-out of Petrobank’s CBU and the completion of the transaction with TriStar, the
management of PetroBakken will determine all operating, investing and financing activities applicable to
the CBU. Accordingly, the amounts recorded in the financial statements may not be indicative of the
amounts that will result in future periods.
Petrobank’s CBU has distinct operating staff and capital budgets. Petrobank also has shared services such
as accounting, human resources, information technology, land administration and corporate compliance.
Historically, Petrobank has maintained accounting records necessary to support its consolidated financial
statements but not specifically for the CBU or its other business units. While the amounts applicable to the
CBU for certain revenues, expenses, assets and liabilities can be derived directly from the accounting
records of Petrobank, it has been necessary to allocate certain items in the manner described below.
Presentation of the Balance Sheets
For purposes of the CBU balance sheets all assets and liabilities, except for future income taxes, have been
derived directly from the accounting records of Petrobank. Future income taxes are prepared on a legal
entity basis and as such it is not possible to specifically identify only those activities that relate to the
CBU, as some corporate Petrobank activities are also included within the legal entity tax filings.
Management has separated the future income tax assets and liabilities directly attributable to the CBU on a
reasonable basis based on best estimates for the purposes of the financial statements.
The Petrobank convertible debentures are considered a corporate activity and as such, have been excluded
from the balance sheets and any related interest excluded from the statement of operations. Proceeds from
the convertible debentures ultimately invested in the CBU are reflected as net investment by Petrobank on
the balance sheets.
Acquisitions which were funded through the issuance of Petrobank common shares are also reflected
within the net investment by Petrobank on the balance sheets.
Presentation of the Statement of Operations
The oil and natural gas revenues, royalties, gain (loss) on risk management contracts, production
expenses, transportation expenses, and depletion, depreciation and accretion are specifically allocated to
the CBU operations in Petrobank’s accounting records, and as such, the amounts included in the financial
statements have been derived directly from Petrobank’s accounting records.
Interest income and interest expense are allocated based on the fact that the CBU bank accounts can be
specifically identified and allocated to these assets, and the assumption that the Canadian credit facility is
primarily secured by the CBU assets and as such, the amount of interest income and expense related to
these bank accounts and credit facility have been derived directly from Petrobank’s accounting records.
General and administrative and stock-based compensation expenses have been derived directly from
Petrobank’s accounting records for the costs attributable to the CBU operations.
Future income taxes are prepared on a legal entity basis and as such it is not possible to specifically
identify only those activities that relate to the CBU, as some corporate Petrobank activities are also
included within the legal entity tax filings. Management has separated the future income tax assets and
liabilities attributable to the CBU on a reasonable basis based on best estimates for the purposes of the
financial statements.
2
Presentation of the Statements of Cash Flow
As discussed above, the cash balances of the CBU can be specifically identified and as such we have
prepared the statements of cash flow to represent the annual change.
Forward-Looking Statements
In addition to historical information, the MD&A contains forward-looking statements that are generally
identifiable as any statements that express, or involve discussions as to, expectations, beliefs, plans,
objectives, assumptions or future events of performance (often, but not always, through the use of words
or phrases such as “will likely result,” “expected,” “is anticipated,” “believes,” “estimated,” “intends,”
“plans,” “projection” and “outlook”). These statements are not historical facts and may be forwardlooking and may involve estimates, assumptions and uncertainties which could cause actual results or
outcomes to differ materially from those expressed in such forward-looking statements. 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. Such factors include, but are not limited to: general economic, market and
business conditions; fluctuations in oil and gas prices; the results of exploration and development of
drilling and related activities; costs and availability of services; fluctuation in foreign currency exchange
rates; the uncertainty of reserve estimates; changes in environmental and other regulations; risks
associated with oil and gas operations; and other factors, many of which are beyond the control of the
CBU. Accordingly, there is no representation by the CBU that actual results achieved during the forecast
period will be the same in whole or in part as those forecasts. Except to the extent required by law, the
CBU assumes no obligation to publicly update or revise any forward-looking statements made in this
MD&A or otherwise, whether as a result of new information, future events or otherwise. All subsequent
forward-looking statements, whether written or oral, attributable to the CBU or persons acting on the
CBU's behalf, are qualified in their entirety by these cautionary statements.
Non-GAAP Measures
This report contains financial terms that are not considered measures under Canadian generally accepted
accounting principles (“GAAP”), such as funds flow from operations, net debt and operating netback.
These measures are commonly utilized in the oil and gas industry and are considered informative for
management and stakeholders. Specifically, funds flow from operations reflects cash generated from
operating activities before changes in non-cash working capital. Management considers funds flow from
operations important as it helps evaluate performance and demonstrate the CBU’s ability to generate
sufficient cash to fund future growth opportunities and repay debt. Net debt includes principal bank debt
outstanding plus accounts payable and accrued liabilities less current assets (excluding future income tax
asset) and is used to evaluate the CBU’s financial leverage. Profitability relative to commodity prices per
unit of production is demonstrated by an operating netback. Funds flow from operations, net debt and
operating netbacks may not be comparable to those reported by other companies nor should they be
viewed as an alternative to cash flow from operations or other measures of financial performance
calculated in accordance with GAAP.
3
Significant Transactions
¾ On January 28, 2008, Petrobank acquired Peerless Energy Inc. (“Peerless”) for $338.8 million,
including net debt assumed. At the time of acquisition, Peerless was producing approximately
5,600 boepd, of which approximately 3,400 bopd was Bakken light oil strategically located
within Petrobank’s CBU core properties in southeast Saskatchewan. Peerless’ proved plus
probable plus possible reserves totalled 18.7 million boe and the net present value discounted at
10% (before tax) totalled $445.6 million at December 31, 2007. Production and financial results
for Peerless have been included in the CBU’s results starting January 28, 2008.
¾ On October 2, 2008, Petrobank acquired Rocor Resources Inc. (“Rocor”) for $52.7 million, net of
working capital assumed. Rocor’s assets are focused on the Montney formation in northeast
British Columbia and included 14 sections of land with two producing vertical wells, and a
five mmcf per day gas plant. Production and financial results for Rocor have been included in the
CBU’s results starting October 2, 2008.
Financial and Operational Review
(Annual comparisons are 2008 compared to 2007 unless otherwise noted)
Average Daily Production
Oil and NGL (bbls)
Natural gas (mcf)
Total (boe)
Years ended December 31,
2007
2008
3,579
15,369
11,379
14,436
5,476
17,775
Change
329%
27%
225%
The significant increases in oil and NGL production are due to production increases from the CBU’s
Bakken light oil properties in southeast Saskatchewan, which accounted for approximately 84% of the
production in 2008. The increases were achieved through continued drilling activity and the acquisition of
Peerless. The CBU drilled 161 operated Bakken wells in 2008 surpassing our goal of 154 wells, and
including non-operated wells we drilled a total of 187.5 net Bakken wells in 2008. To achieve this
accomplishment, we had as many as 10 drilling rigs working in the area in 2008. Natural gas production
was higher in 2008 due to the acquisition of Peerless and completion of the CBU’s second and third
Bakken facilities allowing the CBU to capture associated Bakken natural gas production.
Average Benchmark and Realized Prices Net of
Transportation Costs
WTI (US$/bbl)
WTI ($/bbl)
AECO natural gas ($/mcf)
US$ per C$1
Oil and NGL
Realized price per bbl ($/bbl)
US$ discount as a % of WTI
Natural Gas
Realized price per mcf ($/mcf)
Years ended December 31,
2007
2008
72.41
99.75
76.81
104.30
6.43
8.15
0.93
0.94
Change
38%
36%
27%
1%
92.80
13%
75.64
3%
23%
333%
8.06
6.35
27%
The realized oil and NGL prices, net of transportation, received in 2008 increased by 23% as a result of
higher average WTI prices offset by a larger discount to WTI. The discount compared to WTI increased
in 2008 mainly from higher trucking costs associated with pipeline capacity constraints in southeast
4
Saskatchewan and larger benchmark crude differentials from WTI experienced by the industry in the
fourth quarter.
In 2008 approximately 15% of natural gas production was sold under the CBU’s long-term physical
natural gas sales contract at a price of $5.22 per mcf (2007 – $5.02 per mcf).
Revenue
Revenue
Transportation expenses
Revenue, net of transportation (“plant gate revenue”)
Gross revenue ($/boe)
Transportation expenses ($/boe)
Plant gate revenue ($/boe)
Years ended December 31,
2007
2008
129,997
585,800
4,834
21,212
125,163
564,588
65.04
90.04
2.42
3.26
62.62
86.78
Change
351%
339%
351%
38%
35%
39%
The significant 351% increase in 2008 revenue, net of transportation, was due to higher production and
realized prices.
Transportation costs increased due to higher production in southeast Saskatchewan and pipeline
constraints in the region. The increase in costs on a unit of production basis is mainly due to the pipeline
constraints, that began to alleviate in the fourth quarter of 2008, as well as reductions to fuel surcharges.
Royalties
Years ended December 31,
2007
2008
9,718
65,252
4.86
10.03
8%
12%
Royalties
$ per boe
Royalties as a % of plant gate revenue
Change
571%
106%
50%
Royalty expense increased as a result of increased production and commodity prices in 2008. Royalties as
a percentage of plant gate revenue increased in 2008 as a portion of the CBU’s Bakken wells no longer
receive their royalty holidays. The first 37,740 barrels of production from horizontal Bakken wells drilled
on Saskatchewan Crown land incur a royalty rate of 2.5%.
Gain (Loss) on Risk Management Contracts
Realized gain (loss)
Unrealized gain (loss)
Gain (loss) on risk management contracts
Years ended December 31,
2007
2008
(4,808)
(4,950)
37,854
(4,950)
33,046
Change
-
For the 2008 year, the realized loss for actual monthly settlements incurred during the year was $0.74 per
boe. Unrealized gains and losses represent the change in fair value of the contracts related to expected
future settlements.
At December 31, 2008 the CBU had recorded a $32.9 million asset related to the following crude oil price
risk management contract:
Term
Jan. 1, 2009 – Dec. 31, 2009
Volume (Bopd)
2,000
Price (US$/bbl)
90.00 floor / 121.00 ceiling
Benchmark
WTI
5
In August 2009, the CBU entered into the following crude oil price risk management contracts:
Term
Jan. 1, 2010 – Dec. 31, 2010
Jan. 1, 2010 – Dec. 31, 2010
Jan. 1, 2011 – Dec. 31, 2011
Volume (Bopd)
500
500
500
Production Expenses
Production expense
$ per boe
Price (C$/bbl)
75.00 floor / 93.65 ceiling
75.00 floor / 94.15 ceiling
80.00 floor / 95.60 ceiling
Years ended December 31,
2007
2008
16,360
56,983
8.19
8.76
Benchmark
WTI
WTI
WTI
Change
248%
7%
Production expenses increased in 2008 as a result of increased production. Production expenses per unit
of production increased slightly in 2008, mainly due to new Bakken production being handled through
higher cost single well oil batteries. We completed our second and third Bakken facilities in the second
half of 2008 which have decreased operating costs in southeast Saskatchewan. In addition, these facilities
have allowed the CBU to add liquids rich natural gas production and reserves associated with Bakken
light oil production.
General and Administrative Expenses
General and administrative expenses
$ per boe
Years ended December 31,
2007
2008
4,846
10,512
2.42
1.62
Change
117%
(33%)
Total general and administrative costs increased in 2008 primarily due to additional personnel as a result
of expanding operations. On a unit of production basis, these costs have decreased due to higher
production levels.
Stock-Based Compensation Expenses
Stock-based compensation expenses
Years ended December 31,
2007
2008
3,473
10,831
Change
212%
Stock-based compensation expenses relate to stock options and deferred common shares granted by
Petrobank. The calculation of this non-cash expense is based on the fair value of stock options and
deferred common shares granted, amortized over the vesting period of the option, or immediately upon
grant of the deferred common shares. These expenses for the CBU have been directly derived from
Petrobank's accounting records to represent the portion attributable to the CBU operations.
Interest Expense
Interest expense
Years ended December 31,
2007
2008
2,307
9,542
Change
314%
Interest expense includes interest on bank debt, fees on letters of credit and amortization of deferred
financing costs. The increase in 2008 is primarily a result of higher bank debt outstanding during the year.
6
Depletion, Depreciation and Accretion
(“DD&A”) Expense
DD&A expense
$ per boe
2008
187,372
28.80
2007
48,137
24.08
Change
289%
20%
Higher production caused DD&A expense to increase in 2008. The DD&A rates per unit of production
have increased in 2008 due to significant capital expenditure programs including expenditures on key
facilities in southeast Saskatchewan, future development costs associated with proved undeveloped
reserves and also due to the acquisition of Peerless.
Future Income Taxes
Future income taxes
Years ended December 31,
2007
2008
6,885
71,329
Change
936%
The CBU’s higher future tax expense in 2008 is largely consistent with increased income during the year,
and the fact that a reduction in tax rates was substantively enacted in December 2007 resulting in a future
income tax recovery during that period.
Net Income
Net income
Years ended December 31,
2007
2008
31,319
186,349
Change
495%
The significant increases in net income in 2008 was mainly due to substantially higher production and
realized prices and gains on risk management contracts partly offset by an increase in expenses, most
significantly as a result of increases in royalties, production expenses, interest, DD&A and future income
taxes.
Funds Flow From Operations
Funds flow from operations
Years ended December 31,
2007
2008
94,225
416,628
Change
342%
The increases in funds flow from operations and funds flow per share in 2008 were driven by strong
increases in production, partly offset by higher royalties, production expenses, and cash interest expense.
The following table shows the reconciliation of funds flow from operations to cash flow from operating
activities for the periods noted:
Funds flow from operations: Non-GAAP
Changes in non-cash working capital
Cash flow from operating activities: GAAP
Years ended December 31,
2007
2008
94,225
416,628
(6,044)
13,171
88,181
429,799
Change
342%
387%
7
Capital Expenditures
Capital expenditures
Years ended December 31,
2007
2008
303,687
545,833
Change
80%
2008 Capital Expenditures By Type
315,970
130,283
83,519
4,426
11,635
545,833
Drilling and completions
Land
Facilities
Seismic
Other (1)
Total capital expenditures
(1)
Includes capitalized salaries and office furniture.
Expenditures in 2008 were spread mostly amongst drilling, completions, and land acquisitions, primarily
at the CBU’s southeast Saskatchewan light oil properties. Drilling activity included 187.5 net Bakken
wells in southeast Saskatchewan for the year. Facility expenditures in 2008 include the construction of
two major facilities in southeast Saskatchewan along with related pipeline infrastructure to connect wells
previously run through single well batteries providing the CBU with long-term infrastructure, and
significant land acquisitions were made in 2008 adding to our undeveloped land base in southeast
Saskatchewan and in the Horn River Shale Basin of northeast British Columbia.
Financial and Operational Review 2007
(Annual comparisons are 2007 compared to 2006 unless otherwise noted)
Average Daily Production
Oil and NGL (bbls)
Natural gas (mcf)
Total (boe)
Years ended December 31,
2006
2007
918
3,579
12,940
11,379
3,075
5,476
Change
290%
(12%)
78%
The significant increase in oil and NGL production are due to production increases from the CBU’s
Bakken light oil properties in southeast Saskatchewan. Through 2007, the CBU acquired additional
Bakken lands which added to the drilling inventory and provided a platform for future growth. Natural
gas activity was limited in 2007; accordingly, natural gas production has declined throughout 2007
mainly due to natural declines.
Average Benchmark and Realized Prices Net of
Transportation Costs
WTI (US$/bbl)
WTI ($/bbl)
AECO natural gas ($/mcf)
US$ per C$1
Oil and NGL
Realized price per bbl ($/bbl)
US$ discount as a % of WTI
Natural Gas
Realized price per mcf ($/mcf)
Years ended December 31,
2006
2007
66.25
72.41
75.08
76.81
6.51
6.43
0.88
0.93
Change
9%
2%
(1%)
6%
75.64
3%
61.18
18%
24%
(83%)
6.35
6.21
2%
8
The average discount to WTI on oil and NGL prices decreased in 2007 as high quality Bakken light oil
production was added. The per barrel discount also decreased dramatically as the majority of oil and NGL
revenue was realized during the fourth quarter, coinciding with the period representing the highest WTI
prices of 2007.
In 2007 approximately 18% of natural gas production was sold under the CBU’s long-term physical
natural gas sales contract at a price of $5.02 per mcf (2006 – $3.72 per mcf).
Revenue
Revenue
Transportation expenses
Revenue, net of transportation (“plant gate revenue”)
Gross revenue ($/boe)
Transportation expenses ($/boe)
Plant gate revenue ($/boe)
Years ended December 31,
2006
2007
49,835
129,997
439
4,834
49,396
125,163
44.40
65.04
0.39
2.42
44.01
62.62
Change
161%
1,001%
153%
46%
521%
42%
The significant increase in 2007 revenue was a result of higher oil production and higher realized oil
prices, offset slightly by lower natural gas production.
Transportation expenses increased in 2007 due to higher production in southeast Saskatchewan.
Royalties
Royalties
$ per boe
Royalties as a % of plant gate revenue
Years ended December 31,
2006
2007
7,047
9,718
6.28
4.86
14%
8%
Change
38%
(23%)
(43%)
Royalty expense increased as a result of increased revenue in 2007. Royalties as a percentage of revenue
decreased in 2007 mainly due to royalty holidays on the CBU’s newly drilled Bakken wells. The first
37,740 barrels of production from horizontal Bakken wells drilled on Saskatchewan Crown land incur a
royalty rate of 2.5%.
Gain (Loss) on Risk Management Contracts
Unrealized gain (loss)
Gain (loss) on risk management contracts
Years ended December 31,
2006
2007
(4,950)
(4,950)
Change
-
The unrealized loss in 2007 represents the change in fair value of the contracts related to expected future
settlements on contracts relating to 2008 production.
The CBU had the following risk management contracts outstanding at December 31, 2007:
Term
Jan. 1, 2008 – Dec. 31, 2008
Jan. 1, 2008 – Dec. 31, 2008
Volume (Bopd)
500
500
Price (US$/bbl)
65.00 floor/80.00 ceiling
67.50 floor/81.50 ceiling
Benchmark
WTI
WTI
9
Production Expenses
Production expense
$ per boe
Years ended December 31,
2006
2007
7,736
16,360
6.89
8.19
Change
111%
19%
Production expenses increased in 2007 as a result of increased production in 2007. Production expenses
per unit of production increased by 19% in 2007, mainly due to increased costs at Red Willow and
Bakken production relying on the use of single well batteries and / or third party facilities for the majority
of the year. Early in the fourth quarter of 2007 the CBU completed a Bakken production facility in
southeast Saskatchewan which decreased the operating costs in the area. In addition, this facility allowed
the CBU to add natural gas and NGL production and reserves associated with the Bakken light oil
production.
General and Administrative Expenses
General and administrative expenses
$ per boe
Years ended December 31,
2006
2007
3,981
4,846
3.55
2.42
Change
22%
(32%)
The CBU’s general and administrative costs increased in 2007 mainly due to additional personnel as a
result of expanding operations and a general escalation of costs.
Stock-Based Compensation Expenses
Stock-based compensation expenses
Years ended December 31,
2006
2007
1,526
3,473
Change
128%
Stock-based compensation expenses relate to stock options and deferred common shares granted by
Petrobank. The calculation of this non-cash expense is determined based on the fair value of stock options
and deferred common shares granted amortized over their vesting period of the option, or immediately
upon grant of the deferred common shares.
Interest Expense
Interest expense
Years ended December 31,
2006
2007
3,562
2,307
Change
(35%)
Interest expense includes interest on bank debt, fees on letters of credit and amortization of deferred
financing costs. Interest expense decreased in 2007 as outstanding debt balances were lower than in 2006.
Depletion, Depreciation and Accretion
(“DD&A”) Expense
DD&A expense
$ per boe
2007
48,137
24.08
2006
16,200
14.43
Change
197%
67%
Depletion rates per boe increased due to significant 2006 and 2007 capital programs and $229.9 million
of future development costs associated with proved undeveloped reserves as at December 31, 2007.
10
Future Income Taxes
Future income taxes
Years ended December 31,
2006
2007
3,997
6,885
Change
72%
Future income taxes increased in 2007 primarily as a result of higher taxable income in the year. A
reduction in Canadian tax rates was substantively enacted in December 2007 resulting in a future income
tax recovery in the fourth quarter. Other than the reduction in tax rates, the CBU recorded future income
tax expense fairly consistent with the CBU’s change in taxable income.
Net Income
Net income
Years ended December 31,
2006
2007
5,770
31,319
Change
443%
Net income increased by 443% to $31.3 million in 2007 compared to $5.8 million in 2006. The
significant increase in net income in 2007 was due to substantially higher oil production and higher
realized oil prices, partially offset by lower natural gas production, a mark-to-market unrealized loss on
risk management contracts, higher production expenses, general and administrative expenses, stock-based
compensation costs, depletion, depreciation and accretion, and future income taxes.
Funds Flow From Operations
Funds flow from operations
Years ended December 31,
2006
2007
28,655
94,225
Change
229%
Funds flow from operations increased by 229% to $94.2 million in 2007 compared to $28.7 million in
2006. The increase in 2007 funds flow from operations was primarily due to higher oil production, higher
realized oil prices, and lower royalty rates, partially offset by lower natural gas production, higher
production expenses and general and administrative expenses.
The following table shows the reconciliation of funds flow from operations to cash flow from operating
activities for the periods noted:
Funds flow from operations: Non-GAAP
Changes in non-cash working capital
Cash flow from operating activities: GAAP
Years ended December 31,
2006
2007
28,655
94,225
4,211
(6,044)
32,866
88,181
Change
229%
168%
11
Capital Expenditures
Capital expenditures
Years ended December 31,
2006
2007
303,687
88,033
Change
245%
2007 Capital Expenditures By Type
Drilling and completions
Land and acquisitions
Facilities
Seismic
Workovers
Total capital expenditures
169,615
85,186
37,497
8,141
3,248
303,687
Expenditures in 2007 were spread mostly amongst drilling, completions, land and property acquisitions,
and acquiring and evaluating seismic data primarily at the CBU’s southeast Saskatchewan light oil
properties and exploration areas in northwest Alberta. Drilling activity included 66 operated (64.5 net)
and 26 non-operated (10.0 net) successful oil wells in southeast Saskatchewan.
12
SUMMARY OF QUARTERLY RESULTS
2007
2008
Q4
Q3
Q4
Q3
Q2
Q1
121,012
186,608
168,757
109,423
57,221
Q2
Q1
Financial ($000s except where noted)
Oil and natural gas revenue
Net income
Capital expenditures
32,499
21,173
19,104
47,011
80,847
32,323
26,168
12,774
9,981
4,979
3,585
200,186
165,447
69,711
110,489
79,045
79,005
114,609
31,028
57.71
115.11
117.64
91.87
80.83
76.56
67.53
63.43
8.90
13.36
11.83
6.44
5.70
5.09
5.35
7.31
Operations
Operating netbacks by product
Light/medium oil and NGL sales
price, net of transportation ($/bbl)
Royalties
Production expenses
Operating netback
8.68
9.56
9.55
10.25
8.94
10.13
10.64
9.07
40.13
92.19
96.26
75.18
66.19
61.34
51.54
47.05
Conventional heavy oil sales price
($/bbl)
-
-
-
-
-
-
-
Royalties
-
-
-
-
-
-
-
1.08
Production expenses
-
-
-
-
-
-
-
56.36
Operating netback
-
-
-
-
-
-
-
(17.22)
Natural gas sales price, net of
transportation ($/mcf)
6.86
7.94
9.83
7.73
6.05
5.25
6.77
6.95
Royalties
1.06
1.38
1.81
1.35
0.43
0.36
0.54
0.80
Production expenses
0.77
0.66
0.83
0.89
0.64
0.68
1.06
1.10
Operating netback
5.03
5.90
7.19
5.49
4.98
4.21
5.17
5.05
Oil equivalent sales price, net of
transportation ($/boe)
40.22
55.90
106.51
109.43
83.55
72.42
62.68
54.65
50.46
Royalties
8.62
12.72
11.70
6.74
5.11
4.18
4.35
5.78
Production expenses
8.24
8.84
8.88
9.35
7.99
8.26
8.60
8.08
39.04
84.95
88.85
67.46
59.32
50.24
41.70
36.60
19,841
16,024
14,205
11,351
6,691
3,745
2,132
1,651
Operating netback
Average daily production
Light/medium oil and NGL (bbls)
Conventional heavy oil (bbls)
-
-
-
-
-
-
-
41
Natural gas (mcf)
14,598
14,047
13,871
15,229
9,379
10,006
11,771
14,429
Total (boe)
22,274
18,365
16,517
13,889
8,254
5,413
4,094
4,097
13
Significant factors influencing quarterly results were:
¾ Record production and high benchmark oil prices in the first three quarters of 2008 resulted in
dramatic increases in revenue and funds flow from operations. In the fourth quarter of 2008
benchmark crude oil prices declined significantly, which negatively affected revenue, funds flow
from operations and net income, despite higher production levels.
¾ Light oil production in the fourth quarter of 2008 increased by 24% over the third quarter of 2008
and almost tripled since the fourth quarter of 2007, reflecting the acquisition of Peerless in
January 2008 and the CBU’s industry leading drilling activity on the Bakken light oil resource
play in southeast Saskatchewan. Higher netbacks in the first three quarters of 2008 reflect higher
oil prices and the profitability of our Bakken light oil production.
Commitments
The following is a summary of the estimated costs required to fulfill the CBU's remaining contractual
commitments as at December 31, 2008:
Type of Obligation
Canadian bank debt
Office operating leases
Flow-through expenditures
Total
< 1 Year
3,100
15,283
18,383
1-3 Years
315,658
7,300
322,958
3-5 Years
10,000
10,000
Thereafter
26,600
26,600
Total
315,658
47,000
15,283
377,941
Liquidity and Capital Resources
At December 31, 2008, the CBU had $315.7 million of bank debt and accounts payable and accrued
liabilities in excess of current assets of $90.8 million, resulting in net debt of $406.5 million.
In July 2009, Petrobank completed a US$400 million convertible bond issuance which provides the
flexibility to complete the carve-out of the CBU and the proposed transaction with TriStar. Petrobank will
capitalize PetroBakken with the CBU assets and $400 million of cash on or before October 1, 2009. In
return, Petrobank will receive 109.8 million common shares of PetroBakken which will represent
approximately 64% of PetroBakken’s anticipated shares outstanding after the completion of the acquisition
of TriStar.
Pursuant to a plan of arrangement agreement dated August 4, 2009, PetroBakken intends to acquire all of
the issued and outstanding common shares of TriStar for $600 million in cash and approximately
61,762,500 common shares of PetroBakken. The cash component will be derived from Petrobank’s
$400 million contribution and $200 million from a new $1.05 billion PetroBakken credit facility which has
been committed to from a syndicate of banks. The completion of the transaction is expected to occur on or
about October 1, 2009 and is subject to TriStar shareholder approval as well as other customary regulatory,
stock exchange, court and other approvals.
The economic slowdown in late 2008 and early 2009 and volatile financial and commodity markets have
impacted the CBU's operations to date in 2009, resulting in fewer wells drilled in 2009 compared to 2008.
The third quarter has seen an increase in oil prices and the plan is for PetroBakken to ramp up drilling
activity to be utilizing approximately 14 to 16 rigs by the end of the 2009 and maintain that level for the
foreseeable future, assuming oil prices remain relatively consistent. The CBU and what will become
PetroBakken intends to balance capital spending with existing cash balances, expected future cash flows
and prudent use of its credit facility to execute its capital plans.
Petrobank's current secured Canadian credit facility borrowing limit totals $400 million, of which
$380 million is attributable to the oil and gas reserves of the CBU. The revolving facility has terms
ending on July 2010, extendable by the lenders for an additional year. If the lenders were to not extend
14
the term, the drawn amount would be due in July 2011. The syndicate of lenders of the Canadian facility
assesses the borrowing base semi-annually. Petrobank is not subject to restrictive financial covenants
under its credit facility.
Upon completion of the acquisition of TriStar, it is assumed that the CBU’s credit facility will be
effectively converted into the new $1.05 billion PetroBakken facility which has been committed to by a
syndicate of banks. The PetroBakken facility will be comprised of a $900 million oil and gas reservebased revolver, and a six-month $150 million short-term non-revolving credit facility which will be
extinguished upon the sale of the announced disposition of PetroBakken’s Alberta assets. The revolving
facility is expected to have terms ending in September 2010, extendable by the lenders for an additional
year. If the lenders were to not extend the term, the drawn amount would be due in September 2011. The
syndicate of lenders will assess the borrowing base semi-annually. PetroBakken will not be subject to
restrictive financial covenants under this credit facility.
Upon successful completion of the acquisition of TriStar, PetroBakken expects to have approximately
$950 million drawn on the credit facility. All proceeds from the Alberta asset disposition will decrease the
amount drawn, and after which the $150 million short-term credit facility will terminate. After the sale of
the Alberta assets, the debt to annualized earnings before interest, taxes, depletion, depreciation and
accretion and other non-cash items is expected to be below 1 times.
In addition to the credit facility noted above, other possible sources of funds available to PetroBakken
include the following:
¾ Funds flow from operations.
¾ May monetize risk management contracts.
¾ May issue common shares once the new publicly traded company PetroBakken is formed.
¾ Issuance of subordinated or convertible debt.
¾ May sell additional producing or non-producing assets to raise funds in the short term.
Incremental cash resources generated as a result would be reduced by any resulting decreases in
future cash flows and any required debt payments.
¾ An alternative financing vehicle is a forward sale of a portion of future production.
¾ We expect to satisfy ongoing working capital requirements with funds flow from operations, cash
and available credit.
Capital Plan
The capital plan is focused on the development of our Bakken light oil properties in southeast
Saskatchewan, exploration and development of our northeast British Columbia and northwest Alberta
properties, and leveraging our significant undeveloped land base into new resource opportunities.
Risks and Uncertainties
The CBU is exposed to a variety of risks including, but not limited to: competitive, operational, political,
environmental, and financial risks.
The oil and gas industry is intensely competitive. Competition is particularly intense in the acquisition of
prospective oil and gas properties and oil and gas reserves. The competition for land and resources is
especially intense. Competitors include companies larger than the CBU, with greater access to financial
resources. The CBU’s future success is driven, in large part, by its ability to find and exploit new oil and
natural gas reserves at reasonable costs and reinvestment ratios. The process of evaluating prospects and
estimating oil and natural gas reserves is complex and subject to significant uncertainty. Actual operating
15
results, including production performance, will vary from those estimated, possibly materially. The CBU
manages these risks by maintaining a focused asset base with high working interests and by hiring
qualified professionals, including independent reserve engineers, with appropriate industry experience.
The CBU also competes with other oil and gas companies in attempting to secure drilling rigs and other
equipment necessary for drilling and completion of wells. Such equipment may be in short supply from time
to time. Similarly, equipment and other materials necessary to construct production and transmission
facilities may be in short supply from time to time.
The CBU is exposed to a number of operational risks inherent in the industry including accidents, well
blowouts, uncontrolled flows, labour strikes and environmental risks. Operational risks are managed
using prudent field operating procedures. The CBU has a detailed emergency response plan to deal with
potential incidents and maintains a comprehensive insurance program to reduce the risk of significant
economic loss; however, not all risks can be eliminated. Losses resulting from the occurrence of these
risks could have a material adverse impact on the CBU’s operations.
The CBU is subject to extensive governmental and environmental approvals and regulations in its operating
jurisdictions. Delays in obtaining regulatory approvals could result in project delays and the inability to meet
contractual obligations. Changes to these regulations could increase the costs of conducting business in
these jurisdictions. Environmental risks inherent in the oil and gas industry are subject to increasingly
stringent legislation and regulation. The CBU operates in accordance with all relevant environmental
legislation and strives to minimize the environmental impact of its operations by providing for safety and
environmental issues in all of its business plans.
The CBU’s operations are subject to political and economic uncertainties. Specifically, governments may
change royalties and taxes which could have a material adverse impact on the economics of the CBU’s oil
and gas activities.
The CBU is exposed to normal financial risks inherent within the oil and gas industry, including
commodity price risk, exchange rate risk, interest rate risk and credit risk. Management believes it is
neither appropriate nor possible to eliminate 100% of the CBU’s exposure to these risks. As described in
Note 11 to the 2008 CBU financial statements, the CBU monitors market conditions and may periodically
utilize derivative instruments to mitigate these risks.
Commodity prices are the CBU’s most significant financial risk. Crude oil prices are influenced by global
supply and demand, OPEC policy and worldwide political events. Natural gas prices in Canada are
influenced primarily by North American supply and demand and to a lesser extent by local market
conditions. Weather events and conditions also play a major role in the supply and demand of both
commodities. Fluctuations in commodity prices not only affect the CBU’s cash flows, but may also result
in changes to the borrowing capacity under the CBU's credit facility as assessed by the lenders.
Management believes it is neither appropriate nor possible to eliminate 100% of the exposure to
fluctuations in commodity prices. The CBU monitors market conditions and may selectively utilize
derivative instruments to reduce exposure to commodity price movements.
To the extent revenues and expenditures denominated in or strongly linked to the U.S. dollar are not
equivalent; the CBU is exposed to exchange rate risk. Revenues in Canada are largely determined by U.S.
dollar reference prices. To the extent revenues and expenditures denominated in or strongly linked to the
U.S. dollar are not equivalent; the CBU is exposed to exchange rate risk. The CBU is not currently using
exchange rate derivatives to manage exchange rate risks.
The CBU is exposed to fluctuations in short-term interest rates on amounts drawn under its floating-rate
bank facilities. The CBU monitors market conditions and may selectively utilize derivative instruments to
reduce exposure to interest rate movements.
16
Credit markets throughout the world have tightened recently which could limit the CBU’s ability to
access incremental debt. This risk is mitigated somewhat by the CBU’s strong funds flows from
operations and a CBU credit facility with approximately $45 million of available capacity as at
December 31, 2008. In the event additional capital is required, it may not be available to the CBU or it
may be available on unfavourable terms.
Sensitivities
The CBU's earnings and cash flow are sensitive to changes in crude oil and natural gas prices, exchange
rates and interest rates.
The following factors demonstrate the expected impact on annualized before tax cash flow:
Change of:
Crude oil
Natural gas
Currency
Interest rate
US$1.00/bbl WTI reference price (assuming 17,500 bopd)
500 bopd of production @ US$70/bbl WTI
$1.00/mcf AECO reference price (assuming 15 mmcf per day)
1.0 mmcf per day of production @ $3.00/mcf AECO
US$0.01 in exchange rate
1% change in interest rate
(millions)
$5.4
$10.8
$4.1
$0.7
$4.5
$2.5
Critical Accounting Policies and Estimates
The CBU's financial statements are prepared in accordance with Canadian GAAP, which require
management to make judgements, estimates and assumptions, which may have a significant impact on the
financial statements. A summary of the CBU's significant accounting policies can be found in Note 2 to the
CBU’s 2008 financial statements. The following is a discussion of those accounting policies and estimates
that are considered critical in the determination of the CBU's financial results.
Capital Assets — Full Cost Accounting
The CBU follows the full cost method of accounting as described in Note 2 to the financial statements.
Alternatively, the CBU could follow the successful efforts method of accounting whereby all costs related
to non-productive wells are expensed in the period in which they are incurred.
Under the full cost method of accounting, capitalized costs are subject to a country-by-country cost centre
impairment test. Under the successful efforts method of accounting, the costs aggregated on a propertyby-property basis and the carrying value of each property is subject to an impairment test. These policies
may result in a different carrying value for capital assets and a different net income. The CBU has elected
to follow the full cost method and it is the method most commonly followed in Canada.
Under full cost accounting, a limit is placed on the carrying value of the net capitalized costs in each cost
centre in order to test impairment. Impairment exists when the carrying value of developed properties of a
cost centre exceeds the estimated undiscounted future net cash flows associated with the cost centre’s
proved reserves. Costs relating to undeveloped properties are subject to individual impairment
assessments until it can be determined whether or not proved reserves exist. If impairment is determined
to exist, the costs carried on the balance sheet in excess of the discounted future net cash flows associated
with the cost centre’s proved plus probable reserves are charged to net income.
17
Goodwill
Goodwill is tested for impairment whenever an event or circumstance occurs that may reduce the fair
value of the CBU below its carrying amount, and at least annually. The test is based on estimated future
net cash flows of the CBU. If goodwill is impaired the carrying value is reduced to the estimated fair
value and an impairment loss is recorded in net income.
Reserve Estimates
Reserve estimates can have a significant impact on net income and the carrying value of capital assets.
The process of estimating reserves requires significant judgement based on available geological,
geophysical, engineering, and economic data, projected rates of production, estimated commodity price
forecasts and the timing of future expenditures, all of which are subject to interpretation and uncertainty.
Reserve estimates impact net income through depletion expense and the application of impairment tests.
Revisions or changes in reserve estimates can have either a positive or a negative impact on net income
and can impact the carrying amount of capital assets.
The CBU’s lenders also use reserve estimates to assess the borrowing base under the secured bank credit
facility. Changes to the reserve estimates can result in increases or decreases to the borrowing base, which
may impact the CBU’s financial position.
Asset Retirement Obligations
The CBU recognizes the estimated fair value of future retirement obligations associated with capital
assets as a liability. The CBU estimates the liability based on the estimated costs to abandon and reclaim
its net ownership in tangible long-lived assets such as wells and facilities and the estimated timing of the
costs to be incurred in future periods. Actual payments to settle the obligations may differ from estimated
amounts.
Future Income Taxes
The CBU recognizes a future income tax liability based on estimates of temporary differences between
the book and tax value of its assets. An estimate is also used for both the timing and tax rate upon reversal
of the temporary differences. Actual differences and timing of the reversals may differ from estimates,
impacting the future income tax balance and net income.
Changes in Accounting Policies
Capital Disclosures
Effective January 1, 2008, management prospectively adopted the Canadian Institute of Chartered
Accountants (“CICA”) Section 1535, Capital Disclosures, issued by the Accounting Standards Board
(“AcSB”). The section establishes standards for disclosing information about capital and how it is
managed. It requires disclosures of management’s objectives, policies and processes for managing capital,
the quantitative data about what management regards as capital, whether management has complied with
any capital requirements and if it has not complied, the consequences of such non-compliance. The only
effect of adopting this standard is disclosures on capital and how it is managed and is included in Note 10
of the financial statements.
18
Financial Instruments Disclosures and Presentation
Effective January 1, 2008, management prospectively adopted Section 3862, Financial Instruments
Disclosures and Section 3863, Financial Instruments Presentations. These new accounting standards
replaced Section 3861, Financial Instruments – Disclosure and Presentation. Section 3862 requires
additional information regarding the significance of financial instruments for the financial position and
performance; and the nature, extent and management of risks arising from financial instruments to which
the CBU is exposed. The additional disclosures required under these standards are included in Note 11 of
the financial statements.
Recent Accounting Pronouncements
In February 2008, the AcSB confirmed the convergence of Canadian GAAP with International Financial
Reporting Standards (“IFRS”) will be effective January 1, 2011. The Company has performed an initial
scoping process and will manage the transition in order to ensure successful implementation within the
required timeframe. The impact on the CBU’s financial statements is not reasonably determinable at this
time. Key information will be disclosed as it becomes available during the transition period.
In February 2008, the AcSB issued Section 3064, Goodwill and Intangible Assets, replacing
Section 3062, Goodwill and Other Intangible Assets and Section 3450, Research and Development
Costs. Various changes have been made to other sections of the CICA Handbook for consistency
purposes. Section 3064 establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented
enterprises. Standards concerning goodwill are unchanged from the standards included in the previous
Section 3062. Effective January 1, 2009, the CBU prospectively adopted this standard and the adoption
did not have a material impact on the results of operations or financial position.
In January 2009, the AcSB issued Section 1582, Business Combinations, which replaces former guidance
on business combinations. The section establishes principles and requirements of the acquisition method
for business combinations and related disclosures, and applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period beginning on or
after January 1, 2011, with earlier application permitted. Effective January 1, 2009, the CBU
prospectively adopted this standard and the adoption did not have a material impact on the results of
operations or financial position.
In January 2009, the AcSB issued Section 1601, Consolidated Financial Statements, and Section 1602,
Non-controlling Interests, which together replace Section 1600, Consolidated Financial Statements.
Section 1601 establishes standards for the preparation of consolidated financial statements and Section
1602 provides guidance on accounting for a non-controlling interest in a subsidiary subsequent to a
business combination. These standards are effective on or after the beginning of the first annual reporting
period beginning on or after January 1, 2011, with earlier application permitted. Effective
January 1, 2009, the CBU prospectively adopted these standards and the adoption did not have a material
impact on the results of operations or financial position.
19
Regulatory Policies
Certification of Disclosures in Annual Filings
In accordance with Multilateral Instrument 52-109 of the Canadian Securities Administrators, Petrobank
annually issues a “Certification of Annual Filings” (“Certification”). The Certification requires certifying
officers to state that they are responsible for establishing and maintaining disclosure controls and
procedures (“DC&P”) and internal control over financial reporting (“ICFR”).
The Certification requires certifying officers to state that they designed DC&P, or caused it to be designed
under their supervision, to provide reasonable assurance that: (i) material information relating to
Petrobank is made known to the certifying officers by others; (ii) information required to be disclosed by
Petrobank in reports filed with, or submitted to, securities regulatory authorities is recorded, processed,
summarized and reported within the time periods specified under Canadian securities legislation. In
addition, the Certification requires certifying officers to state that they have designed ICFR, or caused it
to be designed under their supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes.
The certifying officers have evaluated, or caused to be evaluated under their supervision, the effectiveness
of Petrobank's DC&P and ICFR and, based on such evaluation, concluded that Petrobank maintained
effective DC&P and ICFR as of December 31, 2008.
During the year ended December 31, 2008, there has been no change in Petrobank's or the CBU's ICFR
that has materially affected, or is reasonably likely to materially affect, Petrobank's or the CBU's ICFR.
Petrobank, including the CBU, has continually had in place systems relating to DC&P and ICFR and will
continue to monitor such procedures as our business evolves.
20
PETROBANK ENERGY AND RESOURCES LTD.’S CANADIAN BUSINESS UNIT
FINANCIAL & OPERATING HIGHLIGHTS
Three months ended
June 30,
2008
2009
%
change
168,757
124,196
32,323
69,711
988,796
220,727
(39)
(39)
(96)
(44)
31
65
Operations
Operating netback ($/boe except where noted) (1) (2)
Oil and NGL revenue ($/bbl) (3)
62.22
(3)
Natural gas revenue ($/mcf)
3.91
Oil, NGL and natural gas revenue (3)
56.64
Royalties
7.40
Production expenses
6.52
(4)
Operating netback
42.72
117.64
9.83
109.43
11.70
8.88
88.85
Average daily production (2)
Oil and NGL (bbls)
Natural gas (mcf)
Total (boe)
14,205
13,871
16,517
Financial ($000s, except where noted)
Oil and natural gas revenue
Funds flow from operations (1)
Net income
Capital expenditures
Total assets
Net debt (1)
(1)
(2)
(3)
(4)
102,452
75,891
1,168
38,901
1,297,287
364,140
16,761
16,906
19,579
Six months ended
June 30,
2008
2009
%
change
197,938
149,151
148
108,925
1,297,287
364,140
278,180
203,321
58,491
180,200
988,796
220,727
(29)
(27)
(100)
(40)
31
65
(47)
(60)
(48)
(37)
(27)
(52)
54.88
4.56
51.45
6.30
6.67
38.48
106.19
8.73
97.61
9.43
9.10
79.08
(48)
(48)
(47)
(33)
(27)
(51)
18
22
19
18,233
15,550
20,825
12,778
14,550
15,203
43
7
37
Non-GAAP measure. See “Non-GAAP Measures” section within Management’s Discussion and Analysis (“MD&A”).
Six mcf of natural gas is equivalent to one barrel of oil equivalent (“boe”).
Net of transportation expenses.
Excludes hedging activities. In the second quarter of 2009 the realized gain totalled $3.46/boe (2008 – realized loss of
$2.98/boe. In the first six months of 2009 the realized gain totalled $4.44/boe (2008 – realized loss of $2.19/boe).
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following Management’s Discussion and Analysis (“MD&A”) is dated August 31, 2009 and should
be read in conjunction with the unaudited financial statements and accompanying notes of Petrobank
Energy and Resources Ltd.'s (“Petrobank”) Canadian Business Unit (“CBU”, “we” or “our”) as at and for
the three and six months ended June 30, 2009, MD&A for the year ended December 31, 2008, and the
audited financial statements as at and for the year ended December 31, 2008. All amounts are in Canadian
dollars, unless otherwise stated and all tabular amounts are in thousands of Canadian dollars, except share
amounts or as otherwise noted. Natural gas volumes have been converted to barrels of oil equivalent
(“boe”). Six thousand cubic feet (“Mcf”) of natural gas is equal to one barrel based on an energy
equivalency conversion method primarily attributable at the burner tip and does not represent a value
equivalency at the wellhead. Boes may be misleading, especially if used in isolation.
1
Basis of Presentation
Petrobank has incorporated a 100% wholly-owned subsidiary PetroBakken Energy Ltd. (“PetroBakken”),
which will be capitalized with the CBU assets and obligations along with $400 million of cash. In return,
Petrobank will receive 109.8 million common shares of PetroBakken. PetroBakken will then acquire all
of the issued and outstanding common shares of TriStar Oil and Gas Ltd. (“TriStar”) through a plan of
arrangement, which would give TriStar shareholders $600 million in cash, less amounts paid upon the
exercise of options by TriStar option holders which is expected to be approximately $20 million, and
approximately 61.8 million common shares of PetroBakken. After the transaction, Petrobank will own
approximately 64% of PetroBakken. The proposed transaction with TriStar and listing of PetroBakken
would occur on or about October 1, 2009.
Subsequent to the carve-out of Petrobank’s CBU and the completion of the transaction with TriStar, the
management of PetroBakken will determine all operating, investing and financing activities applicable to
the CBU. Accordingly, the amounts recorded in the financial statements may not be indicative of the
amounts that will result in future periods.
Petrobank’s CBU has distinct operating staff and capital budgets. Petrobank also has shared services such
as accounting, human resources, information technology, land administration and corporate compliance.
Historically, Petrobank has maintained accounting records necessary to support its consolidated financial
statements but not specifically for the CBU or its other business units. While the amounts applicable to the
CBU for certain revenues, expenses, assets and liabilities can be derived directly from the accounting
records of Petrobank, it has been necessary to allocate certain items in the manner described below.
Presentation of the Balance Sheets
For purposes of the CBU balance sheets all assets and liabilities, except for future income taxes, have been
derived directly from the accounting records of Petrobank. Future income taxes are prepared on a legal
entity basis and as such it is not possible to specifically identify only those activities that relate to the
CBU, as some corporate Petrobank activities are also included within the legal entity tax filings.
Management has separated the future income tax assets and liabilities directly attributable to the CBU on a
reasonable basis based on best estimates for the purposes of the financial statements.
The Petrobank convertible debentures are considered a corporate activity and as such, have been excluded
from the balance sheets and any related interest excluded from the statement of operations. Proceeds from
the convertible debentures ultimately invested in the CBU are reflected as net investment by Petrobank on
the balance sheets.
Acquisitions which were funded through the issuance of Petrobank common shares are also reflected
within the net investment by Petrobank on the balance sheets.
Presentation of the Statement of Operations
The oil and natural gas revenues, royalties, loss on risk management contracts, production expenses,
transportation expenses, and depletion, depreciation and accretion are specifically allocated to the CBU
operations in Petrobank’s accounting records, and as such, the amounts included in the financial
statements have been derived directly from Petrobank’s accounting records.
Interest income and interest expense are allocated based on the fact that the CBU bank accounts can be
specifically identified and allocated to these assets, and the assumption that the Canadian credit facility is
primarily secured by the CBU assets and as such, the amount of interest income and expense related to
these bank accounts and credit facility have been derived directly from Petrobank’s accounting records.
General and administrative and stock-based compensation expenses have been derived directly from
Petrobank’s accounting records for the costs attributable to the CBU operations.
2
Future income taxes are prepared on a legal entity basis and as such it is not possible to specifically
identify only those activities that relate to the CBU, as some corporate Petrobank activities are also
included within the legal entity tax filings. Management has separated the future income tax assets and
liabilities attributable to the CBU on a reasonable basis based on best estimates for the purposes of the
financial statements.
Presentation of the Statements of Cash Flow
As discussed above, the cash balances of the CBU can be specifically identified and as such we have
prepared the statements of cash flow to represent the annual change.
Forward-Looking Statements
In addition to historical information, the MD&A contains forward-looking statements that are generally
identifiable as any statements that express, or involve discussions as to, expectations, beliefs, plans,
objectives, assumptions or future events of performance (often, but not always, through the use of words
or phrases such as “will likely result,” “expected,” “is anticipated,” “believes,” “estimated,” “intends,”
“plans,” “projection” and “outlook”). These statements are not historical facts and may be forwardlooking and may involve estimates, assumptions and uncertainties which could cause actual results or
outcomes to differ materially from those expressed in such forward-looking statements. 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. Such factors include, but are not limited to: general economic, market and
business conditions; fluctuations in oil and gas prices; the results of exploration and development drilling
and related activities; costs and availability of services; fluctuation in foreign currency exchange rates; the
uncertainty of reserve estimates; changes in environmental and other regulations; risks associated with oil
and gas operations; and other factors, many of which are beyond the control of the CBU. Accordingly,
there is no representation by the CBU that actual results achieved during the forecast period will be the
same in whole or in part as those forecasts. Except to the extent required by law, the CBU assumes no
obligation to publicly update or revise any forward-looking statements made in this MD&A or otherwise,
whether as a result of new information, future events or otherwise. All subsequent forward-looking
statements, whether written or oral, attributable to the CBU or persons acting on the CBU’s behalf, are
qualified in their entirety by these cautionary statements.
Non-GAAP Measures
This report contains financial terms that are not considered measures under Canadian generally accepted
accounting principles (“GAAP”), such as funds flow from operations, net debt and operating netback.
These measures are commonly utilized in the oil and gas industry and are considered informative for
management and stakeholders. Specifically, funds flow from operations reflects cash generated from
operating activities before changes in non-cash working capital. Management considers funds flow from
operations important as it helps evaluate performance and demonstrate the CBU’s ability to generate
sufficient cash to fund future growth opportunities and repay debt. Net debt includes principal bank debt
outstanding plus accounts payable and accrued liabilities less current assets (excluding future income tax
asset) and is used to evaluate the CBU’s financial leverage. Profitability relative to commodity prices per
unit of production is demonstrated by an operating netback. Funds flow from operations, net debt and
operating netbacks may not be comparable to those reported by other companies nor should they be
viewed as an alternative to cash flow from operations or other measures of financial performance
calculated in accordance with GAAP.
3
FINANCIAL AND OPERATING REVIEW
(Comparisons are second quarter of 2009 compared to the second quarter of 2008 and the first six months
of 2009 compared to the first six months of 2008 unless otherwise noted)
Average Daily Production
Oil and NGL (bbls)
Natural gas (mcf)
Total (boe)
Three months ended June 30,
2008 Change
2009
14,205
18%
16,761
13,871
22%
16,906
16,517
19%
19,579
Six months ended June 30,
2008 Change
2009
12,778
43%
18,233
14,550
7%
15,550
15,203
37%
20,825
The significant increases in oil and NGL production are due to production increases from the CBU’s
Bakken light oil properties in southeast Saskatchewan, which accounted for approximately 84% of the
production in the second quarter. The CBU drilled 187.5 net Bakken wells in 2008 and drilled an
additional 7.3 wells in the second quarter bringing the 2009 year to date total to 22.4 wells. Until the end
of June we primarily had only two drilling rigs working in the area but since the end of June, activity
levels have started to ramp back up and we are now utilizing five rigs with plans to increase to eight in the
near future.
Average Benchmark and Realized Prices
WTI (US$/bbl)
WTI ($/bbl)
AECO natural gas ($/mcf)
US$ per C$1
Oil and NGL
Realized price per bbl ($/bbl)
US$ discount as a % of WTI
Natural gas
Realized price per mcf ($/mcf)
Three months ended June 30,
2008 Change
2009
123.80
(52%)
59.79
125.03
(45%)
68.32
10.20
(66%)
3.47
0.99
(13%)
0.86
Six months ended June 30,
2008 Change
2009
111.12
(53%)
51.68
111.91
(46%)
60.27
9.09
(54%)
4.21
0.99
(16%)
0.83
63.21
8%
120.95
6%
(48%)
33%
56.00
9%
108.03
5%
(48%)
80%
3.93
9.83
(60%)
4.59
8.73
(47%)
The realized oil and NGL prices received in the second quarter and first six months decreased as a result
of lower average WTI prices and wider differentials as a percentage of WTI. A portion of the differential
is fixed which causes the percentage to increase as WTI decreases. In the second quarter and first six
months, Canadian dollar denominated realized prices benefited from a respective 13% and 16%
devaluation of the Canadian dollar relative to the U.S. dollar.
In the second quarter and first six months approximately 12% and 13% respectively, of natural gas
production was sold under the CBU’s long-term physical natural gas sales contract at a price of $5.43 per
mcf (2008 – $5.22 per mcf).
4
Revenue
The change in revenue in the second quarter of 2009 compared to the second quarter of 2008 is primarily
due to sales volumes that were 19% higher, offset by lower oil prices, as summarized below:
Total
168,757
16,023
(82,328)
102,452
(66,305)
(39%)
Reconciliation of Changes in Revenue
Three months ended June 30, 2008
Sales volumes
Price variance
Three months ended June 30, 2009
$ change in revenue
% change in revenue
The change in revenue in the first six months of 2009 compared to the first six months of 2008 is
primarily due to sales volumes that were 37% higher, offset by lower oil prices, as summarized below:
Total
278,180
50,792
(131,034)
197,938
(80,242)
(29%)
Reconciliation of Changes in Revenue
Six months ended June 30, 2008
Sales volumes
Price variance
Six months ended June 30, 2009
$ change in revenue
% change in revenue
Revenue
Revenue
Transportation expenses
Total revenue, net of transportation costs
Gross revenue ($/boe)
Transportation costs ($/boe)
Realized price, net of
transportation costs ($/boe)
Three months ended June 30,
2008 Change
2009
168,757
(39%)
102,452
4,283
(64%)
1,541
164,474
(39%)
100,911
112.28
(49%)
57.50
2.85
(70%)
0.86
109.43
56.64
(48%)
Six months ended June 30,
2008 Change
2009
278,180
(29%)
197,938
8,100
(51%)
3,992
270,080
(28%)
193,946
100.54
(48%)
52.51
2.93
(64%)
1.06
51.45
97.61
(47%)
Revenue, net of transportation decreased by 39% from the second quarter of 2008 and by 28% from the
first six months of 2008 as higher production was offset by significantly lower realized prices.
Transportation costs decreased in both dollar terms and on a per boe basis in both the three and six month
periods as an increasing number of our wells are tied into our southeast Saskatchewan facilities and we
realized a significant reduction in trucking tariffs.
Royalties
Royalties
$ per boe
Royalties as a % of realized price, net of
transportation costs
Three months ended June 30,
2008 Change
2009
17,581
(25%)
13,195
11.70
(37%)
7.40
11%
13%
18%
Six months ended June 30,
2008 Change
2009
26,104
(9%)
23,766
9.43
(33%)
6.30
12%
10%
20%
Royalties include the Saskatchewan Resource Surcharge charged as a percentage of sales from our
Saskatchewan Crown lands. As a percentage of realized prices, net of transportation costs, royalties
increased in the second quarter and first six months as a portion of the CBU’s Bakken wells no longer
receive their royalty holidays. The first 37,740 barrels of production from horizontal Bakken wells drilled
on Crown land incur a royalty rate of 2.5% plus Saskatchewan Resource Surcharge of 1.7%.
5
Loss on Risk Management Contracts
Realized gain (loss)
Unrealized loss
Loss on risk management contracts
Three months ended June 30,
2008 Change
2009
(4,476)
6,172
(45%)
(16,392) (29,664)
(70%)
(10,220) (34,140)
Six months ended June 30,
2008 Change
2009
(6,058)
16,727
(18%)
(24,720) (30,280)
(78%)
(7,993) (36,338)
The realized gain for actual monthly settlements incurred during the second quarter and first six months
were $3.46 and $4.44 per boe, respectively. Unrealized gains and losses represent the change in fair value
of the contracts related to expected future settlements.
At June 30, 2009, the CBU had recorded an $8.2 million asset related to the following crude oil price risk
management contract:
Term
Jan. 1, 2009 – Dec. 31, 2009
Volume (Bopd)
2,000
Price (US$/bbl)
90.00 floor / 121.00 ceiling
Benchmark
WTI
In August 2009, the CBU entered into the following crude oil price risk management contracts:
Term
Jan. 1, 2010 – Dec. 31, 2010
Jan. 1, 2010 – Dec. 31, 2010
Jan. 1, 2011 – Dec. 31, 2011
Volume (Bopd)
500
500
500
Production Expenses
Production expenses
$ per boe
Price (C$/bbl)
75.00 floor / 93.65 ceiling
75.00 floor / 94.15 ceiling
80.00 floor / 95.60 ceiling
Three months ended June 30,
2008 Change
2009
13,343
(13%)
11,610
8.88
(27%)
6.52
Benchmark
WTI
WTI
WTI
Six months ended June 30,
2008 Change
2009
25,161
25,146
9.10
(27%)
6.67
Production expenses increased in the second quarter and first six months of 2009 as a result of increased
production. Production expenses per unit of production decreased by 27% in the second quarter and first
six months of 2009, mainly due to Bakken production being handled through two new facilities that were
completed in the second half of 2008. These facilities have also allowed Petrobank to add liquids rich
natural gas production and reserves associated with Bakken light oil production. In addition, we
completed salt water disposal facilities at the end of 2008 which further reduced our expenses on a per
boe basis.
General and Administrative Expenses
General and administrative expenses
$ per boe
Three months ended June 30,
2008 Change
2009
2,642
32%
3,479
1.76
11%
1.95
Six months ended June 30,
2008 Change
2009
4,949
31%
6,479
1.79
(4%)
1.72
General and administrative costs increased in the second quarter and first six months of 2009, primarily
due to additional personnel as a result of expanding operations. On a unit of production basis, costs have
remained relatively consistent.
6
Stock-Based Compensation Expenses
Stock-based compensation expenses
Three months ended June 30,
2008 Change
2009
3,058
(3%)
2,971
Six months ended June 30,
2008 Change
2009
5,002
79%
8,935
Stock-based compensation expenses relate to stock options and deferred common shares granted by
Petrobank. The calculation of this non-cash expense is based on the fair value of stock options and
deferred common shares granted, amortized over the vesting period of the option, or immediately upon
grant of the deferred common shares. These expenses for the CBU have been directly derived from
Petrobank's accounting records to represent the portion attributable to the CBU operations.
Interest Expense
Interest expense
Three months ended June 30,
2008 Change
2009
2,249
11%
2,498
Six months ended June 30,
2008 Change
2009
4,445
25%
5,544
Interest expense includes interest on bank debt, fees on letters of credit and amortization of deferred
financing costs. Interest expense was higher in 2009 as outstanding bank debt averaged approximately
$325 million in the first half of 2009 compared to approximately $130 million a year earlier, offset
somewhat by a decrease in interest rates.
Depletion, Depreciation and Accretion (“DD&A”) Expense
DD&A expense
$ per boe
Three months ended June 30,
2008 Change
2009
42,999
24%
53,309
28.61
5%
29.92
Six months ended June 30,
2008 Change
2009
80,449
39%
112,119
29.08
2%
29.75
Higher production caused DD&A expense to increase in the second quarter and first six months of 2009.
The DD&A rate per unit of production remained relatively consistent compared to the prior year periods.
Future Income Taxes
Future income taxes
Three months ended June 30,
2008 Change
2009
16,258
(85%)
2,512
Six months ended June 30,
2008 Change
2009
29,394
(87%)
3,897
The CBU’s future tax recovery is fairly consistent with the CBU’s change in income after adjustments for
non-deductible items.
7
Net Income
The change in net income in the second quarter and first six months of 2009 is primarily due to lower
commodity prices and higher DD&A expenses, offset by higher production, gains on risk management
contracts, and lower future income taxes, as summarized below:
Reconciliation of Changes in Net Income
Net income: June 30, 2008
Increase (decrease) due to:
Sales volumes
Realized prices
Royalties
Risk management contracts
Production expenses
Transportation expenses
Stock-based compensation expenses
DD&A expense
Future income taxes
Other (1)
Net income: June 30, 2009
(1)
Three months ended June 30,
32,323
16,023
(82,328)
4,386
23,920
1,733
2,742
87
(10,310)
13,746
(1,154)
1,168
Six months ended June 30,
58,491
50,792
(131,034)
2,338
28,345
15
4,108
(3,933)
(31,670)
25,497
(2,801)
148
Includes interest income, general and administrative expenses and interest expense.
Funds Flow From Operations
The decrease in funds flow from operations is primarily due to lower commodity prices offset by higher
production, realized hedging gains and lower transportation expenses, as summarized below:
Reconciliation of Changes in Funds Flow From Operations
Three months ended June 30,
124,196
Funds flow from operations: June 30, 2008
Increase (decrease) due to:
16,023
Sales volumes
(82,328)
Realized prices
4,386
Royalties
Realized portion of risk
management contracts
10,648
1,733
Production expenses
2,742
Transportation expenses
(1,509)
Other (1)
75,891
Funds flow from operations: June 30, 2009
(1)
Six months ended June 30,
203,321
50,792
(131,034)
2,338
22,785
15
4,108
(3,174)
149,151
Includes interest income, general and administrative expenses, cash interest expense and asset retirement obligations settled.
The following table shows the reconciliation of funds flow from operations to cash flow from operating
activities for the periods noted:
Funds flow from operations: Non-GAAP
Changes in non-cash working capital
Cash flow from operating activities: GAAP
Three months ended June 30,
2008 Change
2009
124,196
(39%)
75,891
100%
(37,963) (18,939)
105,257
(64%)
37,928
8
Six months ended June 30,
2008 Change
2009
203,321
(27%)
149,151
(18,997)
(32%)
(12,969)
184,324
(26%)
136,182
Capital Expenditures
Capital expenditures
Three months ended June 30,
2008 Change
2009
69,711
(44%)
38,901
Six months ended June 30,
2008 Change
2009
180,200
(40%)
108,925
Total
25,815
2,790
6,045
255
3,996
38,901
Q2 2009 Capital Expenditures By Type
Drilling, completions and workovers
Facilities
Land
Seismic
Other (1)
Total capital expenditures
Total
71,598
17,516
9,102
593
10,116
108,925
YTD 2009 Capital Expenditures By Type
Drilling, completions and workovers
Facilities
Land
Seismic
Other (1)
Total capital expenditures
(1)
Includes health, safety and environmental, capitalized salaries and office furniture and fixtures.
Expenditures in the second quarter were mainly focused on drilling, completions and workovers,
primarily at the CBU’s southeast Saskatchewan light oil properties as we drilled 7.3 net Bakken wells
bringing our six month total to 22.4 net wells. We also drilled one well in the Horn River Basin in
northeast British Columbia in the second quarter. The majority of the facilities costs in the first six
months include costs to tie-in additional wells and gathering systems to two major facilities that were
completed in the latter half of 2008.
9
SUMMARY OF QUARTERLY RESULTS
2008
2009
Q2
2007
Q4
Q3
Q2
Q1
Q4
121,012
186,608
168,757
109,423
57,221
Q1
Q3
Financial ($000s except where noted)
Oil and natural gas revenue
Net income
Capital expenditures
102,452
95,486
32,499
1,168
(1,020)
47,011
80,847
32,323
26,168
12,774
9,981
38,901
70,024
200,186
165,447
69,711
110,489
79,045
79,005
62.22
48.57
57.71
115.11
117.64
91.87
80.83
76.56
7.97
5.39
8.90
13.36
11.83
6.44
5.70
5.09
Operations
Operating netbacks by product
Light/medium oil and NGL sales
price, net of transportation ($/bbl)
Royalties
Production expenses
6.66
6.98
8.68
9.56
9.55
10.25
8.94
10.13
47.59
36.20
40.13
92.19
96.26
75.18
66.19
61.34
Natural gas sales price, net of
transportation ($/mcf)
3.91
5.35
6.86
7.94
9.83
7.73
6.05
5.25
Royalties
0.67
0.78
1.06
1.38
1.81
1.35
0.43
0.36
Production expenses
0.95
0.90
0.77
0.66
0.83
0.89
0.64
0.68
Operating netback
2.29
3.67
5.03
5.90
7.19
5.49
4.98
4.21
56.64
46.81
55.90
106.51
109.43
83.55
72.42
62.68
Royalties
7.40
5.32
8.62
12.72
11.70
6.74
5.11
4.18
Production expenses
6.52
6.81
8.24
8.84
8.88
9.35
7.99
8.26
42.72
34.68
39.04
84.95
88.85
67.46
59.32
50.24
Light/medium oil and NGL (bbls)
16,761
19,722
19,841
16,024
14,205
11,351
6,691
3,745
Natural gas (mcf)
16,906
14,179
14,598
14,047
13,871
15,229
9,379
10,006
Total (boe)
19,579
22,085
22,274
18,365
16,517
13,889
8,254
5,413
Operating netback
Oil equivalent sales price, net of
transportation ($/boe)
Operating netback
Average daily production
Significant factors influencing quarterly results were:
¾ Record production and high benchmark oil prices in the first three quarters of 2008 resulted in
dramatic increases in operating netbacks, revenue and funds flow from operations. In the fourth
quarter of 2008 and first quarter of 2009 benchmark crude oil prices declined significantly, which
negatively affected profitability, despite higher production levels.
¾ Light oil production in the first quarter of 2009 increased by 59% over the first quarter of 2008,
reflecting the acquisition of Peerless in January 2008.
¾ The CBU’s industry leading drilling activity on the Bakken light oil resource play in southeast
Saskatchewan contributed to continued production increases throughout 2008.
¾ Capital expenditures have decreased in the first and second quarter of 2009 in response to lower
crude oil prices and as a result, we have experienced anticipated production declines.
10
Commitments
The following is a summary of the estimated costs required to fulfill the CBU's remaining contractual
commitments as at June 30, 2009:
Type of Obligation
Bank debt – principal
Office operating leases
Flow-through expenditures
Total
< 1 Year
3,700
3,600
7,300
1-3 Years
335,000
7,900
342,900
3-5 Years
10,200
10,200
Thereafter
24,100
24,100
Total
335,000
45,900
3,600
384,500
Liquidity and Capital Resources
At June 30, 2009, the CBU had $335.0 million of bank debt outstanding and accounts payable and
accrued liabilities in excess of current assets of $29.1 million, resulting in net debt of $364.1 million. The
ratio of debt to annualized earnings of the most recent quarter before interest, taxes, depreciation and
other non-cash items was 1.1 times, within a range acceptable to the CBU.
In July 2009, Petrobank completed a US$400 million convertible bond issuance which provides the
flexibility to complete the carve-out of the CBU and the proposed transaction with TriStar. Petrobank will
capitalize PetroBakken with the CBU assets and $400 million of cash on or before October 1, 2009. In
return, Petrobank will receive 109.8 million common shares of PetroBakken which will represent
approximately 64% of PetroBakken’s anticipated shares outstanding after the completion of the acquisition
of TriStar.
Pursuant to a plan of arrangement agreement dated August 4, 2009, PetroBakken intends to acquire all of
the issued and outstanding common shares of TriStar for $600 million in cash and approximately
61,762,500 common shares of PetroBakken. The cash component will be derived from Petrobank’s
$400 million contribution and $200 million from a new $1.05 billion PetroBakken credit facility which has
been committed to from a syndicate of banks. The completion of the transaction is expected to occur on or
about October 1, 2009 and is subject to TriStar shareholder approval as well as other customary regulatory,
stock exchange, court and other approvals.
The economic slowdown in late 2008 and early 2009 and volatile financial and commodity markets have
impacted the CBU's operations to date in 2009, resulting in fewer wells drilled in 2009 compared to 2008.
The third quarter has seen an increase in oil prices and the plan is for PetroBakken to ramp up drilling
activity to be utilizing approximately 14 to 16 rigs by the end of the 2009 and maintain that level for the
foreseeable future, assuming oil prices remain relatively consistent. The CBU and what will become
PetroBakken intends to balance capital spending with existing cash balances, expected future cash flows
and prudent use of its credit facility to execute its capital plans.
Petrobank's current secured Canadian credit facility borrowing limit totals $400 million, of which
$380 million is attributable to the oil and gas reserves of the CBU. The revolving facility has terms
ending on July 2010, extendable by the lenders for an additional year. If the lenders were to not extend
the term, the drawn amount would be due in July 2011. The syndicate of lenders of the Canadian facility
assesses the borrowing base semi-annually. Petrobank is not subject to restrictive financial covenants
under its credit facility.
Upon completion of the acquisition of TriStar, it is assumed that the CBU’s credit facility will be
effectively converted into the new $1.05 billion PetroBakken facility which has been committed to by a
syndicate of banks. The PetroBakken facility will be comprised of a $900 million oil and gas reservebased revolver, and a six-month $150 million short-term non-revolving credit facility which will be
extinguished upon the sale of the announced disposition of PetroBakken’s Alberta assets. The revolving
facility is expected to have terms ending in September 2010, extendable by the lenders for an additional
year. If the lenders were to not extend the term, the drawn amount would be due in September 2011. The
11
syndicate of lenders will assess the borrowing base semi-annually. PetroBakken will not be subject to
restrictive financial covenants under this credit facility.
Upon successful completion of the acquisition of TriStar, PetroBakken expects to have approximately
$950 million drawn on the credit facility. All proceeds from the Alberta asset disposition will decrease the
amount drawn, and after which the $150 million short-term credit facility will terminate. After the sale of
the Alberta assets, the debt to annualized earnings before interest, taxes, depletion, depreciation and
accretion and other non-cash items is expected to be below 1 times.
In addition to the credit facility noted above, other possible sources of funds available to PetroBakken
include the following:
¾ Funds flow from operations.
¾ May monetize risk management contracts.
¾ May issue common shares once the new publicly traded company PetroBakken is formed.
¾ Issuance of subordinated or convertible debt.
¾ May sell additional producing or non-producing assets to raise funds in the short term.
Incremental cash resources generated as a result would be reduced by any resulting decreases in
future cash flows and any required debt payments.
¾ An alternative financing vehicle is a forward sale of a portion of future production.
¾ We expect to satisfy ongoing working capital requirements with funds flow from operations, cash
and available credit.
Risks and Uncertainties
There have been no significant changes in the three and six months ended June 30, 2009 to the risks and
uncertainties identified in the MD&A for the year ended December 31, 2008.
Sensitivities
There have been no significant changes in to the CBU's earnings and cash flows sensitivities to changes in
crude oil and natural gas prices, exchange rates and interest rates than what was identified in the MD&A
for the year ended December 31, 2008.
Critical Accounting Policies and Estimates
There have been no changes to the CBU's critical accounting policies and estimates in the three and six
months ended June 30, 2009.
Changes in Accounting Policies
On January 1, 2009, management retrospectively adopted the Canadian Institute of Chartered
Accountants (“CICA”) Handbook Section 3064, Goodwill and Intangible Assets issued by the Canadian
Accounting Standards Board (“AcSB”). The new section replaces the previous goodwill and intangible
asset standard and revises the requirement for recognition, measurement, presentation and disclosure of
intangible assets. The adoption of this standard had no impact on the financial statements.
On January 1, 2009, management adopted the CICA’s EIC-173, Credit Risk and the Fair Value of
Financial Assets and Financial Liabilities. The EIC provides guidance on how to take into account credit
risk of an entity and counterparty when determining the fair value of financial assets and financial
liabilities, including derivative instruments. The adoption of this EIC had no impact on the financial
statements.
12
On January 1, 2009, management adopted CICA Handbook Section 1582, Business Combinations, which
replaces former guidance on business combinations. Under the new standard, the purchase price used in a
business combination is based on the fair value of consideration at the date of exchange. Previously the
purchase price was based on the fair value of the consideration for a reasonable period before and after
the date of acquisition was agreed upon and announced. The new standard generally requires all
acquisition costs be expensed, which were previously capitalized as part of the purchase price. In
addition, the new standard modified the accounting for contingent consideration and negative goodwill.
The adoption of this standard will impact the accounting treatment of future business combinations.
On January 1, 2009, management adopted CICA Handbook Sections 1601, Consolidated Financial
Statements, and 1602, Non-controlling Interests, which replace existing guidance. Section 1601
establishes standards for the preparation of consolidated financial statements and Section 1602 provides
guidance on accounting for a non-controlling interest in a subsidiary subsequent to a business
combination. The adoption of these standards did not have a material impact on our results of operations
or financial position.
Recent and Pending Accounting Pronouncements
In June 2009, the CICA issued amendments to CICA Handbook Section 3862, Financial Instruments —
Disclosures. The amendments include enhanced disclosures related to the fair value of financial
instruments and the liquidity risk associated with financial instruments. The amendments will be effective
for annual financial statements for fiscal years ending after September 30, 2009. The amendments are
consistent with recent amendments to financial instrument disclosure standards in International Financial
Reporting Standards (“IFRS”). Management will include these additional disclosures in its annual
financial statements for the year ending December 31, 2009.
The Canadian Accounting Standards Board has confirmed that IFRS will replace Canadian GAAP
effective January 1, 2011, including comparatives for 2010, for Canadian publicly accountable
enterprises. Petrobank has completed its high-level IFRS impact study and established a preliminary
timeline for the execution and completion of the conversion project. The impact of IFRS on the CBU’s
financial statements is not reasonably determinable at this time. Key information will be disclosed as it
becomes available during the transition period.
Regulatory Policies
Certification of Disclosures in Interim Filings
In accordance with Multilateral Instrument 52-109 of the Canadian Securities Administrators, Petrobank
quarterly issues a “Certification of Interim Filings” (“Certification”). The Certification requires certifying
officers to state that they are responsible for establishing and maintaining disclosure controls and
procedures (“DC&P”) and internal control over financial reporting (“ICFR”).
The Certification requires certifying officers to state that they designed DC&P, or caused it to be designed
under their supervision, to provide reasonable assurance that: (i) material information relating to
Petrobank is made known to the certifying officers by others; (ii) information required to be disclosed by
Petrobank in reports filed with, or submitted to, securities regulatory authorities is recorded, processed,
summarized and reported within the time periods specified under Canadian securities legislation. In
addition, the Certification requires certifying officers to state that they have designed ICFR, or caused it
to be designed under their supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes.
13
During the quarter ended June 30, 2009, there has been no change in Petrobank's or the CBU's ICFR that
has materially affected, or is reasonably likely to materially affect, Petrobank's or the CBU's ICFR.
Petrobank, including the CBU, has continually had in place systems relating to DC&P and ICFR and will
continue to monitor such procedures as our business evolves.
14
APPENDIX "F"
INFORMATION CONCERNING TRISTAR
F-1
TABLE OF CONTENTS
Documents Incorporated by Reference..........................................................................................................................3
The Business of TriStar .................................................................................................................................................4
Description of the Business of TriStar...........................................................................................................................4
Description of Share Capital..........................................................................................................................................6
Prior Sales......................................................................................................................................................................6
Market for Securities .....................................................................................................................................................8
Risk Factors ...................................................................................................................................................................8
Auditor, Transfer Agent and Registrar ..........................................................................................................................8
Additional Information and Availability of Financial Statements.................................................................................9
F-2
DOCUMENTS INCORPORATED BY REFERENCE
Information has been incorporated by reference in this Appendix "F" from documents filed by TriStar with
securities commissions or similar authorities in Canada. Copies of the documents incorporated herein by
reference concerning TriStar may be obtained on request without charge from the Vice-President, Finance and
Chief Financial Officer of TriStar at Suite 800, 425 – 1st Street S.W., Calgary, Alberta, T2P 3L8 Telephone: (403)
268-7800, Fax: (403) 268-6075. In addition, copies of the documents incorporated herein by reference may be
obtained from the securities commissions or similar authorities in Canada through the SEDAR website at
www.sedar.com.
The following documents of TriStar are filed with the various securities commissions or similar authorities in the
provinces of Canada and are specifically incorporated by reference into and form an integral part of this Appendix
"F":
(a)
the TriStar AIF;
(b)
TriStar's audited consolidated comparative financial statements as at and for the years ended December 31,
2008 and 2007, together with the report of the auditor thereon and the notes thereto;
(c)
TriStar's management's discussion and analysis for the years ended December 31, 2008 and 2007;
(d)
TriStar's unaudited consolidated financial statements of TriStar as at and for the three and six month
periods ended June 30, 2009;
(e)
TriStar's management's discussion and analysis for the three and six month periods ended June 30, 2009;
(f)
TriStar's material change report dated March 9, 2009 with respect to TriStar's acquisition of oil and gas
assets and the offering by TriStar of subscription receipts;
(g)
the management information circular dated March 28, 2008 in respect of the annual general meeting of
shareholders of TriStar held on May 9, 2008; and
(h)
TriStar's material change report dated August 11, 2009 concerning the Arrangement.
Any business acquisition reports, material change reports (excluding confidential reports), comparative interim
financial statements, comparative annual financial statements and the auditors' report thereon, management's
discussion and analysis and information circulars filed by TriStar with the securities commissions or similar
authorities in Canada subsequent to the date of this Information Circular and prior to the Meeting shall be deemed
to be incorporated by reference in this Information Circular.
Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for the purposes of this Appendix "F" to the extent that a statement
contained herein or in any other subsequently filed document which also is, or is deemed to be, incorporated
by reference herein modifies or supersedes such statement. The modifying or superseding statement need not
state that it has modified or superseded a prior statement or include any other information set forth in the
document that it modifies or supersedes. The making of a modifying or superseding statement shall not be
deemed an admission for any purposes that the modified or superseded statement, when made, constituted a
misrepresentation, an untrue statement of a material fact or an omission to state a material fact that is
required to be stated or that is necessary to make a statement not misleading in light of the circumstances in
which it was made. Any statement so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Appendix "F".
F-3
THE BUSINESS OF TRISTAR
General
TriStar is a Calgary, Alberta based oil and gas company amalgamated under the ABCA. It is engaged in the
exploration, acquisition, development and production of oil and natural gas reserves, primarily in the provinces of
Alberta and Saskatchewan.
The head office of TriStar is located at Suite 800, 425 - 1st Street S.W., Calgary, Alberta and the registered office is
located at 1200, 425 – 1st Street S.W., Calgary, Alberta. The TriStar Shares are listed and posted for trading on the
TSX under the symbol "TOG". TriStar is a reporting issuer in each of the provinces of Canada.
DESCRIPTION OF THE BUSINESS OF TRISTAR
Corporate Strategy
TriStar's business plan is to pursue profitable per share growth in reserves, production and cash flow in western
Canada. To accomplish this, TriStar pursues an integrated growth strategy, including strategic, accretive
acquisitions together with development and exploration drilling.
TriStar maintains a balance between exploration, exploitation and development drilling for oil and gas reserves,
although management of TriStar also considers asset and corporate acquisition opportunities that meet its business
parameters. To achieve sustainable and profitable growth, management of TriStar believes in controlling the timing
and costs of its projects wherever possible. Accordingly, TriStar seeks to become the operator of its properties to
the greatest extent possible. Further, to minimize competition within its geographic areas of interest, TriStar strives
to maximize its working interest ownership in its properties where reasonably possible. Management of TriStar has
industry experience in producing areas in western Canada and has the capability to expand the scope of its activities
as opportunities arise.
In reviewing potential drilling or acquisition opportunities, TriStar gives consideration to the following criteria:
(a)
risk capital to secure or evaluate the opportunity;
(b)
the potential return on the project, if successful;
(c)
the likelihood of success; and
(d)
risked return versus cost of capital.
In general, TriStar pursues a portfolio approach in developing a large number of opportunities with a balance of
risk profiles and commodity exposure in an attempt to generate sustainable high levels of growth.
Properties and Business
TriStar has properties in Southeast Saskatchewan, Southern Alberta, Central Alberta and West Central Alberta.
Southeast Saskatchewan is TriStar's largest core area. The Southeast Saskatchewan properties are located
approximately 200 kilometres southeast of the city of Regina along the geologically defined
Frobisher/Kisbey/Alida/Tilston subcrop edge with additional production from the Bakken and Torquay zones.
These assets include an average working interest of approximately 82% in 412,125 gross (338,204 net) acres of
undeveloped land. The Southeast Saskatchewan properties include fields at Bellegarde, Fertile, Freestone, Hastings
and Hazelwood. Production from the Southeast Saskatchewan properties is weighted 97% to light oil, with the
F-4
balance being solution gas. The Southeast Saskatchewan properties include 747 (525.2 net) producing oil wells,
206 (143.9 net) non-producing oil wells and 2 (2.0 net) non-producing gas wells as at December 31, 2008.
The Southern Alberta assets are located approximately 150 kilometres southeast of the City of Calgary. These
assets include an average working interest of approximately 77% in 71,584 gross (54,915 net) acres of undeveloped
land. The Southern Alberta properties include fields at Countess, Enchant and Scandia. Production from the
southern Alberta assets is weighted 55% to oil, with the balance being solution and non-associated gas. The
Southern Alberta assets include 128 (103.2 net) producing oil wells, 38 (35.5 net) non-producing oil wells, 139
(122.1 net) producing gas wells and 39 (30.9 net) non-producing gas wells as at December 31, 2008.
The Central Alberta assets are located within an approximate 150 kilometre radius of the City of Edmonton. These
assets include an average working interest of approximately 82% in 66,659 gross (54,714 net) acres of undeveloped
land. The Central Alberta properties include fields at Ferrybank, Redwater and Inland. Production from the
Central Alberta assets is weighted 50% to natural gas, with the balance being light oil and natural gas liquids. The
Central Alberta assets include 196 (148.4 net) producing oil wells, 243 (209.3 net) non-producing oil wells, 187
(114.5 net) producing gas wells and 44 (31.6 net) non-producing gas wells as at December 31, 2008.
The West Central Alberta assets are located approximately 150 kilometres northwest of the City of Edmonton.
These assets include an average working interest of approximately 91% in 341,847 gross (309,622 net) acres of
undeveloped land. The West Central Alberta properties include fields at Ante Creek, Ante Creek North and
Virginia Hills. Production from the West Central Alberta assets is weighted 60% to natural gas with the balance
being light oil and natural gas liquids. The West Central Alberta assets include 35 (32.4 net) producing oil wells, 7
(5.1 net) non-producing oil wells, 37 (27.3 net) producing gas wells and 17 (12.4 net) non-producing gas wells as at
December 31, 2009.
Further details concerning TriStar, including information with respect to TriStar's assets, operations and
developmental history, are provided in the AIF and the other documents incorporated by reference into this
Appendix "F". Readers are encouraged to thoroughly review these documents as they contain important
information concerning TriStar.
Recent Developments
Partnership Acquisition
On March 2, 2009, TriStar and its wholly-owned subsidiary, Vortex Energy Corporation, acquired all of all of the
issued and outstanding partnership interests of an Alberta general partnership (the "TriStar Acquired Partnership")
carrying on business in Southeast Saskatchewan in exchange for 2,407,992 TriStar Shares and cash payment in the
amount of $8.6 million. The acquired interests included 550 bbls/d of light oil production, an operated production
facility within TriStar's Bakken focus area and 10 net sections of prospective Bakken lands. The acquisition had an
effective date of February 1, 2009.
Asset Acquisition and Subscription Receipt Financing
Effective June 1, 2009, TriStar, through its wholly-owned affiliate, TOG Partnership, and Crescent Point Resources
Limited Partnership ("CPRLP") each acquired an undivided 50% interest in certain oil and natural gas assets from
Talisman Energy Canada and Fortuna (US) L.P. (the "Vendors") for total cash consideration of $720 million,
subject to adjustments (the "Asset Acquisition").
Immediately following the completion of the acquisition, TOG Partnership and Crescent Point Resources Limited
Partnership sold a portion of the acquired assets to Shelter Bay Energy Inc. for aggregate cash consideration of $71
million, subject to adjustments. TOG Partnership and CPRLP each received 50% of the aggregate sale price. The
cash purchase price paid by TriStar for its 50% interest in the assets less the assets disposed of to Shelter Bay
F-5
Energy Inc. (the "TriStar Acquired Assets") was $324.5 million, subject to adjustments.
Additional information with respect to the acquisition and the TriStar Acquired Assets is set forth on pages 9 to 16
of the short form prospectus of TriStar dated March 17, 2009 under the headings "The Acquisition" and
"Information Concerning the TriStar Acquired Assets", which pages are incorporated by reference into and form an
integral part of this Appendix "F".
On March 24, 2009, TriStar issued 35,937,500 subscription receipts (the "Subscription Receipts") pursuant to a
short form prospectus at a price of $8.00 per subscription receipt for aggregate gross proceeds of $287,500,000.
Each Subscription Receipt was exchanged for one TriStar Share on June 1, 2009 concurrent with the closing of the
Asset Acquisition. The proceeds from the financing were used to fund a portion of the purchase price in respect of
the TriStar Acquired Assets.
DESCRIPTION OF SHARE CAPITAL
TriStar is authorized to issue an unlimited number of TriStar Shares and an unlimited number of four classes of
preferred shares, each such class being issuable in series. Holders of TriStar Shares are entitled to one vote for each
TriStar Share held and to receive any dividends declared by the Board of Directors or any distribution of the assets
of TriStar upon a liquidation, dissolution or winding-up of TriStar, subject to the rights of the preferred shares and
any other classes of shares ranking in priority to the TriStar Shares. As of August 31, 2009, there were
152,579,255 TriStar Shares and no preferred shares issued and outstanding.
PRIOR SALES
On June 1, 2009, TriStar issued 35,937,500 TriStar Shares on the exchange of the Subscription Receipts.
On December 18, 2008, TriStar issued 1,025,000 TriStar Shares on a "flow-through" basis at a price of $14.70 per
TriStar Share for gross aggregate proceeds of $15,067,500.
TriStar has issued the following TriStar shares pursuant to the exercise of TriStar options in the 12 month period
preceding the date of the this Information Circular:
Date
September 2, 2008
September 5, 2008
September 12, 2008
October 29, 2008
December 2, 2008
January 15, 2009
April 1, 2009
April 6, 2009
May 25, 2009
June 1, 2009
June 10, 2009
June 16, 2009
August 18, 2009
August 24, 2009
August 26, 2009
August 27, 2009
August 27, 2009
August 28, 2009
Exercise Price
($)
7.29
7.29
7.29
7.29
7.29
7.29
7.29
7.29
7.29
7.29
7.29
7.29
7.29
7.29
7.29
7.29
12.67
10.60
F-6
Number
32,367
334
1,033
8,034
5,334
15,500
1,367
500
7,233
20,000
10,833
3,100
333
32,334
20,802
73,835
1,033
13,333
Date
August 28, 2009
August 31, 2009
August 31, 2009
Exercise Price
($)
7.29
7.29
14.79
Number
59,433
25,671
666
TriStar has also issued the following TriStar Shares pursuant to the redemption of TriStar Incentive Shares in the 12
month period preceding the date of the this Information Circular:
Date
September 10, 2008
September 26, 2008
October 1, 2008
October 6, 2008
October 15, 2008
November 5, 2008
November 7, 2008
November 15, 2008
January 2, 2009
February 1, 2009
February 6, 2009
February 11, 2009
February 19, 2009
March 1, 2009
March 3, 2009
March 7, 2009
March 10, 2009
March 17, 2009
March 18, 2009
March 24, 2009
April 1, 2009
April 14, 2009
April 16, 2009
April 23, 2009
April 28, 2009
May 1, 2009
May 15, 2009
June 9, 2009
July 2, 2009
July 21, 2009
July 28, 2009
August 20, 2009
August 24, 2009
August 31, 2009
Number
3,033
7,467
4,234
1,867
6,533
8,333
8,400
3,033
30,400
10,100
600
9,333
7,733
1,600
6,333
2,200
15,866
11,000
11,200
2,967
5,033
7,467
8,200
6,533
15,000
2,516
2,700
733
3,000
2,710
500
1,500
303,810
3,333
F-7
MARKET FOR SECURITIES
The TriStar Shares are listed and posted for trading on the TSX under the trading symbol "TOG". The following
table sets forth the reported market price ranges and the trading volumes for the TriStar Shares for the periods
indicated, as reported by the TSX.
Period
2008
September
October
November
December
2009
January
February
March
April
May
June
July
August
Price Range ($)
High
Low
Trading Volume
$20.24
$15.79
$12.90
$12.50
$13.92
$6.90
$8.54
$8.56
30,167,069
27,279,268
26,645,326
24,427,726
$13.79
$11.45
$10.25
$11.33
$12.90
$12.39
$12.10
$15.61
$9.90
$7.93
$7.41
$8.98
$10.29
$10.51
$9.50
$11.51
15,691,884
33,613,260
32,551,184
22,249,240
20,898,918
27,907,908
16,882,943
87,350,750
On August 3, 2009, being the last trading day prior to the public announcement of the Arrangement, the closing
price of the TriStar Shares on the TSX was $11.46. On August 30, 2009, being the last day on which the Shares
traded prior to the mailing of this Information Circular, the closing price of the Shares on the TSX was $14.70.
RISK FACTORS
An investment in the TriStar Shares is subject to certain risks. Readers should carefully consider the risks
factors described under the heading "Risk Factors" in the TriStar AIF. Readers should also consider the
following additional risk factor:
Failure to Complete the Arrangement
The completion of the Arrangement is subject to a number of conditions precedent, certain of which are outside the
control of TriStar. There can be no certainty, nor can TriStar provide any assurance, that these conditions will be
satisfied or, if satisfied, when they will be satisfied. If the Arrangement is not approved by the TriStar Shareholders or
the other conditions to the Arrangement are not satisfied or waived, the Arrangement will not proceed and there can be
no assurance that TriStar will pursue or complete an alternative transaction with respect to the sale of the TriStar Shares
on terms equivalent to the Arrangement or at all. In addition, the Arrangement Agreement provides that, in certain
circumstances, PetroBank and PetroBakken may terminate the Arrangement Agreement and such termination may give
rise to a non-completion fee payable by TriStar. See "The Arrangement Agreement – Conditions Precedent to the
Arrangement" and "The Arrangement Agreement – Agreement as to Damages – Damages Payable to Petrobank" in the
main body of the Information Circular.
AUDITOR, TRANSFER AGENT AND REGISTRAR
The auditors of TriStar are KPMG LLP, Chartered Accountants, Calgary, Alberta.
The transfer agent and registrar for the TriStar Shares is Olympia Trust Company, at its principal offices in
Calgary, Alberta and Toronto, Ontario.
F-8
ADDITIONAL INFORMATION AND AVAILABILITY OF FINANCIAL STATEMENTS
Additional information relating to TriStar is available on SEDAR at www.sedar.com. Financial information
concerning TriStar is provided in its financial statements for the year ended December 31, 2008 and the
accompanying management’s discussion and analysis, all of which can be accessed on SEDAR.
F-9
APPENDIX "G"
PRO FORMA FINANCIAL STATEMENTS
G-1
Pro Forma Consolidated Financial Statements
(Unaudited)
June 30, 2009 and December 31, 2008
PetroBakken Energy Ltd.
Pro Forma Consolidated Balance Sheet
As at June 30, 2009
(unaudited)
($ thousands, except per share amounts)
Assets
Current Assets
Cash and cash equivalents
Accounts receivable
Prepaid expenses
Risk management assets
Capital assets
Goodwill
Risk management assets
Liabilities
Current Liabilities
Accounts payable and accrued liabilities
Future income tax liabilities
Risk management liabilities
Bank debt
Obligations under gas sale contract and deferred credit
Asset retirement obligations
Future income tax liabilities
Risk management liabilities
Shareholders' Equity
Common shares
Net investment by Petrobank Energy and Resources Ltd.
Contributed surplus
Accumulated other comprehensive income
Retained earnings
PetroBakken
Petrobank:
Canadian
Business Unit
TriStar
-
4,550
46,127
3,527
8,697
62,901
65,838
4,319
11,411
81,568
-
1,199,334
35,052
1,297,287
2,036,869
249,799
1,701
2,369,937
-
92,041
2,606
94,647
123,062
402
9,930
133,394
-
333,190
4,462
11,876
168,650
612,825
348,049
41,818
269,524
3,590
796,375
-
457,419
512
226,531
684,462
1,297,287
1,494,771
19,456
59,335
1,573,562
2,369,937
See accompanying notes to pro forma consolidated financial statements
Adjustments (note)
(6,469) (2b)
(6,469)
238,308
555,073
786,912
(2a)
(2a)
15,456 (2b), (2d)
(402)
15,054
200,000
58,815
273,869
1,073,340
(457,419)
(19,456)
(83,422)
513,043
786,912
(1), (2a)
(2a), (2d)
(1), (2a), (2d), (2f), (2g)
(2g)
(2f)
(2a), (2d), (2f)
Pro Forma
PetroBakken
4,550
105,496
7,846
20,108
138,000
3,474,511
839,924
1,701
4,454,136
230,559
2,606
9,930
243,095
881,239
4,462
53,694
496,989
3,590
1,683,069
2,568,111
512
202,444
2,771,067
4,454,136
PetroBakken Energy Ltd.
Pro Forma Consolidated Statement of Operations
For the six months ended June 30, 2009
(unaudited)
($ thousands, except per share amounts)
Revenue
Oil and natural gas
Royalties
Gain (loss) on risk management contracts
Interest income
Expenses
Production
Transportation
General and administration
Depletion, depreciation and accretion
Interest
Stock-based compensation
Income (loss) before taxes
Taxes
Capital tax expense
Future income taxes (recovery)
Net income (loss)
PetroBakken
Petrobank:
Canadian
Business Unit
TriStar
Adjustments (note)
Pro Forma
PetroBakken
-
197,938
(23,766)
(7,993)
81
166,260
181,681
(26,547)
(14,074)
141,060
(1,909) (3a)
(1,909)
379,619
(52,222)
(22,067)
81
305,411
-
25,146
3,992
6,479
112,119
5,544
8,935
162,215
42,120
3,298
9,281
119,012
5,027
4,631
183,369
14,088
2,600
16,688
67,266
7,290
15,760
245,219
13,171
13,566
362,272
-
4,045
(42,309)
(18,597)
-
3,897
3,897
1,909
(9,599)
(7,690)
-
148
(34,619)
Earnings (loss) per share
Basic and diluted
See accompanying notes to pro forma consolidated financial statements
(3b)
(2e)
(56,861)
(1,909) (3a)
(4,867) (3c)
(6,776)
(11,821)
(10,569)
(10,569)
(46,292)
(3d)
($0.27)
PetroBakken Energy Ltd.
Pro Forma Consolidated Statement of Operations
For the year ended December 31, 2008
(unaudited)
($ thousands, except per share amounts)
Revenue
Oil and natural gas
Royalties
Gain (loss) on risk management contracts
Interest income
Expenses
Production
Transportation
General and administration
Depletion, depreciation and accretion
Interest
Acquisition related costs
Stock-based compensation
Income (loss) before taxes
Taxes
Capital taxes
Current income taxes
Future income taxes
Net income (loss)
PetroBakken
Petrobank:
Canadian
Business Unit
TriStar
Adjustments (note)
Pro Forma
PetroBakken
-
585,800
(65,252)
33,046
536
554,130
613,161
(117,162)
34,443
530,442
(7,447) (3a)
(7,447)
-
56,983
21,212
10,512
187,372
9,542
10,831
296,452
82,581
11,312
11,714
246,286
13,287
7,278
372,458
41,836
5,200
29,825
76,861
-
257,678
157,984
(84,308)
331,354
-
71,329
71,329
7,447
(5,673)
51,563
53,337
(7,447) (3a)
(22,063) (3c)
(29,510)
(5,673)
100,829
95,156
-
186,349
104,647
(54,798)
236,198
Earnings (loss) per share
Basic and diluted
See accompanying notes to pro forma consolidated financial statements
(3b)
(2e)
(2d)
(3d)
1,198,961
(189,861)
67,489
536
1,077,125
139,564
32,524
22,226
475,494
28,029
29,825
18,109
745,771
$1.38
PetroBakken Energy Ltd.
Notes to Pro Forma Consolidated Financial Statements
As at and for the six months ended June 30, 2009 and the year ended December 31, 2008
(unaudited)
1.
Basis of presentation
PetroBakken Energy Ltd. (“PetroBakken”) will be formed through a carve-out of Petrobank Energy and Resources Ltd.'s (“Petrobank”)
Canadian Business Unit (“CBU”). Petrobank is capitalizing PetroBakken with its CBU assets and $400 million of cash. In return, Petrobank will
receive 109.8 million common shares of PetroBakken.
PetroBakken will then acquire all the outstanding shares of TriStar Oil and Gas Ltd. (“TriStar”) through a plan of arrangement (hereinafter the
“Arrangement”). As a result, Petrobank's ownership interest will be reduced to approximately 64% of PetroBakken's anticipated shares
outstanding. Consideration to TriStar shareholders will consist of a combination of PetroBakken common shares and cash. At the election of
the holder and subject to certain limits, a TriStar shareholder will receive $14.75 cash, or 0.5350 of a PetroBakken share, or a combination
thereof, for each share held. In aggregate, TriStar shareholders will receive approximately $600 million in cash, less amounts paid upon the
exercise of options by TriStar option holders which is expected to be approximately $20 million, and 61,762,500 shares of PetroBakken,
representing 36% of PetroBakken's anticipated shares outstanding. In the event that the holders of TriStar shares elect to receive more or
less than the set amount of cash, or more or less than the set amount of PetroBakken shares of which they are entitled, the amount of cash or
shares to be received by a holder will be adjusted pro rata and the balance of the consideration will be paid in cash or PetroBakken shares, as
the case may be. The proposed transaction between TriStar and PetroBakken is anticipated to close on or about October 1, 2009.
The accompanying unaudited pro forma consolidated balance sheet of PetroBakken as at June 30, 2009 and the unaudited pro forma
consolidated statements of operations for the six months ended June 30, 2009 and the year ended December 31, 2008 (collectively, the “pro
forma financial statements”) have been prepared to reflect the Arrangement between PetroBakken and TriStar to form an intermediate oil and
gas exploration and development company.
The pro forma statements have been prepared from information derived from and should be read in conjunction with the following:
1)
PetroBakken's audited balance sheet as at July 30, 2009;
2)
Petrobank’s CBU unaudited interim financial statements as at and for the six months ended June 30, 2009 and the audited financial
statements of Petrobank's CBU as at December 31, 2008 and 2007, and for the years ended December 31, 2008, 2007 and 2006,
included in the Information Circular;
3)
TriStar’s unaudited interim consolidated financial statements as at and for the six months ended June 30, 2009 and the audited
consolidated financial statements of TriStar as at and for the year ended December 31, 2008, incorporated in the Information Circular by
reference;
The pro forma financial statements have been prepared by management in accordance with Canadian generally accepted accounting
principles. The pro forma balance sheet gives effect to the transactions described herein as if they had occured on June 30, 2009. The pro
forma statement of operations gives effect to the transactions and assumptions described herein as if they had occurred on January 1, 2008.
The pro forma financial statements may not be indicative of the results that actually would have occurred if the events reflected therein had
been in effect on the dates indicated or of the results which may be obtained in the future.
Accounting policies used in the preparation of the pro forma financial statements are in accordance with those disclosed in the financial
statements of Petrobank's CBU as at and for the year ended December 31, 2008, except for new guidance regarding business combinations
which the CBU adopted on January 1, 2009. Under the new guidance in the Canadian Institute of Chartered Accountants Handbook Section
1582, Business Combinations , the purchase price used in a business combination is based on the fair value of consideration at the date of
exchange. Previously the purchase price was based on the fair value of the consideration for a reasonable period before and after the date of
acquisition was agreed upon and announced. The new guideline generally requires all acquisition costs to be expensed, which were previously
capitalized as part of the purchase price.
2.
Pro forma unaudited consolidated balance sheet adjustments
The unaudited consolidated balance sheet as at June 30, 2009 gives effect to the following assumptions and adjustments as if they occurred
on June 30, 2009:
(a) For the purposes of determining a purchase price allocation, a value of $27.57 was used to value each PetroBakken share issued.
PetroBakken will account for the acquisition using the purchase method of accounting whereby the assets acquired and the liabilities
assumed of TriStar are recorded at fair values.
The purchase price allocation relating to the TriStar acquisition is as follows:
($ thousands)
Net assets received, at estimated fair value
Capital assets
Goodwill
Working capital deficiency
Risk management liabilities
Bank debt
Asset retirement obligations
Future income tax liabilities
Consideration
Cash
Shares issued (61,762,500 common shares)
2,275,177
804,872
(52,905)
(408)
(348,049)
(41,818)
(334,077)
2,302,792
600,000
1,702,792
2,302,792
The above purchase price allocation has been determined from information that is available to the management
of PetroBakken at this time and incorporates estimates. The allocation of the purchase price to the assets and liabilities of TriStar will be
finalized after all actual results have been obtained and the final fair values of the assets and liabilities have been determined, and
accordingly, the above purchase price equation will change.
Pursuant to the acquisition of TriStar, PetroBakken expects to finalize a $1.05 billion borrowing base credit facility.
(b) As at June 30, 2009, the CBU owed $6.5 million to TriStar related to joint venture billings incurred in the normal course of business. This
intercompany balance has been eliminated.
(c) The bank debt has been increased to reflect the estimated payment of in-the-money TriStar stock options. In the pro forma financial
statements, it has been assumed that all holders of in-the-money stock options will be paid out in cash.
(d) The estimated costs to be incurred by each of PetroBakken and TriStar with respect to the Arrangement and related matters including,
without limitation, financial advisory, accounting and legal fees, severance, change of control and similar payments, proxy solicitation fees
and the preparation, printing and mailing of this Information Circular and other related documents and agreements, are expected to
aggregate approximately $29.8 million. These costs have been tax effected at 26.17% and assumed to be fully tax deductible. The pro
forma adjustment for the cash portion of these costs is reflected in accounts payable on the pro forma consolidated balance sheet.
In addition, all financial advisors have agreed to receive a portion of their fees in the form of PetroBakken shares. The fair value of this
non-cash transaction cost is estimated to be approximately $7.9 million, being 286,545 PetroBakken shares at an estimated value of
$27.57 per share. The pro forma adjustment for these tax-effected costs is reflected in common shares and retained earnings on the pro
forma consolidated balance sheet. It is also reflected in acquisition related costs on the pro forma income statement for the year ended
December 31, 2008.
(e) Incremental interest expense on net debt pro forma adjustments have been calculated at 2.6% per annum, which represents Petrobank's
CBU effective interest rate at June 30, 2009.
(f)
The adjustment of Shareholders' Equity items includes the elimination of the TriStar amounts for common shares, contributed surplus and
retained earnings in order to present the pro forma PetroBakken Shareholders' Equity.
(g) Net investment by Petrobank of $0.5 million has been reclassified to common shares.
3.
Pro forma unaudited consolidated statement of operations adjustments
The unaudited pro forma consolidated statements of operations for the six months ended June 30, 2009 and year ended December 31, 2008,
give effect to the following assumptions and adjustments as if the transaction occurred at January 1, 2008:
(a) Capital taxes are comprised of the estimated Saskatchewan Capital Tax and Resource Surcharge. TriStar includes these capital taxes
as a component of taxes. For the purpose of these pro forma financial statements, these amounts have been reclassified to royalties to
conform with PetroBakken's presentation.
(b) Depreciation, depletion and accretion expenses have been adjusted to reflect the application of the appropriate unit-of-production rate for
the full cost pool resulting from acquisitions based on the estimated proved petroleum and natural gas reserves and the related
production of the petroleum and natural gas reserves acquired.
(c) The provision for future income taxes for the year ended December 31, 2008 and six months ended June 30, 2009 has been adjusted for
the impact of the pro forma adjustments on the pro forma consolidated statement of operations. The tax rate used is 26.17%.
(d) The earnings (loss) per PetroBakken common shares has been based on the following weighted average number of PetroBakken
common shares:
Number of shares
Balance, January 1, 2008
-
Issued on incorporation
Issued to Petrobank (Note 1)
Issued to TriStar (Note 2a)
Issued to advisors (Note 2d)
1
109,800,000
61,762,500
286,545
Balance, June 30, 2009
171,849,046
APPENDIX "H"
SECTION 191 OF THE BUSINESS CORPORATIONS ACT (ALBERTA)
_______________
191(1) Subject to sections 192 and 242, a holder of shares of any class of a corporation may dissent if the corporation
resolves to
(a)
amend its articles under section 173 or 174 to add, change or remove any provisions restricting or
constraining the issue or transfer of shares of that class,
(b)
amend its articles under section 173 to add, change or remove any restrictions on the business or
businesses that the corporation may carry on,
(b.1)
amend its articles under section 173 to add or remove an express statement establishing the unlimited
liability of shareholders as set out in section 15.2(1),
(c)
amalgamate with another corporation, otherwise than under section 184 or 187,
(d)
be continued under the laws of another jurisdiction under section 189, or
(e)
sell, lease or exchange all or substantially all its property under section 190.
(2)
A holder of shares of any class or series of shares entitled to vote under section 176, other than section
176(1)(a), may dissent if the corporation resolves to amend its articles in a manner described in that section.
(3)
In addition to any other right the shareholder may have, but subject to subsection (20), a shareholder entitled
to dissent under this section and who complies with this section is entitled to be paid by the corporation the
fair value of the shares held by the shareholder in respect of which the shareholder dissents, determined as of
the close of business on the last business day before the day on which the resolution from which the
shareholder dissents was adopted.
(4)
A dissenting shareholder may only claim under this section with respect to all the shares of a class held by the
shareholder or on behalf of any one beneficial owner and registered in the name of the dissenting shareholder.
(5)
A dissenting shareholder shall send to the corporation a written objection to a resolution referred to in
subsection (1) or (2)
(6)
(a)
at or before any meeting of shareholders at which the resolution is to be voted on, or
(b)
if the corporation did not send notice to the shareholder of the purpose of the meeting or of the
shareholder's right to dissent, within a reasonable time after the shareholder learns that the resolution
was adopted and of the shareholder's right to dissent.
An application may be made to the Court by originating notice after the adoption of a resolution referred to in
subsection (1) or (2),
(a)
by the corporation, or
(b)
by a shareholder if he has sent an objection to the corporation under subsection (5),
H-1
to fix the fair value in accordance with subsection (3) of the shares of a shareholder who dissents under this
section, or to fix the time at which a shareholder of an unlimited liability corporation who dissents under this
section ceases to become liable for any new liability, act or default of the unlimited liability corporation.
(7)
If an application is made under subsection (6), the corporation shall, unless the Court otherwise orders, send
to each dissenting shareholder a written offer to pay the shareholders an amount considered by the directors to
be the fair value of the shares.
(8)
Unless the Court otherwise orders, an offer referred to in subsection (7) shall be sent to each dissenting
shareholder
(9)
(a)
at least 10 days before the date on which the application is returnable, if the corporation is the
applicant, or
(b)
within 10 days after the corporation is served with a copy of the originating notice, if a shareholder is
the applicant.
Every offer made under subsection (7) shall
(a)
be made on the same terms, and
(b)
contain or be accompanied by a statement showing how the fair value was determined.
(10)
A dissenting shareholder may make an agreement with the corporation for the purchase of the shareholder's
shares by the corporation, in the amount of the corporation's offer under subsection (7) or otherwise, at any
time before the Court pronounces an order fixing the fair value of the shares.
(11)
A dissenting shareholder
(12)
(a)
is not required to give security for costs in respect of an application under subsection (6), and
(b)
except in special circumstances must not be required to pay the costs of the application or appraisal.
In connection with an application under subsection (6), the Court may give directions for
(a)
joining as parties all dissenting shareholders whose shares have not been purchased by the
corporation and for the representation of dissenting shareholders who, in the opinion of the Court, are
in need of representation,
(b)
the trial of issues and interlocutory matters, including pleadings and examinations for discovery,
(c)
the payment to the shareholder of all or part of the sum offered by the corporation for the shares,
(d)
the deposit of the share certificates with the Court or with the corporation or its transfer agent;
(e)
the appointment and payment of independent appraisers, and the procedures to be followed by them;
(f)
the service of documents, and
(g)
the burden of proof on the parties.
H-2
(13)
(14)
On an application under subsection (6), the Court shall make an order
(a)
fixing the fair value of the shares in accordance with subsection (3) of all dissenting shareholders who
are parties to the application,
(b)
giving judgment in that amount against the corporation and in favour of each of those dissenting
shareholders,
(c)
fixing the time within which the corporation must pay that amount to a shareholder;
(d)
fixing the time at which as dissenting shareholder of an unlimited liability corporation ceases to
become liable for any new liability, act or default of the unlimited liability corporation.
On
(a)
the action approved by the resolution from which the shareholder dissents becoming effective,
(b)
the making of an agreement under subsection (10) between the corporation and the dissenting
shareholder as to the payment to be made by the corporation for the shareholder's shares, whether by
the acceptance of the corporation's offer under subsection (7) or otherwise, or
(c)
the pronouncement of an order under subsection (13),
whichever first occurs, the shareholder ceases to have any rights as a shareholder other than the right to be
paid the fair value of the shareholder’s shares in the amount agreed to between the corporation and the
shareholder or in the amount of the judgment, as the case may be.
(15)
Subsection (14)(a) does not apply to a shareholder referred to in subsection (5)(b).
(16)
Until one of the events mentioned in subsection (14) occurs,
(a)
the shareholder may withdraw his dissent, or
(b)
the corporation may rescind the resolution,
and in either event proceedings under this section shall be discontinued.
(17)
The Court may in its discretion allow a reasonable rate of interest on the amount payable to each dissenting
shareholder, from the date on which the shareholder ceases to have any rights as a shareholder by reason of
subsection (14) until the date of payment,
(18)
If subsection (20) applies, the corporation shall, within 10 days after
(a)
the pronouncement of an order under subsection (13), or
(b)
the making of an agreement between the shareholder and the corporation as to the payment to be
made for the shareholder’s shares,
notify each dissenting shareholder that it is unable lawfully to pay dissenting shareholders for their shares.
H-3
(19)
Notwithstanding that a judgment has been given in favour of a dissenting shareholder under subsection
(13)(b), if subsection (20) applies, the dissenting shareholder, by written notice delivered to the corporation
within 30 days after receiving the notice under subsection (18), may withdraw the shareholder's notice of
objection, in which case the corporation is deemed to consent to the withdrawal and the shareholder is
reinstated to the shareholder's full rights as a shareholder, failing which the shareholder retains a status as a
claimant against the corporation, to be paid as soon as the corporation is lawfully able to do so or, in a
liquidation, to be ranked subordinate to the rights of creditors of the corporation but in priority to its
shareholders.
(20)
A corporation shall not make a payment to a dissenting shareholder under this section if there are reasonable
grounds for believing that
(a)
the corporation is or would after the payment be unable to pay its liabilities as they become due, or
(b)
the realizable value of the corporation's assets would by reason of the payment be less than the
aggregate of its liabilities
H-4