Quarterly / Earnings Reports | Second Quarter (2Q) Update | Production Rates

Connacher Announces Q2 2019 Results; Production Falls -14%

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Connacher Oil and Gas announces its financial and operating results for the three and six months ended June 30, 2019 (“Q2 2019”) (all amounts are in Canadian dollars unless otherwise noted).

Operational

• Q2 2019 and YTD 2019 production decreased 14% to 10,804 bbl/d (Q2 2018 – 12,593 bbl/d) and 15% to 10,779 bbl/d (YTD 2018 – 12,631 bbl/d), respectively, primarily due to natural declines
• Q2 2019 and YTD 2019 blending costs decreased 27% to $12.8 million (Q2 2018 – $17.5 million) and 26% to $25.1 million (YTD 2018 – $33.7 million), respectively, primarily due to lower diluent benchmark pricing and lower diluent volumes associated with reduced bitumen production
• Q2 2019 and YTD 2019 transportation and handling costs increased 8% to $11.4 million (Q2 2018 – $10.6 million) and 12% to $23.0 million (YTD 2018 – $20.5 million), respectively, primarily due to higher transportation costs associated with delivery to higher netback locations, partially offset by lower sales volumes

Q2 2019 Highlights

Financial

• Q2 2019 and YTD 2019 capital expenditures totaled $5.9 million (Q2 2018 – $1.6 million) and $7.6 million(YTD 2018 – $6.9 million), respectively, and focused primarily on well servicing required to restore and maintain production. The Company incurred capital expenditures of $3.9 million associated with the drilling of new infill wells in 2019
• The Company exited Q2 2019 with a cash balance of $70.9 million (including restricted cash of $7.1 million) (Q4 2018 – $54.3 million)

Q2 2019 Financial Highlights

Q2 2019 Operational Highlights

Amended and Restated Support Agreement

On May 6, 2019, the Company entered into an Amended and Restated Support Agreement (the “Amended and Restated Support Agreement”) with the First Lien Agent and the Consenting First Lien Lenders. In addition, on May 16, 2019, the Court, among other things: approved the Company’s entry into the Amended and Restated Support Agreement; accepted the filing by the Company of a CCAA Plan of Compromise and Arrangement as contemplated by the Amended and Restated Support Agreement and attached at Schedule “C” thereto (the “2019 CCAA Plan”); approved a key employee retention plan; and authorized the Company to call meetings of its creditors to consider and vote on the 2019 CCAA Plan (the “Creditors’ Meetings Order”).

The Amended and Restated Support Agreement amended the Original Support Agreement and contemplates a transaction whereby the first lien lenders under the First Lien Credit Agreement (the “First Lien Lenders”) will become the owners of the Company’s business either through (i) an exchange of a portion of the obligations under the First Lien Credit Agreement (the “First Lien Debt”) for new senior secured debt of the Company and all of the Company’s equity, which shall be effected by way of the 2019 CCAA Plan and on the terms set out in the Plan Term Sheet (the “Plan Term Sheet”) attached as Schedule “B” to the Amended and Restated Support Agreement (the “Plan Transaction”), or (ii) in the event that the 2019 CCAA Plan is not approved by the Company’s creditors or the Court, or if the Company and the Consenting First Lien Lenders jointly determine that it is no longer viable to implement the Plan Transaction (each a “CCAA Plan Termination Event”), the First Lien Agent, on behalf of the First Lien Lenders, shall cause a new company to be formed (the “Credit Bid Purchaser”) to credit bid a portion of the First Lien Debt for all or substantially all of the Company’s property and assets which shall be effected by way of a Purchase and Sale Agreement (the “PSA”) substantially in the form attached as Schedule “E” to the Amended and Restated Support Agreement and on the terms set out in the Credit Bid Term Sheet (the “Credit Bid Term Sheet”) attached as Schedule “D” to the Amended and Restated Support Agreement (the “Credit Bid Transaction”).

The Plan Transaction includes the following transactions whereby, among other things, pursuant to and in accordance with the 2019 CCAA Plan:

• all Affected Claims (as defined in the 2019 CCAA Plan) will be compromised and extinguished;
• a portion of the Company’s cash-on-hand shall be used to (i) satisfy in full all claims which rank pari passu with or in priority to the First Lien Debt, and (ii) establish an administrative reserve fund;
• each Tranche A Lender under the First Lien Credit Agreement shall receive in respect of the principal amount of its Tranche A Loans, its pro rata share of the obligations under a new senior secured term facility on the key terms set out in the Plan Term Sheet;
• each Tranche A Lender and Tranche B Lender shall receive in respect of, in the case of a Tranche A Lender, the accrued interest on its Tranche A Loans, and, in the case of a Tranche B Lender, the principal and accrued interest of its Tranche B Loans, its pro rata share of voting common shares of a new class of shares of the Company, which, immediately following issuance, will constitute all of the issued and outstanding shares of the Company; and
• a portion of the Company’s cash-on-hand shall be used to establish a general creditor pool in the aggregate amount of $500,000 (plus the amount required to satisfy “Convenience Class Claims” under the 2019 CCAA Plan) which shall be distributed to the Affected Creditors (as defined in the 2019 CCAA Plan) in accordance with the 2019 CCAA Plan.

In the event that a CCAA Plan Termination Event occurs, subject to the terms and conditions of the Amended and Restated Support Agreement and PSA, the Credit Bid Purchaser will acquire all or substantially all of the property and assets of the Company in exchange for a portion of the First Lien Debt. If the Credit Bid Transaction occurs, the Company does not expect any value will accrue to any of the Company’s creditors (other than the First Lien Lenders and those creditors with claims that rank pari passu with or in priority to the First Lien Debt) and, subject to approval by the Court, the Company’s property and assets will be transferred to the Credit Bid Purchaser free and clear of all claims.

Pursuant to the Amended and Restated Support Agreement, the Company put in place a key employee retention plan (the “Credit Bid KERP”) for certain of the Company’s key employees to incentivize them to remain with the Company through successful completion of the Plan Transaction or Credit-Bid Transaction and beyond emergence from CCAA. The Credit Bid KERP is an important component of the parties’ support under the Amended and Restated Support Agreement.

On July 16, 2019, the Company announced the approval of the Company’s 2019 CCAA Plan, as amended and restated in accordance with its terms, by the required majorities of affected creditors and the Court. The resolution (the “Plan Resolution”) approving the 2019 CCAA Plan pursuant to the CCAA was approved by 100% of the First Lien Lenders and 100% of the Company’s general unsecured creditors who were present and voted in person or by proxy on the Plan Resolution at the creditors’ meetings held on June 19, 2019, in accordance with the Creditors’ Meetings Order granted by the Court on May 16, 2019.

Following the positive vote at the creditors’ meetings, the Court entered an order sanctioning Connacher’s Plan (the “2019 Plan Sanction Order”), which reflected certain voluntary amendments to address requests of the Court (the “Plan Amendments”). The Plan Amendments are not materially prejudicial to the interests of any of the creditors under the 2019 CCAA Plan.