Victory Energy and Lucas Energy propose merger

Victory Energy Corp. (OTCQX: VYEY), a Permian Basin-focused oil and gas company, and Lucas Energy Inc. (NYSE MKT: LEI), which is focused on the Austin Chalk and Eagle Ford shale plays, have executed a letter of intent and term sheet for a proposed business combination between the two companies. 

The business combination is contingent on the signing of a definitive merger agreement, which will contain customary terms and conditions. The parties expect that the business combination will involve the issuance of equity by Lucas to Victory's shareholders with no cash payment being made. The parties also expect that, upon completion of the business combination, the shareholders of Victory and Victory's partner Navitus Energy Group will own more than a majority of outstanding Lucas shares.

The letter of intent contains a binding exclusivity provision that requires the two companies to work toward a definitive merger agreement to the exclusion of other potential merger partners. Victory and Lucas are also negotiating the terms of a funding agreement that is intended to provide the capital necessary for Lucas to satisfy its obligations for several Eagle Ford wells, critical accounts payable, and to provide Lucas with necessary working capital during the period prior to the consummation of the business combination. 

The parties expect that, as part of the transaction, seven of Lucas' Eagle Ford wells with varying working interests from a portfolio of 130 future drilling locations will be funded and brought into production during the period of February–June. Based on nearby EOG Resources and Marathon Oil well production volumes in addition to internal economic reservoir calculations, the parties anticipate that the monthly production revenue from these combined wells will exceed $1.1 million of revenue to the company interest, assuming a price per barrel of oil of $50, which would bring both companies into a positive cash-flow position and add significant proved producing reserves to the combined 2015 company portfolio. 

Victory and Lucas expect that funding of these obligations will come from a variety of sources, including certain affiliates of Victory. These sources anticipate total funding needs of approximately $12 million during the business combination with additional funding for post-closing debt reduction and expansion to exceed $8 million.

Kenneth E. Hill, the current CEO and director of Victory Energy, is expected to serve as the CEO and president of the combined company. Other executive and officer appointments will be determined at a later date.

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