Connacher Oil And Gas Limited Closes New Issues Of Long Term Notes And Purchases Old Notes Pursuant To Tender Offer; Completes Arrangement Of Amended And Expanded Revolving Credit Facility; Provides Operations Update - Record Bitumen Production in April 2011

CALGARY, May 31, 2011 /PRNewswire/ - Connacher Oil and Gas Limited (TSX: CLL) ("Connacher" or  "we") announced today that we have now completed the issuance of US$550 million face value 8.5% senior secured second lien notes, due August 1, 2019 ("US Dollar Notes") and CDN$350 million face value 8.75% senior secured second lien notes, due August 1, 2018 ("CDN Dollar Notes" and, together with the US Dollar Notes, the "Notes").

The Notes were originally purchased by a syndicate of investment banks, led by Credit Suisse and RBC Capital Markets as Global Coordinators and Joint Book-Running Managers and including TD Securities as Joint Lead Manager and BMO Capital Markets and AltaCorp Capital as Co-Managers, who in turn resold the Notes pursuant to applicable securities laws exemptions in the United States and Canada.

Net proceeds from the issuance of the Notes were approximately CDN$869 million and were primarily utilized to purchase US$782.9 million, or approximately 99.4%, of the face value of our previously outstanding first lien and second lien secured notes ("Old Notes"), together with the payment of related premiums, consent solicitation fees and other amounts pursuant to tender offers for the Old Notes launched by us on May 10, 2011.  Under US$5 million of the Old Notes remain outstanding as of the date hereof and, if not tendered prior to the final expiration date for the tender offers, are expected to be redeemed at the first opportunity available to us pursuant to their terms.  Credit Suisse Securities (USA) LLC and RBC Capital Markets, LLC acted as Dealer Managers for the tender offers.

Net of payments relating to the tender offers and estimated expenses of the various transactions, the issuance of the Notes also resulted in the addition of approximately CDN$34 million to our working capital.

In conjunction with the completion of the successful tender offers and financing to further enhance Connacher's financial capacity and flexibility, we have also entered into an expanded and extended three-year revolving operating CDN$100 million credit facility.

The refinancing of our Old Notes and arrangement of the expanded credit line significantly improve Connacher's overall financial condition and flexibility, while also resulting in a reduction of our annual cash interest payments to service our indebtedness, which is anticipated to enhance future cash flow.  It also simplified the structure of our balance sheet, provided additional cash balances and extended the due date of our secured debt to 2018 and 2019, or four years beyond the respective previous maturity dates of our Old Notes.  We will continue to have no financial maintenance covenants applicable to our long term debt and modest and acceptable financial maintenance covenants with respect to our revolving credit facility. We also now have incremental additional unutilized borrowing capacity for future financial flexibility, if required.

Our CDN$100 million face value 4.75% convertible subordinated unsecured debentures remain outstanding and will be dealt with in an appropriate manner at or prior to their maturity in June, 2012.

Operational Update

We successfully completed our five day turnaround at Algar during May 2011 and have reactivated our production and ensuing rampup.  Great Divide production for the month of April 2011 was at a record level for the company, reaching 14,169 bbl/d.  We are exerting various efforts to continue the improvement of our overall Great Divide production throughout the balance of 2011.  These include the continued rampup at Algar, the introduction of SAGD plus solvent at Algar during the second half of 2011 and other innovative measures designed to enhance individual well and overall productivity with associated reduction in steam:oil ratios ("SORs").  We continue to provide guidance that our 2011 Great Divide bitumen production will be at average levels for the year of between 14,500 bbl/d and 16,500 bbl/d.

We are fortunate to advise that our Great Divide operations in northeastern Alberta have not been affected by the impact of forest fires in northern regions of Alberta.

We are pleased to advise that the Horse River electrical substation has been activated by the regional utility.  While we are now able to be increasingly reliant on output from our own 13.1 megawatt electrical cogeneration plant for both Pod One and Algar at Great Divide, we now have more confidence than ever before in our ability to access consistent, reliable power, as we also now have available backup capacity.

Prices for heavy oil and bitumen have rallied substantially from their low levels in February 2011 and market conditions have also improved.  We are also experiencing healthy pricing conditions and demand for the products we produce in market areas served by our Great Falls, Montana refinery.  We anticipate a strong year for our refining operation if weather conditions, especially for paving, are cooperative.

Our evaluation program at the company's Pekisko light gravity crude oil  resource play near Twining, in central Alberta, continues to attract our attention and enthusiastic support,  although we have been limited in our ability to accelerate field operations at Twining by an extended spring breakup and recent wet weather conditions. We also hold lands in another area of central Alberta that is prospective for light gravity crude oil in another formation.  Our Board recently authorized a $40 million expansion of our planned investment in these light gravity crude oil resource plays this year, including a one rig, six-well drilling and completion program, anticipated to occur between now and year end.  We are attracted by the strong economics and large potential areal extent indicated by our geoscientific investigations and encouraged by early results. Readers are reminded we are at an early stage of play development and drilling and production results to date are not necessarily indicative of long-term sustainable results.

Connacher had developed five principal initiatives for 2011.

Our primary focus is on production reliability and optimization at Great Divide.   This is well underway, as evidenced by record April 2011 bitumen production and also now that the Algar mandated turnaround is complete and our rampup at Algar can proceed without further anticipated interruption.

A second key objective was the simplification of our capital structure and the improvement of our balance sheet, with the potential of increased available cash flow due to lower interest payments and more overall financial flexibility.  This has now been accomplished.

Thirdly, we were determined to rationalize our asset base and improve our overall corporate liquidity.  We sold our mature Battrum crude oil property in February 2011; we sold our natural gas properties at Marten Creek in April 2011 and, on a combined basis, injected $80 million of cash into our treasury.  We continue to have assets (including investments and non-cash generating properties) held for sale which we anticipate may be sold by year end 2011, which could provide in the range of an additional $70 million.  This added liquidity initially serves to reduce our net indebtedness, until redeployed in high return capital programs.  It also allows us to consider new opportunities with greater confidence, while eliminating any need to access capital markets to fund our 2011 capital budget and still leave us in a strong financial position.

We are continuing to expand our new light gravity crude oil resource exposure with great enthusiasm and early success. We believe this can quickly become a cornerstone asset for Connacher, nicely complementing the long-lived substantial 500 million barrels of Proved and Probable ("2P") reserves we have established at Great Divide.

Finally, in contemplation of our anticipated receipt of regulatory approval for expansion of our already established reserves at Algar, towards a total production capacity of 44,000 bbl/d at Great Divide, we intend to embark on a formal process to determine a suitable form and structure for a joint venture with a third party. The objective of this type of arrangement would be to enhance the underlying value of our assets using third party funding. This would accelerate our realization of the already-identified bitumen production growth potential at Great Divide, without permanent equity dilution or the incurral of additional debt.  We hope to have this process underway shortly after mid-year 2011, with a goal of some form of resolution by year end 2011, about the same time as we anticipate receiving regulatory approval for the Great Divide Expansion Program and related Environmental Impact Assessment ("EIA").  In this manner, we would be favorably positioned to embark on field activity sometime in late 2012, allowing us in the interim the time to benefit more fully from our broadened operational experience and enhanced knowledge from our production activities at Algar and Pod One.  Under these circumstances, we would envisage first   incremental production towards the end of 2013.  At that time, Connacher would accordingly be positioned to participate in the growth of operating cash flow and value enhancement of 2P reserves which could be upgraded to Proved ("1P") producing status, which would be beneficial to both our shareholders and our Note holders.

As we now focus on the second half of 2011, we are enthused about the potential impact of our full year capital program.  We have a stronger, more liquid and stabilized financial condition. We are hopeful crude oil market conditions will stabilize and that the resultant improved netbacks will contribute to improving financial results.

Connacher Oil and Gas Limited is a Calgary-based company whose primary assets are two steam assisted gravity drainage ("SAGD") bitumen production projects, called Pod One and Algar, which are a core part of the company's Great Divide project in Alberta's oil sands area.  Further expansion of the company's bitumen production is contemplated from the continuing rampup of production at Algar, from the application of optimization programs and the introduction of innovative new recovery methods at both projects, including SAGD plus solvent at Algar in 2011.  We hold extensive undeveloped bitumen reserves and are participating in two new light gravity crude oil resource plays in central Alberta.  Our wholly-owned subsidiary owns and operates a 9,500 bbl/d heavy oil refinery in Great Falls, Montana, U.S.A.

Forward Looking Information:

This press release contains forward looking information including but not limited to expectations relating to increased cash flow as a result of reduced annual cash interest payments, anticipated future bitumen production levels, planned implementation of the SAGD plus solvent project and the timing associated therewith, improved stability of power at Pod One and Algar, future development and exploration activities, optimization of production at Pod One and Algar, continued plans to rationalize assets and anticipated proceeds therefrom, possible joint venture arrangements, planned expansion of oil sands operations and productive capacity, planned capital expenditures for 2011 and the potential of Connacher's conventional resource plays.

Forward looking information is based on management's expectations regarding future growth, results of operations, production, future commodity prices and foreign exchange rates, future capital and other expenditures (including the amount, nature and sources of funding thereof), plans for and results of drilling activity, environmental matters, business prospects and opportunities and future economic conditions. Forward looking information involves significant known and unknown risks and uncertainties, which could cause actual results to differ materially from those anticipated. These risks include, but are not limited to: the risks associated with the oil and gas industry (e.g., operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve and resource estimates; the uncertainty of geological interpretations; the uncertainty of estimates and projections relating to production, costs and expenses; and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, risks associated with the impact of general economic conditions, risks and uncertainties associated with securing and maintaining the necessary regulatory approvals and financing to proceed with the operation and continued expansion of the Great Divide oil sands project and risks associated with the sale of other non-cash generating assets.

Additional risks and uncertainties affecting Connacher and its business and affairs are described in further detail in Connacher's Annual Information Form for the year ended December 31, 2010, which is available at www.sedar.com. Although Connacher believes that the expectations in such forward looking information are reasonable, there can be no assurance that such expectations shall prove to be correct. The forward looking information included in this press release is expressly qualified in its entirety by this cautionary statement. The forward looking information included herein is made as of the date of this press release and Connacher assumes no obligation to update or revise any forward looking information to reflect new events or circumstances, except as required by law.

SOURCE Connacher Oil and Gas Limited