Obsidian Energy Ltd. went public early Monday with a non-binding proposal to buy Bonterra Energy Corp., while warning that only a “vastly inferior” option exists as the firms struggle to maintain market confidence.

Obsidian interim president and chief executive Stephen Loukas said in a publicly-released letter to Bonterra chairman, president and CEO George Fink that, based on the information it has access to, Obsidian is prepared to swap two of its shares for each Bonterra share. He also dangled the possibility of sweetening that exchange ratio if Bonterra can “demonstrate additional value.”

Loukas warned that Obsidian “is prepared to pursue all options” to get the deal done if Bonterra doesn’t engage in negotiations in the coming days, and that it expects a response by Sept. 4.

“Bonterra currently trades at a premium to Obsidian Energy and other relevant public oil producing companies, despite recent performance that has been weaker than Obsidian Energy as measured by cash flow, operating costs, and well results. We recognize the attractive, low-decline attributes of Bonterra’s portfolio, but we do not believe that the Bonterra valuation premium will be sustained in the stand-alone entity,” Loukas wrote in the letter.

According to Loukas’ letter, the two Calgary-based oil and gas companies have discussed the possibility of a friendly combination since at least January 2019, and Obsidian’s board has been looking to hold “substantive” negotiations since June. In the talks, Loukas claims both sides agreed there’s merit in combining since equity and debt markets “have been sending a clear signal” of no support for small- and mid-cap products. Loukas said his company decided to proceed with its non-binding offer after the two companies disagreed on potential standstill agreements.

In the letter, Loukas listed nine reasons in favour of doing a deal, including the potential to save more than $100 million in costs over the first three years after combining, a lower break-even West Texas Intermediate oil price of U$37 per barrel, and access to alternative financing options.

“We feel strongly that engaging with Obsidian Energy is a far better outcome for Bonterra shareholders than the pursuit of incremental second-lien debt financing from the Business Development Bank of Canada. It is clear that adding more debt to an already over-levered balance sheet is a vastly inferior outcome for Bonterra equity holders compared to the synergies and corresponding share price appreciation that a merger would enable,” Loukas wrote.