12 Jan 2016
Rescheduling of Skipper Well and proposed £10 million Additional FundingIndependent Oil and Gas plc ("IOG" or the "Company") (AIM: IOG.L), the North Sea focused oil and gas company, provides the following update on its plans to drill the Skipper appraisal well and its forward funding plans to mid-2018.
Skipper appraisal well
Following recent oil price movements and bad weather in the North Sea, IOG believes that it is in the best interests of shareholders that the Skipper appraisal well is delayed until there is greater stability and clarity in the oil market.
The existing timetable for drilling Skipper in Q1 2016 requires the announced loans and contractor deferral funding to be repaid by IOG at the end of 2016. IOG now considers this refinancing risk to be increased due to the very weak commodity prices and negative market sentiment towards oil and gas.
Moreover, the very bad weather in the North Sea has increased concerns that significant delays could be encountered or a sub-optimal well result may be achieved. Therefore, the Board believes that drilling in a more favourable weather window with at least some improvement in market sentiment would be prudent.
The Company now anticipates the Skipper appraisal well to be drilled later this year. To achieve this revised timetable, IOG will need agreement from its principal lenders and contractors and agreement from the OGA to extend the Skipper licence beyond 30 March 2016. These critical discussions are ongoing.
Proposed £10million additional funding
To facilitate this rescheduling and also to provide capital for potential acquisitions, London Oil and Gas Ltd (“LOG”) has agreed terms in principle with IOG to provide a further £10 million of convertible debt funding. This funding is subject to the execution of legally binding documentation which is expected to be completed shortly.
The further loan funding would be in addition to the existing £2.75 million and £0.8 million loans from LOG, as announced on 7 December 2015 and 11 December 2015 respectively, both of which remain undrawn as certain conditions precedent to their drawdown have yet to be satisfied.
The contemplated additional financing agreements envisage that LOG would also potentially provide access to significant additional funds for acquisitions and developments. Reaching a position acceptable to LOG with certain existing creditors of IOG will be a Condition Precedent to the new loan. The £10 million loan would be secured against IOG’s assets and fully convertible at LOG’s election into IOG ordinary shares at a conversion price of 10p.
£3 million of this new funding would specifically cover G&A and licence fees for the next 30 months. The Board is therefore confident that subject to this agreement proceeding and the Company being able to drawdown on the sums committed, IOG will obtain immediate working capital and have financial security until at least mid-2018.
Given IOG’s current inability to drawdown on the existing loans from LOG, in the event that IOG is unable to close this additional funding deal with LOG and draw down on the sums committed in short order, the Company will have an urgent funding requirement. The Company will provide an update in due course.
The £7m balance of the proposed funding would be used to add value to the IOG portfolio, both organically and via acquisitions. The downturn in the oil and gas market creates significant opportunities and IOG is reviewing several potential acquisitions that could add materiality and diversity to its current portfolio.
It is proposed that the loan would need to be drawn in full within three years of completion. Each drawing would then need to be converted into ordinary shares in IOG three years after drawing. If committed, the funding would not be able to be used for debt repayments.
Subject to completion of the loan agreement and satisfactory regulatory due diligence, IOG will invite two members of the LOG team to join the board.
Mark Routh CEO of IOG commented:
Upon completion, this £10 million funding deal with LOG would be a major milestone for IOG, ensuring that we would be in the best possible position not only to survive this severe industry downturn but also to capture some of the opportunities that it creates.
Whilst it has been a very difficult decision, it has undoubtedly become prudent to postpone the Skipper appraisal well given the significant further oil market weakness in recent weeks, as well as unsettled weather conditions in the North Sea.
We very much appreciate the support to date from our various stakeholders and are now working hard to get the loan funding fully documented and to enable the Skipper well to be rescheduled to the earliest feasible date.
We are excited about working more closely with LOG and look forward to formalising the proposed loan agreements and inviting new appointments to our board in due course.
About Independent Oil and Gas:
IOG is an oil and gas company with established assets focused on the UK North Sea. The company's strategy is to deliver near term development and production assets in North West Europe, through its extensive technical and commercial expertise, whilst maintaining some exposure to exploration upside. The company is looking to grow both organically and through acquisition. After the completion of the Skipper acquisition from Alpha Petroleum Resources Ltd. (“Alpha”), the combined estimate of 2P reserves in Blythe and 2C resources in Skipper net to IOG will be 37.1 million barrels of oil equivalent (“MMBoe”).
Post completion of the Cronx acquisition IOG will have five licences in the North Sea. Four of these licences will now be owned 100% by IOG and subject to DECC/OGA approval will be operated by IOG. The Blythe licence is co-owned 50% with Alpha which is the operator. IOG has a 100% working interest in two other licences, one awarded in the 27th licensing round and another in the recent 28th licensing round. One is to the east of Blythe containing the Truman prospect and Harvey discovery and the other is between the Blythe and Cronx licences which contains the Elgood and Hambleton discoveries and the Tetley and Rebellion prospects. Both these 100% owned licences have potential resources that could be tied back to nearby infrastructure or to the Blythe development.
Further information can be found on www.independentoilandgas.com
The Blythe gas discovery straddles Blocks 48/22b and 48/23a in the Southern North Sea in licence P1736 which is 50% co-owned by IOG and Alpha (operator). Blythe needs no further appraisal and has independently verified gross 2P reserves of 34.3 BCF (6.1 MMBoe) which is 17.2 BCF (3.0 MMBoe) net to IOG. (Source: ERC Equipoise Competent Person’s Report (“CPR”) dated September 2013.)
The Skipper oil discovery is in Block 9/21a in the Northern North Sea in licence P1609. Skipper needs further appraisal by drilling a well to retrieve an oil sample in order to design the optimum field development plan. Subject to the completion of the previously announced acquisition of Skipper from Alpha, IOG can now progress to the appraisal and development stage of this asset. Skipper has independently verified gross 2C resources of 26.2 MMBbls. IOG management estimates that the recoverable oil from Skipper is 34.1 MMBbls based on a recovery factor of 25%, compared to the historic CPR estimate of 19%. Successful flow tests from nearby heavy oil fields substantiate the company’s estimate of a 25% recovery factor. The appraisal well will also target two exploration prospects directly beneath the Skipper oil discovery which may contain oil in place of 46 MMBbls. (Source: AGR Tracs CPR dated September 2013.)
IOG has agreed to acquire 100% of Cronx (Block 48/22a, licence P1737) which is subject to completion. The Cronx gas discovery is 14km north-west of the Blythe field in which IOG owns 50%. Cronx was discovered in 2007 by well 48/22b-6 drilled by Perenco UK Ltd.
IOG commissioned an independent CPR by ERC Equipoise on Cronx in July 2012 which shows a base case expected gas recovery of 17.6 BCF or 3.4 MMBOE 2C resource. IOG anticipates drilling a well in 2016, subject to rig availability, the necessary permits and funding. IOG expects the well to confirm the recoverable resources, which IOG believes has the potential to be larger than the 17.6 BCF base case in the CPR. IOG is currently evaluating options for the development and export of the Cronx gas.
About Elgood and Hambleton:
The Elgood discovery (IOG 100%) (Block 48/22c, licence P2260) was drilled by Enterprise Oil in 1991 and tested gas to surface at 17.6 MMcfd but was not progressed by Enterprise due to size and gas prices at that time. IOG's estimate of the recoverable reserves in Elgood is 2.1 MMBoe.
The Hambleton discovery, to the south of the same licence, was drilled by Century Exploration in 2005 but also was not progressed to development. IOG estimates that Hambleton has recoverable resources of 6 BCF (1 MMBoe). IOG believes that the reprocessing of existing 3D seismic data could increase recoverable resources up to 26 BCF.
There are prospective resources on licence P2260 of 5.3 MMBoe in the Tetley and Rebellion prospects. Reprocessing of existing 3D seismic across 48/22a and 48/22c is required to determine whether Elgood connects to Cronx which would boost recoverable reserves significantly. The new seismic interpretation will also determine the likely size of Hambleton. IOG is now working on the potential development plans and will commission a CPR to confirm the resources over this area.
Competent Person’s Statement:
In accordance with the AIM Note for Mining and Oil and Gas Companies, IOG discloses that Mark Routh, IOG's CEO and Interim Executive Chairman is the qualified person that has reviewed the technical information contained in this announcement. Mark Routh has an MSc in Petroleum Engineering and has been a member of the Society of Petroleum Engineers since 1985. He has over 35 years' operating experience in the upstream oil and gas industry. Mark Routh consents to the inclusion of the information in the form and context in which it appears.
About London Oil and Gas:
Further information can be found on http://www.londongroupplc.com/