Empyrean Energy PLC Proposed Disposal of Sugarloaf for up to US$71.5M (1480M)

TIDMEME

RNS Number : 1480M

Empyrean Energy PLC

18 January 2016

Empyrean Energy Plc / Index: AIM / Epic: EME / Sector: Oil & Gas

18 January 2016

Empyrean Energy PLC ("Empyrean" or the "Company")

Proposed Disposal of Sugarloaf AMI Project for a Consideration of up to US$71.5 million

Empyrean Energy PLC (AIM: EME.L), the profitable US onshore oil, gas and condensate exploration, development and production company with assets in Texas and California, is pleased to announce that it has entered into a conditional purchase and sale agreement (the "PSA Agreement") with Carrier Energy Partners II, LLC ("CEP II"), a Delaware corporation, to dispose of all of its right, title and interest in the Sugarloaf AMI development (the "Sugarloaf AMI Project" or the "Asset") for an initial cash consideration of US$61,500,000 (the "Purchase Price") (the "Transaction"). The Company may also receive, in certain circumstances further set out below, a contingent consideration of a maximum of US$10,000,000. Empyrean currently has a 3% working interest in the Sugarloaf AMI Project, which is operated by Marathon Oil Company, a subsidiary of US major Marathon Oil Corporation (NYSE: MRO) ("Marathon" or the "Operator"). CEP II is a Houston, Texas based private oil and gas company focused on the acquisition and exploitation of upstream assets. Backed with an equity commitment from Riverstone Holdings LLC, its primary objective is to partner with select operators that are developing both unconventional and conventional reservoirs in North America.

Subject to Closing, the Transaction has an effective date of 1 October 2015 (the "Effective Date") and is expected to close in the first quarter of 2016. Following the Transaction, the Company's portfolio will comprise a 58.084% working interest ("WI") in the Eagle Oil Pool Development Project, located in the San Joaquin Basin in southern California; a 7.5% WI in two producing wells and lesser interests in another six producing wells located in the Sugarloaf Block A operated by ConocoPhillips and; a 10% WI in the Riverbend Project, located in the Tyler and Jasper counties, onshore Texas, further details of which are outlined below.

The value of the Transaction means that at, and subject to, Closing, the Transaction would be deemed to be a disposal resulting in a fundamental change of business of the Company under Rule 15 of the AIM Rules. Accordingly, Closing of the Transaction is conditional on the approval of Shareholders at a General Meeting. The Company intends to post a circular to Shareholders and a notice convening a General Meeting as soon as possible.

The Company confirms that it has received irrevocable undertakings from certain Shareholders to vote in favour of the Transaction in respect of a total of 23.6 per cent. of the Company's issued share capital. This includes irrevocable undertakings from Tom Kelly, Chief Executive Officer, who is interested in 20,881,563 Ordinary Shares, representing approximately 9.4 per cent. of the Company's issued share capital, and Messrs Knight, Appleby and Farthing who are interested, in aggregate, in a further 31,552,595 Ordinary Shares, representing approximately 14.2 per cent of the Company's issued share capital.

Empyrean CEO, Tom Kelly, said:

"This Transaction crystallises the value of the Sugarloaf AMI Project at a time when there are significant challenges facing the resources sector in general and, specifically, when the additional financing required to support the Company's continued participation in the development of the Asset in the current low oil price environment would incur either an unacceptable cost or unacceptable dilution when compared with the Transaction. In line with the Board's stated strategy, the last year has seen the Company, led by our partner, Marathon, continue to demonstrate the future upside potential of the Sugarloaf AMI Project and deliver significantly-increased reserves and resources. We believe that we have reached the right time to realise the value of the Sugarloaf asset and de-risk our position against continued depressed oil prices. I hope Shareholders will share in my excitement for the Transaction and the opportunities it may unlock in respect of the Company's remaining assets and others that may arise at a time when drilling and associated costs are significantly reduced and a number of operators and market participants are financially distressed. Subject to the successful completion of the Transaction, we will retain our interests in three further prospective exploration and development projects in the USA, and as a debt-free entity with sufficient working capital, we will be well placed to further develop those assets and build value in the future."

Carrier Energy Partners II CEO, Mark Clemans, commented:

"The addition of these Eagle Ford shale properties of the Sugarloaf AMI project are a complement to our existing unconventional assets located in the Permian Basin. Our non-operated business strategy is to partner with highly successful operators to focus on asset development and value creation in resource plays and other capital intensive basins. Marathon has a proven track record in Karnes County and we are excited to be included in the project as a joint venture partner."

Macquarie Capital acted as financial adviser to Empyrean in respect of the Transaction.

Overview of the assets subject to the Transaction

The Sugarloaf AMI Project is a development project covering approximately 24,000 gross acres in Karnes County, onshore Texas, USA, in the liquids rich core of the Eagle Ford Shale. As outlined above, the Company currently has a 3 per cent. WI in the Sugarloaf AMI Project, which is operated by Marathon, with approximately 290 gross wells in production and an inventory of a further 26 wells drilling and/or in various stages of completion as at 23 December 2015. Average daily production net to Empyrean's interest after royalties from the Sugarloaf AMI Project during the three months to 30 September 2015 was 1,250 boe.

The target in any well is any one of four formations; the Lower Eagle Ford Shale, which has been the major producer to date, the Austin Chalk, which was appraised and delineated for development during late 2013 and 2014, the Upper Eagle Ford Shale, which is expected to become increasingly important, and the upper portion of the Lower Eagle Ford Shale.

Aggregate production net to Empyrean after royalties and costs for the six months to 30 September 2015 ("H1 2015") was 224,182 boe. Revenues attributable to the Sugarloaf AMI Project in H1 2015 (excluding any general corporate or financing costs) totalled US$5,790,000 (H1 2014: US$7,534,000) and net profit before tax was US$3,525,000 (H1 2014: US$4,323,000). As disclosed in the Company's interim results announced on 31 December 2015, the Company's revenues for H1 2015 totalled US$6,033,000 (H1 2014: US$7,911,000) and net profit before tax was US$1,830,000 (H1 2014: US$2,705,000).

On 13 October 2015, the Company announced that an updated reserves report by DeGolyer and MacNaughton had highlighted a further significant increase in the Company's Reserves and Resources at the Sugarloaf AMI Project as set out below:

   --    13.84% increase in Proven Reserves (1P) to 6.58 MMboe (5.78 MMboe to 31 December 2014) 
   --    9.77% increase in Probable Reserves to 7.53 MMboe (6.86 MMboe to 31 December 2014) 

-- 11.63% increase in Proven plus Probable Reserves (2P) to 14.11 MMboe (12.64 MMboe to 31 December 2014 )

-- 10.90% increase in Proven plus Probable plus Possible Reserves (3P) to 23.19 MMboe (20.91 MMboe to 31 December 2014)

   --    2P Reserves plus 2C Resources up 0.65% to 15.59 MMboe (15.49 MMboe to 31 December 2014) 
   --    NPV (10) of 1P Reserves valued at approximately US$45.7m (US$43.8m to 31 December 2014) 
   --    NPV (10) of 2P Reserves valued at approximately US$135.9m (US$121.7m to 31 December 2014) 
   --    NPV (10) of 3P Reserves valued at approximately US$294.7m (US$263.5m to 31 December 2014) 

Principal terms of the Transaction

Pursuant to the terms of the PSA Agreement, the Company has conditionally agreed to sell to CEP II and CEP II has agreed to buy, as of the Effective Date, all of the Company's rights, interests and title in the Sugarloaf AMI Project (less certain excluded assets) for a purchase price of US$61,500,000 in cash plus certain contingent payments (if any) and less any agreed adjustments in accordance with the terms of the PSA Agreement.

The principal terms of the PSA Agreement are as follows:

Conditions to Closing

Closing of the PSA Agreement is conditional on, inter alia:

o the approval of the PSA Agreement and the transactions contemplated by it by the shareholders of the Company;

o the approval of the PSA Agreement and the transactions contemplated by it by the Board; and

o the aggregate amount of the downward adjustment of the Purchase Price at Closing to reflect any payment obligations owed by the Company for disputes relating to title defects or environmental defects (as determined pursuant to the terms of the PSA Agreement) not exceeding 12.5 per cent. of the Purchase Price.

Subject to certain conditions being met and there being no exercise of the termination rights under the PSA Agreement, the Closing of the Transaction shall occur on the later of (i) the fifth business day following Shareholder approval at a General Meeting and (ii) the thirty-first day after the date of the PSA Agreement.

Escrow of Funds

January 18, 2016 04:09 ET (09:09 GMT)

The following definitions apply throughout this announcement, unless the context otherwise requires:

 
 "Austin Chalk"            shale formation overlying the Eagle 
                            Ford Shale 
 
 "boe"                     barrels of oil equivalent 
 
 "D&M report"              an independent appraisal and report 
                            prepared by DeGolyer & MacNaughton, 
                            effective to 30 June 2015 
 
 "Eagle Ford Shale"        shale formation underlying much of 
                            southern Texas in the United States 
 
 "Eagle Oil Pool           the Company's 58.084 per cent. working 
  Development Project"      interest in a target based in the San 
                            Joaquin Basin in southern California 
 
 "Marathon"                a subsidiary of US major Marathon Oil 
                            Corporation (NYSE:MRO) 
 
 "possible reserves"       unproved reserves which analysis of 
  or "3P reserves"          geological and engineering data suggests 
                            are less likely to be recoverable than 
                            probable reserves but with at least 
                            a 10 per cent. probability that the 
                            quantities actually recovered 
 
 "probable reserves"       reserves which, based on the available 
  or "2P reserves"          evidence and taking into account technical 
                            and economic factors, have at least 
                            a 50 per cent chance of being produced 
 
 "prospective resources"   those quantities of petroleum which 
                            are estimated, on a given date, to 
                            be potentially recoverable from undiscovered 
                            accumulations 
 
 "proven reserves"         reserves which, based on the available 
  or "1P reserves"          evidence and taking into account technical 
                            and economic factors, have at least 
                            a 90 per cent chance of being produced 
 
 "reserves"                those quantities of petroleum which 
                            are anticipated to be commercially 
                            recoverable by application of development 
                            projects to known accumulations from 
                            a given date forward under defined 
                            conditions, reference should be made 
                            to the full PRMS definitions for the 
                            complete definitions and guidelines 
 
 "resources"               contingent and prospective resources, 
                            unless otherwise specified 
 
 "Riverbend Project"       the Company's 10 per cent. working 
                            interest in the Wilcox Formation in 
                            the Cartwright Well in onshore Texas 
 
 "Sugarloaf AMI            the Sugarloaf AMI development operated 
  Project"                  by Marathon Oil located in Karnes County, 
                            onshore Texas, USA, in the liquids 
                            rich core of the Eagle Ford Shale in 
                            which the Company has a 3 per cent. 
                            working interest 
 

This information is provided by RNS

The company news service from the London Stock Exchange

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January 18, 2016 04:09 ET (09:09 GMT)