Madagascar Oil Limited Company Update (4596P)

TIDMMOIL

RNS Number : 4596P

Madagascar Oil Limited

18 February 2016

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN OR INTO THE UNITED STATES, AUSTRALIA, CANADA OR JAPAN

18 February 2016

MADAGASCAR OIL LIMITED

("Madagascar Oil" or the "Company")

Company Update

Madagascar Oil provides the following update on the status of its operations, the Partner Process, its financial position and its funding situation, including the potential requirement for the Company to propose a delisting of Madagascar Oil from AIM.

The Company is also pleased to announce the granting of the Environmental Permit for the Tsimiroro Block 3104 Phase 1a Exploitation by the Office Nationale de l'Environnement ("O.N.E.") of Madagascar and the signing of the Environmental Management Programme ("PGE"). This is the first Environmental Permit issued for an oil exploitation project in Madagascar.

Terms used in this announcement have the same meaning as in the Company's announcement of 29 September 2015.

OPERATIONAL UPDATE

The Group continues to operate the Steam Flood Pilot Facility in Madagascar and currently has over 150,000 barrels of Tsimiroro Crude in its storage tanks at the Tsimiroro Block 3104. Under the Tsimiroro Development Plan, the Group is permitted to undertake domestic sales of its Tsimiroro Crude and the Group is in the process of negotiating offtake agreements with local power suppliers. Whilst it is in advanced negotiations with Symbion Power regarding a Fuel Supply Agreement for the Mandroseza power station, no sales agreement has been concluded and there have been no sales to date. Pursuant to the terms of the Bridge Facility, any revenues from oil sales (less associated transportation costs) are to be applied to repaying amounts outstanding under the Bridge Facility.

On 29 September 2015, the Company announced that, due to storage capacity constraints at the Tsimiroro Facility and in response to the challenging oil price environment that continues to persist today, the Group had decided to scale down operations and production from the Steam Flood Pilot, until such time as an offtake agreement has been signed for the domestic sale of Tsimiroro Crude and the Partner Process has come to a successful conclusion. The scale down is being implemented according to plan, including shut down of steam injection and managed reduction of production to an average daily-rate of 100-150 barrels of oil per day ("bopd").

As announced by the Company on 15 December 2014, Madagascar Oil S.A. has formally requested a two year extension of the exploration periods for blocks 3105, 3106 and 3107 from the Malagasy Government. This formal request was made ahead of the scheduled end date of the current exploration periods and the Group remains hopeful of receiving these extensions in the near future.

ENVIRONMENTAL PERMIT APPROVAL

The process for obtaining the Environmental Permit was launched on 23 June 2015, upon submission of the Environmental and Social Impact Assessment ("ESIA") for Exploitation Phase 1a of the Tsimiroro Block 3104, in accordance with Decree No. 2004-167 (setting compatibility between Investment and Environment) and other legal texts including the Madagascar Petroleum Code and the Production Sharing Contract signed between the Malagasy Government, represented by OMNIS, and Madagascar Oil S.A.

The evaluation of the ESIA lasted over seven months and was conducted by:

- A Technical Assessment Committee ("CTE"), coordinated by O.N.E. for reviewing the technical aspects of the ESIA;

- A Commission of Inquiry and Public Hearing ("CEAP") assessing the social aspects relating to project execution: 11 public consultation sessions were held, including 7 sessions in the municipalities surrounding the Tsimiroro site (Ankondromena, Andramy, Beravina, Betsipolitra, Soaloka, and Ankavandra, Morafenobe), 3 sessions in the local regions (Menabe, Melaky and Bongolava) and a national level Public Consultation (Antananarivo).

During the evaluation process, key issues submitted in the ESIA were studied by the CTE and raised during the public consultation sessions. These included aspects relating to biodiversity, water management, waste management and emissions, management of grazing areas, recruitment, rehabilitation of the national road RN1 / RN1bis and the local content component.

The evaluation process included adjusting the measures suggested by the Group to address, minimise or correct the impacts of its activities on the environment and on the local population. This assessment and the consultations which have followed have resulted in the signing of the Environmental Management Programme ("PGE"), which includes all mitigation measures agreed during the ESIA evaluation.

The granting by O.N.E. of the Environmental Permit and the signing of the PGE for Exploitation Phase 1a is a significant milestone in the enforcement of the Production Sharing Contract signed between Madagascar Oil S.A. and OMNIS, as it is the starting point of the implementation of the Tsimiroro Block 3104 Development Plan, approved by the Malagasy Government in April 2015. This is the first Environmental Permit issued for an oil exploitation project in Madagascar.

Chief Executive Officer, Robert Estill, commented:

"The granting of this Environmental Permit is a significant milestone for the country and for the Company, as it is the first ever permit for the petroleum exploitation industry in Madagascar. We engaged in open and close dialogue with the National Environment Office and public institutions during the process of ESIA assessment and we are looking forward to continuing in this manner. With this permit, Madagascar Oil's goal is to be an exemplary company in the petroleum industry as we proceed with the Tsimiroro field development."

PARTNER PROCESS UPDATE

Since the summer of 2015, the Company has been conducting, with the assistance of Jefferies and other advisers, a "Partner Process", to identify and secure a strategic partner(s), to work with Madagascar Oil on the development and funding of the Tsimiroro Block. The Company can confirm that this Partner Process is continuing, but that it has yet to yield any actionable proposals.

There remain a number of discussions ongoing, but it will take time to confirm whether any of these discussions can be converted into an executable deal and there is no guarantee that any of them will be consummated within any predictable timeframe, if at all.

Under the terms of the Bridge Facility, the Company provided a Lender Report to the lenders on 6 January 2016. In this, the Company reported that it had presented the opportunity to over 140 organisations ranging from E&P companies, oil services companies, private equity firms and private investors. The Lender Report explained that a number of leads were being pursued and were undertaking due diligence including:

-- An Asian consortium, including upstream and infrastructure expertise, which was undertaking formal technical due diligence which it hoped to complete within 2-3 months.

-- A southern African Investment firm, which had undertaken initial internal due diligence and wished to continue with more in depth due diligence which it estimated would take around 2 months.

-- An Asian E&P company, which was potentially interested in an asset farm-in deal and had amassed a significant due diligence team but expected that the due diligence process would take between 2-4 months to complete.

-- Various large multinational oil and gas services companies, who were at various stages of due diligence and were potentially interested in arrangements to provide services to the Tsimiroro Block 3104.

As at the date of this announcement, the Company understands that these companies are still interested in the project and can confirm that due diligence is continuing. However, there have been no formal or informal offers received by the Company from any of these parties at this stage and no certainty that any offers will be forthcoming.

FUNDING SITUATION

In parallel with the Partner Process, the Company has also sought to identify alternative sources of short-term funding for the Company, either by way of equity, debt, contractor and offtake partner funding.

With respect to short term funding, as announced on 29 September 2015, the Company entered into a US$21.89 million Bridge Facility, provided by Outrider Management LLC ("Outrider"), BMK Resources Ltd ("BMK"), SEP African Ventures Ltd ("SEP") and the John Paul Dejoria Family Trust ("JEP"), together "the Lenders"). The First Tranche under the Bridge Facility, comprising US$8.9 million of new funds, was received by the Company by 13 October 2015. Under the terms of the Bridge Facility, a further second tranche of up to US$8 million of new funds ("Second Tranche") would be potentially available from 1 February 2016, at the sole discretion of each of the Lenders, if they were satisfied with the progress being made by the Company towards achieving its objectives (including pursuant to the Partner Process).

As at the date of this announcement, approximately US$14.4 million, including rolled up interest, is outstanding under the Bridge Facility, but no Second Tranche funds have been drawn down.

Following discussions during January and early February 2016, the Lenders advised the Company that they were not prepared to provide the full amount available under the Second Tranche of the Bridge Facility, but some of them indicated that they may provide some further funding, subject to additional conditions.

As at 31 December 2015, the Company had approximately US$2.8 million in available cash and US$1.5 million trade and other payables due during the first quarter of 2016. Accordingly, the Company urgently needed to secure additional financing in early 2016 to continue the Group's operations and to allow the Company to operate as a going concern.

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