Solo Oil invests in Reef Resources through loan agreement

Solo Oil (AIM: SOLO) has agreed terms for an investment in Reef Resources (TSX-V: REE), through a staged C$1.65m loan facility which will provide Solo with certain revenue sharing arrangements. Reef Resources’ primary asset in Ontario, has estimated proved and probable reserves of 35,533 barrels of oil equivalent (boe) and 159,370 boe respectively. The project is currently shut-in awaiting development financing to take it into production.

Upon financing, Solo said that production is estimated to re-commence in Ontario within two months. The investment is expected to be completed by early May 2010.

“The financing facility provides Solo with the opportunity to participate in a producing asset with immediate production revenue payback and reserves security, as well as the opportunity of establishing a working relationship with Reef with a view to increasing collaboration both in the Ontario basin and other assets throughout Canada”, Solo stated.

Through the non-interest paying loan, Solo will receive a revenue share equivalent to 48% of all oil gross revenues, and 54% of gas gross revenues for all incremental production from the funded development stages.

Subsequently, upon loan repayment, Solo will continue to receive 50% of the net operating income from the funded development stages, with an exclusive first-right option to increase its participation in both the Ontario asset and Reef’s shareholding structure.

Under the terms of the two-stage C$1.65m loan facility, Solo will first provide C$750,000 to re-establish oil and gas production in Ontario, and Solo will receive 60% of net production post-tax revenue. Subsequently, Solo will provide a further Stage two loan investment of another C$900,000 once production has recommenced, to fund additional production enhancements - including new wells, re-completions and tie-ins.

The company also highlighted that a Solo representative will act as an advisor to Reef, providing commercial and operational advice. On repayment of the loans, Solo will revert to 50% of the net operating income from the funded stage developments.

“Solo’s investment in Reef will provide us with exposure and access to international financing resources”, Reef President & CEO Arnie Hansen commented. “We look forward to working closely with Solo and its team of experienced oil and gas and corporate finance professionals.”

Reef Resources’ Ontario asset, the Ausable reef, is a fully developed Guelph pinnacle reef of Silurian age, and the company said it has a 312-acre footprint, is cylindrically shaped with a gross pay interval ranging between 45 and over 100 meters thick, at a depth between 500-620 meters.

According to Reef Resources, the Reef Ausable #1 discovery well had an initial production rate of 350 thousand cubic feet per day (mcf/day) and 25 barrels of 38 API oil.

Reef Resources highlights that the Ausable reef is analogous, with similar geology, to the nearby Grand Bend Pool. According to Reef, the Grand Bend Pool has produced over 900,000 barrels of oil since 1956.  In 1998 and 1999, Reef completed 23,500 acres of high quality 3D seismic across the area. The company noted that the seismic data indicates three more fully developed Guelph pinnacle reefs - two of which are owned by Reef Resources - and numerous connecting incipient reefs within the seismic survey area.

Reef Resources emphasised that it has established a four-stage production development program, which includes the drilling of a series of multi-zone well targets, executing recompletions and tie-ins.

The Alberta-headquartered company noted that the Solo loan covers the first two stages of expenditure on this program and that the successful execution of the program would also enable Reef to capitalize on the gas storage and gas recycling rights on the acreage, once depleted.

In addition to its properties in Ontario, Reef Resources has also identified multiple oil and gas acquisition and development opportunities throughout Canada.

Solo Oil, through its mandated investment strategy, plans to acquire a diverse portfolio of direct and indirect interests in exploration, development and production oil and gas assets, based in the Americas, Europe or Africa.

Last week, Solo decided to exercise its option to take up a 12.5% interest in the Ruvuma PSA (production sharing agreement) and in the joint operating agreement between Aminex’s (LSE: AEX) subsidiary Ndovu and operator Tullow Oil (LSE: TLW).

Through the newly expanded joint venture, the partners are exploring the prospective Ruvuma delta region in Tanzania. The PSA covers approximately 12.000 square kilometres of which roughly 80% is onshore and 20% offshore. Within the PSA are two specific, adjoining licence areas, known as Lindi and Mtwara.

The Likonde-1 wildcat well was drilled in the Lindi Block. Likonde-1, which was drilled to a total depth of 3,647 metres and intersected two sandstone intervals of over 250 metres (820 feet) combined thickness with evidence of residual oil and gas. The encouraging results will be followed up with detailed technical work prior to selecting the next drilling location.