Proposed Acquisition-McCoy Interest & Fundraising
Prior to publication, the information contained within this announcement was deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR"). With the publication of this announcement, this information is now considered to be in the public domain.
4 November 2019
Rose Petroleum plc
("Rose" or the "Company")
Proposed Acquisition of McCoy Lease Interest and Equity Fundraising
Rose Petroleum plc (AIM: ROSE), the Rocky Mountain-focused oil and gas company, is pleased to announce it has entered into a Letter of Intent ("LOI") with Captiva Energy Holdings II, LLC ("CEH") for the proposed acquisition of an initial 10% of CEH's 89.5% net working interest in the 317-acre McCoy lease located in the Denver-Julesburg Basin ("DJ Basin") in Weld County, Colorado, U.S. (the "Acquisition").
In addition, the Company will have an option to acquire, at its sole discretion, up to a further 80% of CEH's 89.5% working interest in the McCoy lease (the "Option").
The directors of the Company (the "Board") consider that the proposed Acquisition will provide Rose with near-term, low-risk horizontal development drilling exposure in the prolific Niobrara shale play, and on acreage contiguous to other major DJ Basin operators including Occidental Petroleum Corporation, Great Western Operating Company LLC, and Crestone Peak Resources. The DJ Basin is a mature oil basin currently undergoing a resurgence as vertical production is replaced with successful one and two-mile horizontal well developments. The McCoy lease is located in an active part of the DJ Basin and a horizontal redevelopment of the existing productive lease is proposed, with a forecast commencement date in mid-2020 for an initial 12 well drilling programme with up to two-mile long laterals (the "Initial Drilling Programme").
The Company expects to shortly conclude an equity fundraising to raise up to £1.25 million (the "Placing") at 1.1p per share ("the "Placing Price"), and a portion of the proceeds from the Placing will be committed to the Acquisition. Further details on the Placing can be found below.
Colin Harrington, Rose CEO, commented: "The DJ Basin is a world-class, liquids-rich resource play with over 4,000 horizontal wells drilled to date. There is significant infrastructure in place with available capacity, and ready access to service providers and contractors. Rose's new management team, as well as that of our partner CEH, has significant experience delivering production from horizontal development in close proximity to the McCoy lease.
"This proposed Acquisition, and associated Option, is the first in a series of expected deals designed to build value via attractively priced, low risk assets which can deliver production in the short term. We believe the McCoy lease will be an excellent addition to the Rose portfolio and will both complement and balance our newly restructured Paradox Basin appraisal asset.
"I look forward to updating the market on our progress as we build and grow our asset portfolio."
The Acquisition has multiple commercial benefits:
· A near-term, low risk development opportunity alongside Captiva Energy Partners, LLC ("CEP"), a U.S. based industry partner with a proven track record of successful horizontal development in the immediate area;
· An attractive entry cost when compared to similar transactions, with consideration payable in Rose shares at a premium to the Placing Price;
· A robust, accretive project with strong well economics;
· Near-term production programme proposed, with drilling anticipated within a year;
· Optionality to acquire up to a further 80% of CEH's working interest in the McCoy lease at Rose's sole discretion; and
· Ongoing discussions to enlarge the project and secure a significant funding partner for the project's development.
The Acquisition will give Rose access to prime acreage within the prolific DJ Basin Niobrara shale play with optionality to increase its working interest position significantly. It also marks the beginning of a partner relationship with CEH and its management team, which operates through CEP. This partnership will provide further deal flow, access to proven competence and a wealth of experience in the Rocky Mountain region. The deal fits well with the stated Rose strategy targeting low-risk, low-entry cost acquisitions which can deliver near-term production to balance the Rose asset portfolio currently comprised of the longer-term Paradox Basin appraisal asset.
CEP is managed by Paul Onsager and Bill Hayworth (the "Executive Team"), two professional engineers, each with more than 30 years' domestic US and international oil and gas industry experience with the last five years focused almost exclusively on the DJ Basin. Since founding CEP in 2016, the team executed a successful horizontal development on farm-out acreage from Anadarko, sold a horizontal development to Great Western Oil & Gas and purchased CEH's interest in the McCoy lease from Vanguard Natural Resources. Prior to CEP, Paul and Bill led a DJ Basin horizontal development programme for a Colorado-based private equity backed oil and gas firm. Prior to that, Paul was VP Operations for the Rockies Asset team at Pioneer Natural Resources, former VP for Reservoir Engineering at Norwest Corp and former Reservoir Engineering team leader at the U.S. Bureau of Land Management. Bill is the former President of PRB / Black Raven Energy and the former VP of Operations at Intoil (both Rocky Mountain-focused oil companies), and he has held senior engineering and operations roles at Unit Corporation, Patrick Petroleum and Phillips Petroleum. Both Bill and Paul are registered Professional Engineers in the State of Colorado.
McCoy Lease Background
CEH initially acquired its interest in the McCoy lease from Vanguard Natural Resources in September 2018. Since the acquisition, CEH has invested additional capital related to permitting and partner negotiations for the planning of a horizontal redevelopment of the McCoy lease, and total cash expenditure by CEH to date has been $2.7 million. Rose will be purchasing its percentage of the McCoy lease at CEH's pro-rata cost, which the independent directors of Rose believe is an attractive valuation when compared to other acreage transactions in the immediate area.
The McCoy lease offers near-term, low-risk horizontal development drilling exposure that will target the proven Niobrara and Codell Formations' chalk and sandstone reservoirs. These formations both have existing commercial production from horizontal wells on the lands directly off-setting the McCoy lease.
Pending definitive agreements with potential strategic partners and mandatory consents, and following completion of the Acquisition, Rose will have the right to participate in the proposed Initial Drilling Programme, further details of which are set out below. These wells will target the Niobrara and Codell Formations.
Reserves and production data will be made public pending completion of a Competent Person's Report ("CPR") and partnership discussions.
The Acquisition (including the Option) is subject to, inter alia, the completion of technical and financial due diligence by Rose, execution of a formal sale and purchase agreement, successful conclusion of partnership discussions, and approval of the application for a Drilling Spacing Unit ("DSU") to accommodate the drilling of up to two-mile laterals (for the proposed Initial Drilling Programme) across multiple leasehold interests, including the McCoy lease.
CEH and Rose are working with partners to implement a DSU on which the Initial Drilling Programme is expected to commence in mid-2020. Rose estimates that there is the potential to drill up to 26 wells within the proposed DSU.
As the Initial Drilling Programme will be across multiple leasehold interests, Rose currently expects that the 10% working interest in the McCoy lease being acquired will result in Rose having an approximate 2.217% working interest in the Initial Drilling Programme, rising to a maximum approximate 19.954% working interest in the Initial Drilling Programme should the Option to acquire the additional 80% working interest in the McCoy lease be exercised in full.
The Company estimates that the total CAPEX for the 12 well programme will be circa US$72m, or circa US$6m per well, and the expected Estimated Ultimate Recovery from each of the wells will be circa 850,000 barrels of oil equivalent (0.85mmboe).
The proposed low-risk Initial Drilling Programme would, if successful, and based on current oil prices, generate significant cashflows to Rose and would be accretive to shareholders.
Based on the proposed Initial Drilling Programme, Rose's CAPEX on its initial acquisition of 10% of CEH's working interest ("Initial Tranche") is currently forecast to be $1.6 million, with up to a further $12.6 million CAPEX should the Option be exercised in full. In addition, Rose will also carry CEH to an equivalent 11.1% of Rose's CAPEX on the first 20 wells drilled on the lease. The carry obligation on the Initial Tranche would be approximately $175,000 and would be scaled upwards pro-rata for the first 20 wells if the Option is exercised.
Consideration to CEH for the Initial Tranche will be calculated based on CEH's pro-rata portion of all back costs (including acquisition and development costs) associated with the Initial Tranche. As outlined above, CEH's back costs to-date have been $2.7 million, so the pro-rata portion net to Rose's interest is $270,000 (approximately £208,000) (the "Consideration"). The Consideration will be satisfied by the issue of new ordinary shares of 0.1p in Rose ("Ordinary Shares") to CEH, priced at 1.32p per share (being a 20% premium to the Placing Price) ("Initial Consideration Shares").
In addition, Rose will also carry CEH to an equivalent 11.1% of Rose's CAPEX on the first 20 wells drilled on the McCoy lease (the "Carry"). If Rose exercises its Option to acquire a 50% working interest or greater in the McCoy lease, it will also be responsible for CEH's proportionate share of the plugging and abandonment costs of the five existing vertical wellbores prior to horizontal redevelopment.
As part of the proposed Acquisition, Rose will also receive the Option, valid up to and including 28 February 2020, and extendable at the sole discretion of CEH, to acquire up to a further 80% of CEH's interest in the McCoy leasehold (excluding ownership of the existing vertical wellbores) if Rose can demonstrate sufficient means to fund its share of the related McCoy development CAPEX budget for any additional working interest acquired, as well as funding the Carry as described above. During this option period, Rose can acquire any percentage that it chooses, in several tranches, at its sole discretion. The price for the subsequent tranches in the lease will be calculated on the same basis as the Initial Tranche (linked directly to pro-rata back costs, adjusted to reflect any subsequent development costs incurred by CEH) and will also be payable in new Ordinary Shares. The number of shares to be issued for exercising the Option will be determined by the 60-day volume weighted average price of Ordinary Shares on the date the Option is exercised divided into the pro-rata back costs.
On completion of the Acquisition, an ongoing management fee will be payable by Rose to the Executive Team of CEP (which, for the avoidance of doubt, excludes Rick Grant and Colin Harrington) to manage and oversee the project on Rose's behalf.
As outlined above, the Acquisition (including the Option) is subject, inter alia, to completion of technical and financial due diligence by Rose, execution of a formal sale and purchase agreement, successful conclusion of partnership discussions, and approval of the application for the DSU to accommodate the drilling of up to two-mile laterals (for the proposed Initial Drilling Programme) across multiple leasehold interests, including the McCoy lease. As such, there can be no certainty that a final agreement will be entered into to enable the Acquisition to proceed. The Initial Consideration Shares will be issued when Rose and CEH enter into the formal sale and purchase agreement for the Acquisition.
In order to part-finance the Company's CAPEX obligations on the Initial Tranche, which includes its contribution to the Initial Drilling Programme in 2020, the preparation of a CPR and due diligence on the Acquisition, as well as to provide the Company with additional working capital, Rose is expected to shortly conclude the Placing.
Origin Creek Energy LLC ("OCE") and Chris Eadie (Finance Director of Rose) have indicated that they intend to participate in the Placing for £480,000 and £10,000 respectively.
A further announcement with details of the Placing is expected to be released shortly.
Related Party Transaction
CEH is indirectly controlled by OCE. The shareholders of OCE are Rick Grant, the Chairman of Rose, and Colin Harrington, the CEO of Rose and who are also directors of CEH and the directors of OCE. Therefore, the Acquisition including the Option, should it proceed, would be a related party transaction pursuant to rule 13 of the AIM Rules for Companies.
Rose Petroleum plc
Colin Harrington (CEO)
Chris Eadie (CFO)
Tel: +44 (0)20 7225 4599
Tel: +44 (0)20 7225 4599
Allenby Capital Limited - AIM Nominated Adviser
Jeremy Porter / James Reeve / Liz Kirchner
Tel: +44 (0)20 3328 5656
Turner Pope Investments - Joint Broker
Andy Thacker / Zoe Alexander
Tel: +44 (0)20 3657 0050
Cantor Fitzgerald Europe - Financial Adviser and Joint Broker
Tel: +44 (0)20 7894 7686
Novum Securities Limited - Joint Broker
Tel: +44 (0)20 7399 9427
Tel: +44 (0) 20 3633 1730
Dr Gregor Maxwell, BSc Hons. Geology and Petroleum Geology, PhD, Technical Adviser to the board of Rose Petroleum plc, who meets the criteria of a qualified person under the AIM Note for Mining and Oil & Gas Companies - June 2009, has reviewed and approved the technical information contained within this announcement.
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