LHD Lochard Energy

TIDMLHD

RNS Number : 0495G

Lochard Energy Group PLC

31 May 2013

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART, IN, INTO OR FROM ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF SUCH JURISDICTION

31 May 2013

Lochard Energy Group PLC

("Lochard" or the "Company")

Operational and trading update and offer by The Parkmead Group plc ("Parkmead")

On 23 May 2013, Parkmead announced a recommended all-share offer for Lochard with the support of shareholders who in aggregate hold approximately 40.1 per cent. of the issued ordinary share capital of the Company, expressed by way of irrevocable undertakings or letters of intent. The support has now increased to approximately 41.4 per cent. as at 30 May 2013.

The Lochard Directors (the "Directors") note the announcement dated 30 May 2013 from a consortium of investors, represented by Cornhill Capital Limited, (the "Cornhill Consortium").

This announcement provides an operational and trading update on Lochard as well as further detail on the Directors' rationale for recommending Parkmead's offer. The Directors encourage Lochard shareholders to read this announcement to get an accurate understanding of the Company's current operational and financial position.

Exploration assets

The Company lost its status as a North Sea operator in February 2013 because it no longer had the financial resources to meet its licence commitments. This involved Lochard having to relinquish its interest in the Thunderball licence, its only appraisal and development prospect, because of a lack of funding availability to meet a firm drilling commitment. Accordingly, the Company is no longer able to operate its remaining three North Sea exploration interests.

The Company's subsidiary, Zeus Petroleum Limited ("Zeus"), has interests in three exploration licences:

-- Blocks 9/17b & 22b; Lochard holds a 90 per cent. working interest (this will fall to a 50 per cent. working interest should the farm-out agreement with Strike Oil Limited ("Strike Oil") close

-- Block 14/17 (which includes the prospect analogous to Athena, sometimes also called North West Athena); Lochard holds a 50 per cent. working interest,Strike Oil holds a 40 per cent. working interest

-- Blocks 3/5 & 10c; Lochard holds a 50 per cent. working interest, Strike Oil holds a 40 per cent. working interest

Aimwell Energy Limited ("Aimwell") holds a 10 per cent. carried interest on the three exploration licences. Lochard is responsible for funding Aimwell's 10 per cent. share of exploration and development costs.

The licences underlying these interests have now lapsed and the Department of Energy & Climate Change has given Lochard until 2 July 2013 to complete a farm-out agreement which would permit Lochard to retain a minority non-operated interest in the licences.

An agreement in principle had been reached with another North Sea Operator (the "Operator") to farm-in and assume the operator role on the Company's three remaining exploration interests.

To participate further in these interests Lochard would need to set aside material funds to develop these three early stage licences to meet, as a minimum, the Lochard share of these cost obligations (plus the carry of the 10 per cent. Aimwell interest in these licences), which could potentially include an exploration well on each licence in 2014.

In the opinion of the Directors, the Company would not have sufficient funds as a stand-alone entity to meet the likely drilling costs and other commitments to which Lochard would be exposed from January 2014 on these exploration assets, while also maintaining sufficient resources to meet potential contingencies in connection with the Athena field.

The Directors believe, therefore, that the best way for Lochard shareholders to retain an interest in these three exploration licences would be to merge with a suitable partner, such as Parkmead. Parkmead has an experienced oil and gas team with a successful track record of exploiting exploration and production opportunities in the UK Continental Shelf and is therefore well placed to maximise value from these licences. In the absence of such a transaction, these licences are likely to lapse and the Company's only remaining asset would be its 10 per cent. non-operated interest in the Athena field.

Athena

The only recent available reserve estimate for Athena to have been published by an independent competent person is that of Sproule International Limited ("Sproule"). The most recent estimate, undertaken for Ithaca Energy Inc, the operator of Athena, is 2P reserves of 22.6 mmbbl (gross) as at 31 December 2012. The reserves as at 31 May 2013 would be lower as the field has continued to produce in the intervening period.

The estimate for 2P reserves contained in an earlier Competent Persons Report commissioned by Lochard from Sproule included recovery from an area of the field possibly outside the drainage area of the existing wells. It is the opinion of the Directors that additional wells may be required to recover the 2P reserves consistent with the Sproule independent estimate. While no additional wells are anticipated to be drilled in the next two years, in the event that the Athena consortium partners decided to develop further parts of the Athena field, Lochard would be liable for its share of the relevant development costs.

Decisions on further capital expenditure at Athena require the agreement of two or more partners having a combined participation interest of at least 65 per cent. With only a 10 per cent. participation interest, Lochard is unable, on its own, to prevent a decision to proceed with any further expenditure on the field.

The Directors are conscious that the original field development plan called for significant additional expenditure two to three years after first oil. The Company's ability to fund any such expenditure will be dependent on the quantum and timing of any cash call by the operator.

Since completion of post-start up commissioning activities, production from the field has been stable at a gross daily rate of between 10,000 and 11,000 bopd (1,000 to 1,100 bopd net to Lochard), and this production comes predominantly from only two wells which are artificially lifted by down hole electrical submersible pumps ("ESPs"). A variety of operational issues during March, April and May 2013, including some short-term interruptions to ESP output, temporarily reduced output from the field below 10,000 bopd. These interruptions highlight the uncertainties to Lochard of being dependent on cash flow from a single asset such as Athena.

Parkmead has a stronger balance sheet and a more diversified asset base, which therefore provides Lochard shareholders with access to a company that is not reliant solely on one producing asset.

Financial position

As at 30 May 2013, Lochard's cash position stood at approximately GBP196,000.

Gemini Oil & Gas Fund II, L.P. ("Gemini") provided funding of $14.0 million to Lochard for the development of Athena in 2011. In return for providing this funding, Gemini are entitled to an overriding royalty on Lochard's share of sales from Athena. Based on forward curve oil prices and forecasted oil production at 31 December 2012, Lochard expects to repay a total of $31.8 million in total to Gemini.

As at 30 May 2013, approximately $13.8 million had been paid to Gemini at a rate of 50 per cent. of Lochard's share of sales from Athena. Under the terms of the funding arrangement, Gemini is entitled to a 50 per cent. overriding royalty until $14 million is paid. A royalty rate of 20 per cent. then applies until a further $14 million has been paid. Gemini is subsequently entitled to a royalty of 5 per cent. and if cumulative production from Athena reaches 20 mmbbl (gross) a 2.5 per cent. royalty applies thereafter. No further payments are due to Gemini once 95 per cent. of the reserves of Athena have been produced.

In addition to the Gemini funding arrangement, as at 30 May 2013, Lochard had drawn down a principal amount of $1.7 million under a loan facility provided by Henderson Global Investors Limited to fund its working capital shortfall. The facility is due for repayment in October 2013. At the time of repayment, Lochard will need to repay the principal amount together with interest (accruing at 12 per cent. per annum) thereon and a repayment premium of 5 per cent. of the outstanding principal amount.

Returning cash to shareholders

In the event the Parkmead offer is not successful, an alternative would be to seek to return cash to shareholders by way of dividends or share buy-backs, when it is possible for the Company to do so. Currently, the Company does not have sufficient distributable reserves to be able to return cash to shareholders in these ways.

Additionally, given the expectation of further cash calls to meet certain potential production and development activity or to meet contingencies related to Athena, the Board would need to maintain an appropriate cash balance to meet those commitments. Lochard's Directors therefore believe that there will be a period in which a sufficient cash reserve would have to be accumulated to meet those commitments, before the Company would be able to consider returning cash to shareholders.

Over the medium term, the Company will also be required to set aside certain cash amounts to meet its projected decommissioning obligations. This is also expected to limit the ability of the Company to return cash to shareholders.

Lochard Directors' Recommendation

It has now been more than 12 months since the previous management team was removed and over eight months since the formal sale process commenced. The formal sale process has been extensive and after thorough evaluation of the options available to the Company, the Directors firmly believe that the all-share offer from Parkmead represents the best course of action for Lochard shareholders, providing a combination of diversification, upside potential and higher liquidity in the shares of the combined entity. In the absence of such a transaction, the Directors' believe the Company's exploration licences will lapse and its only asset would be its non-operated interest in Athena.

The Board notes that the Cornhill Consortium includes individuals with longstanding links to the Company but who are unlikely to be aware of the most recent performance of the Company and its assets. The former CEO of the Company, who was voted off the Lochard Board by a majority of shareholders last year, is also part of this consortium.

The current Board inherited a company in financial distress due to the decisions made by the previous management which included litigation with Senergy UK Ltd which was settled for $9.0 million as well as a A$1.3 million payment due under Australian employment law from the Company to the former CEO on his departure. The focus of the current Board has been to remedy the problems caused by this situation and to act in the best interests of the Company and its shareholders, as a whole.

The Directors, who have been so advised by CIBC World Markets plc, continue to consider the terms of the Parkmead offer to be fair and reasonable. In providing its advice, CIBC World Markets plc has taken into account the commercial assessments of the Directors. In addition, the Directors consider the terms of the Parkmead offer to be in the best interests of the Company and Lochard shareholders, as a whole.

Accordingly, the Lochard Directors continue to intend to recommend unanimously that Lochard shareholders vote in favour of the Scheme at the Court Meeting and the resolutions to be proposed at the General Meeting (or in the event that the Parkmead offer is to be implemented by means of a contractual offer, to accept, or procure the acceptance of, such contractual offer).

In addition, the Directors note that Parkmead has received letters of intent and irrevocable undertakings to vote in favour of the Scheme and the resolutions in respect of 123,719,434 Lochard Shares representing, in aggregate, approximately 41.4 per cent. of the issued ordinary share capital of Lochard.

Clive Carver, Non-executive Chairman, said:

"Your Board's objective has always been to achieve the best possible outcome for its shareholders. After an extensive formal sale process, the unanimous view of the Board remains that the Parkmead offer is fair, reasonable and in the best interests of Lochard's shareholders. Shareholders who are considering rejecting the Parkmead offer need to be very clear that the perceived alternative of accumulating and returning cash to shareholders may take many years to complete and has significant operational and financial risks."

For further information, call:

CIBC World Markets plc +44 (0) 20 7234 6462

Financial adviser and Rule 3 adviser to Lochard

Sameer Pethe

Jonathan Bradfield

finnCap Limited +44 (0) 20 7220 0500

Nominated adviser and Broker to Lochard

Matthew Robinson

Christopher Raggett

CIBC World Markets plc, which is authorised in the UK by the Prudential Regulation Authority and regulated in the UK by the Financial Conduct Authority and the Prudential Regulation Authority, is acting exclusively for Lochard and no one else in connection with the matters described in this announcement and will not be responsible to anyone other than the Company for providing the protections afforded to clients of CIBC World Markets plc nor for providing advice in relation to the matters described in this announcement.

finnCap Limited, which is authorised and regulated in the UK by the Financial Conduct Authority, is acting exclusively for Lochard and no one else in connection with the matters described in this announcement and will not be responsible to anyone other than the Company for providing the protections afforded to clients of finnCap Limited nor for providing advice in relation to the matters described in this announcement.

Qualified Person Statement

In accordance with AIM Note for Mining and Oil & Gas Companies, and ASX Listing Rules 5.11, 5.12 and 5.13 Lochard discloses that Peter Kingston, a non-executive director of Lochard and the Chief Operating Officer of Lochard's operating subsidiary Zeus Petroleum Limited, is the qualified person that has reviewed the technical information contained in this press release.

Peter Kingston is a member of the Society of Petroleum Engineers (SPE) and has 47 years' operating experience in the upstream oil industry. For much of that period he has been a practicing reservoir engineer and has routinely reviewed corporate oil and gas reserve submissions at Board level since 1984.

Peter Kingston consents to the inclusion of the information in the form and context in which it appears.

Disclosure requirements of the City Code on Takeovers and Mergers (the "Code")

Under Rule 8.3(a) of the Code, any person who is interested in 1% or more of any class of relevant securities of an offeree company or of any paper offeror (being any offeror other than an offeror in respect of which it has been announced that its offer is, or is likely to be, solely in cash) must make an Opening Position Disclosure following the commencement of the offer period and, if later, following the Announcement in which any paper offeror is first identified. An Opening Position Disclosure must contain details of the person's interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company; and (ii) any paper offeror(s). An Opening Position Disclosure by a person to whom Rule 8.3(a) applies must be made by no later than 3.30 pm (London time) on the 10th Business Day following the commencement of the offer period and, if appropriate, by no later than 3.30 pm (London time) on the 10th Business Day following the Announcement in which any paper offeror is first identified. Relevant persons who deal in the relevant securities of the offeree company or of a paper offeror prior to the deadline for making an Opening Position Disclosure must instead make a Dealing Disclosure.

Under Rule 8.3(b) of the Code, any person who is, or becomes, interested in 1% or more of any class of relevant securities of the offeree company or of any paper offeror must make a Dealing Disclosure if the person deals in any relevant securities of the offeree company or of any paper offeror. A Dealing Disclosure must contain details of the dealing concerned and of the person's interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company and (ii) any paper offeror, save to the extent that these details have previously been disclosed under Rule 8. A Dealing Disclosure by a person to whom Rule 8.3(b) applies must be made by no later than 3.30 pm (London time) on the Business Day following the date of the relevant dealing.

If two or more persons act together pursuant to an agreement or understanding, whether formal or informal, to acquire or control an interest in relevant securities of an offeree company or a paper offeror, they will be deemed to be a single person for the purpose of Rule 8.3.

Opening Position Disclosures must also be made by the offeree company and by any offeror and Dealing Disclosures must also be made by the offeree company, by any offeror and by any persons acting in concert with any of them (see Rules 8.1, 8.2 and 8.4).

Details of the offeree and offeror companies in respect of whose relevant securities Opening Position Disclosures and Dealing Disclosures must be made can be found in the Disclosure Table on the Takeover Panel's website at www.thetakeoverpanel.org.uk, including details of the number of relevant securities in issue, when the offer period commenced and when any offeror was first identified. You should contact the Panel's Market Surveillance Unit on +44 (0)20 7638 0129 if you are in any doubt as to whether you are required to make an Opening Position Disclosure or a Dealing Disclosure.

Rule 2.10 Disclosure

In accordance with Rule 2.10 of the Code, Lochard confirms that it has 298,865,616 Lochard Shares in issue and admitted to trading on AIM, a market of the London Stock Exchange under ISIN GB00B02YHV99.

Publication on website

A copy of this announcement will be made available, free of charge subject to certain restrictions relating to persons resident in Restricted Jurisdictions, at www.lochardenergy.com by no later than 12 noon (London time) on the Business Day following the date of this announcement.

Neither the content of the website referred to in this announcement nor the content of any website accessible from hyperlinks on Lochard's website (or any other website) is incorporated into, or forms part of, this announcement.

You may request a hard copy of this announcement, free of charge, by contacting Computershare Investor Services Plc on +44 (0) 870 707 1256. Unless so requested, a hard copy of this announcement will not be sent to you. Lochard shareholders may also request that all future documents, announcements and information to be sent to them in relation to the Parkmead offer should be in hard copy form.

This information is provided by RNS

The company news service from the London Stock Exchange

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