TIDMLHD TIDMPMG
RNS Number : 5174G
Lochard Energy Group PLC
07 June 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
7 June 2013
Lochard Energy Group PLC
("Lochard" or the "Company")
Operational update and offer by The Parkmead Group plc
("Parkmead")
Further to the announcement on 23 May 2013 that the boards of
Lochard and Parkmead had reached agreement on the terms of a
recommended all-share offer by Parkmead for Lochard to be effected
by means of a Court-sanctioned scheme of arrangement under Part 26
of the Companies Act 2006 (the "Scheme") (the "Offer Announcement")
and the announcement by the Company on 31 May 2013 (the "31 May
Announcement"), Lochard shareholders should be aware of the
following information in relation to the Athena field and Lochard's
exploration licences, and their significance to the Company.
Any decision in relation to the offer should be made solely on
the basis of the information that will be set out in the circular
to Lochard shareholders (the "Scheme Circular") containing the
terms and conditions of the offer from Parkmead. It is expected
that the Scheme Circular will be posted to Lochard shareholders
and, for information purposes only, to Lochard share incentive
scheme participants in mid-June 2013.
Athena
The Field Development Plan ("FDP") was approved by the
Department of Energy & Climate Change ("DECC") in September
2010. Original recoverable mid case reserves were estimated at
approximately 15 million barrels ("mmbbl") (gross), based on four
production wells and one water injector, with upside potential of
31 mmbbl (gross) in total based on six production wells (i.e. if
two additional production wells are drilled).
Sproule International Limited ("Sproule") undertook an
independent reserves assessment for Lochard in 2012 and estimated
original recoverable Proved Developed Producing reserves at 18
mmbbl (gross) and Proved plus Probable reserves at 26 mmbbl
(gross). Approximately 3.6 mmbbl (gross) of oil has been produced
as at 31 May 2013. It is the opinion of the Lochard Directors (the
"Directors") that extra investment in wells would be required to
achieve the reserves consistent with the Sproule Proved plus
Probable estimate.
The field was developed with four production wells and one water
injector with the expectation that the economic viability of adding
two extra production wells could be assessed once reservoir
performance from the first four wells was understood. The FDP
projected initial production to be 22,000 barrels of oil per day
("bopd") (gross) from the four wells producing at the well design
rates; these rates depended on the performance of Electrical
Submersible Pumps ("ESPs"). The well completions incorporated two
such ESPs in each well with the intention that together, they would
provide uninterrupted well performance for approximately five
years. ESPs are typically expected to last for a period of two to
three years. As the field utilises a Floating Production Storage
and Offloading ("FPSO") vessel, workovers to replace these ESPs
would require the intervention of a drilling rig and the timing of
any workover would therefore depend on rig availability.
The Athena field began producing around the end of May 2012 at
an unexpectedly low level varying between 10,000 and 12,000 bopd
(gross). Only two wells were producing at expected levels and one
well had only one pump available. Despite that poor start,
production had stabilised until recently at between 10,000 and
11,000 bopd (gross). Fears of early water breakthrough have been
unfounded removing the probability of very low reserves recovery,
but it is still too soon to predict production levels both in the
short term and medium term (that is, over the next two years).
Like all oil and gas fields, the production from Athena will
decline over time and, in their report to Lochard, Sproule have
forecast a production decline rate of approximately 20% per annum
from 2013 onwards under the Proved Developed Producing reserves
case. Additionally, Sproule have forecast that it would not be
economically viable to continue to produce from the Athena field at
an estimated daily production rate between 3,500 and 4,000 bopd
(gross). At this point, the costs of production would exceed the
revenue generated and the field would therefore be
decommissioned.
Workover activity and the drilling of additional wells could
slow or reverse this projected decline, lead to increased recovery
and extend the economic life of the field. However, there are no
current plans or capital budgeted for workover or drilling of
additional wells and the Directors believe that such a decision
will not be taken until a longer production history at Athena has
been established.
Current Athena production issues
As noted above, although initial production was below
expectations, Athena has produced relatively consistently to date
but there remain uncertainties, a number of which have been
highlighted over the past month:
Wells
On average, between 80% and 85% of production comes from two
wells, P3 and P4. Any loss of either of these wells would lead to a
significant loss of revenue. The field co-venturers are making
contingency arrangements to be able to replace ESPs in either of
these two strongly producing wells in the event of any failure. The
timing and cost implications of such an operation are unknown at
present, but would be material to Lochard. The Directors do not
believe that such expenditure is likely to occur in the near future
but a cash reserve needs to be built up for Lochard to be able to
meet its share of any contingent costs. In this respect, it is
noted that well P4 has now been switched to its second ESP, after
the failure of the first ESP which occurred earlier than expected.
As noted above, ESPs are typically expected to last for a period of
two to three years, although two of the ESPs used in the first
phase of the Athena field have failed within the first year.
There are currently no plans to undertake recompletion work in
the event that the two underperforming wells, P1 and P2, fail. Well
P2 (which had been producing at approximately 600 bopd) has
recently failed and requires additional spend on remedial works,
although it is not expected to require recompletion. Lochard's
share of funding the remedial works is currently estimated at
approximately GBP200,000, which the Company expects to fund from
its payment for recent oil sales due to be received in
mid-June.
Neither the switch to the second ESP for well P4 nor the failure
of well P2 are, individually, considered material in the normal
course of business for Lochard. However, these events highlight the
risks of being a single asset company should equipment fail.
Current production from Athena, from the three producing wells, is
approximately 9,300 - 9,600 bopd.
Water production
A positive aspect of production until recently had been
production of water at only trace levels (less than one per cent.)
which is encouraging for indicating potential reserves recovery.
Since the Lochard operating and trading update was released on 31
May 2013, it has become clear that the water percentage in Athena
production has risen to an estimated two to three per cent. At
these levels of water production there is no basis for making
informed longer term production predictions, although monitoring
the trend of water cut development over the next six months will
improve the operator's ability to make such predictions. This new
development does, however, highlight the uncertainties in making
assumptions about Lochard's production income from Athena over the
next two years.
Further background on Lochard's exploration licences
In 2012, Lochard had an interest in a conventional exploration
licence (Thunderball) expiring on 13 February 2013 and six promote
licences from the UK Continental Shelf ("UKCS") 26(th) Licensing
Round, which all had expiry dates of 9 January 2013. In the normal
course of business, Lochard would have been required by 9 January
2013 either to relinquish the promote licences or to commit to
spend material sums on exploration drilling.
In late 2012, it was clear to the Lochard Board (the "Board")
that following the failure to complete a third party farm-out to
meet the GBP16 million commitment in respect of the Thunderball
licence, DECC would revoke Lochard's operator status and Lochard
would no longer be allowed to operate any North Sea assets. The
loss of Lochard's operator status also limited the opportunity to
seek further retention flexibility with respect to any of the
promote licences. The Thunderball licence lapsed on 13 February
2013.
The promote licenses were available for farm-out for a long time
with Aimwell Energy Limited ("Aimwell"), Lochard's technical
partner and exploration consultant, leading the process on behalf
of the Company. In January 2013, Lochard relinquished three of its
promote licences (13/16b & 17, 14/27b and 16/8c) as they were
deemed not worth pursuing following extensive technical work and an
inability to find a suitable farm-in partner. Aimwell were
successful in generating interest from a North Sea operator in the
remaining three licences and DECC approval was obtained for Lochard
to keep the licences extant until a farm-out transaction was
completed.
DECC approved the farm-out to another North Sea Operator (the
"Operator") effective 2 April 2013 with a deadline of 2 July 2013
(three months) for the farm-out to be completed; the Operator was
also approved as the operator of these licences.
It remained the intention of the Board to not commit funds for
exploration drilling on these licences without having the required
financial resources to do so. Based on feedback from potential
partners as part of the Formal Sale Process as well as the specific
farm-out process, it was apparent to the Board that there was
little interest in these licences. Accordingly, the Board believed
that future farm-downs of these licences would be challenging and
its view evolved to the point that in April 2013 the Directors
resolved not to enter into any agreements in respect of the three
exploration licences that would require significant further
funding, without first securing a merger partner that had a
stronger balance sheet and financial capacity.
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 three exploration licences,
while also maintaining sufficient resources to meet potential
contingencies in connection with the Athena field. Given Lochard's
financial position, the Board do not believe it would be in the
best interests of Lochard shareholders to expose the Company to
unfunded exploration drilling commitments that are likely to
materialise in 2014.
The Directors continue to 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 UKCS 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.
The Board recognises that the Parkmead offer is unlikely to
complete before DECC's deadline of 2 July 2013, although it is
possible that the Company in conjunction with Parkmead may be able
to agree an extension to this deadline given Parkmead's
relationships. The Lochard Board does not believe that any
agreement with DECC can be reached until there is greater certainty
on Parkmead's offer for Lochard.
Implications for the Parkmead offer
The Directors do not see the recent operational issues as a
serious impediment to the longer term performance of Athena,
although there may be a requirement for remedial investment and the
recent pump failures have led to a reduction in current production.
The recent events described above highlight the need for Lochard to
build up a significant cash reserve over the medium term to cover
the contingencies of operational down time and the cost of
remediation.
In summary, the Board remains positive about the long term
potential for Athena and believes that drilling further wells in
the future may be justified to increase reserves; any drilling will
be subject to partner approval. There are currently no plans for
such investment in the next two years. However, a critical issue to
be noted is that sustained cash flow from Athena is dependent on
two wells continuing to perform without interruption and one of
these is now operating on its second pump. Loss of production is
also possible from the two lower production wells which will not be
recompleted in the event of failure.
In making their decision regarding the Parkmead offer, Lochard
shareholders should take into consideration the fact that
contingent investment that may be significant for Lochard could be
required in the next one to two years and that the Board's first
priority is to be able to meet its share of costs.
Further enquiries:
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 Advisor and Broker to Lochard
Matthew Robinson
Christopher Raggett
The Parkmead offer will be made solely by means of the circular
to Lochard shareholders (the "Scheme Circular"), which, together
with the Forms of Proxy, will contain the full terms and conditions
of the Parkmead offer, including details of how to vote in favour
of the Scheme, the reasons for the unanimous recommendation by the
Lochard directors to vote in favour of the Scheme at the Court
Meeting and the resolutions to be proposed at the General Meeting,
as contained in the Offer Announcement, the 31 May Announcement and
this announcement, together with the notices of the Court Meeting
and the General Meeting. Lochard and Parkmead urge Lochard
Shareholders to read the Scheme Circular which will be distributed
to Lochard shareholders and, for information purposes only,
participants in the Lochard share incentive scheme shortly (with
the exception of certain Lochard shareholders in Restricted
Jurisdictions).
Unless otherwise defined herein, capitalised terms and
expressions used in this announcement shall have the meanings
ascribed to them in the Offer Announcement.
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.
Forward looking Statements
This announcement may contain statements about Parkmead and
Lochard that are or may be forward looking statements. All
statements other than statements of historical facts included in
this announcement may be forward looking statements. Without
limitation, any statements preceded or followed by or that include
the words "targets", "plans", "believes", "expects", "aims",
"intends", "will", "may", "anticipates", "estimates", "projects" or
words or terms of similar substance or the negative thereof, are
forward looking statements. Forward looking statements include
statements relating to the following: (i) future capital
expenditures, expenses, revenues, earnings, synergies, economic
performance, indebtedness, financial condition, dividend policy,
losses and future prospects; (ii) business and management
strategies and the expansion and growth of Parkmead's and/or
Lochard's operations and potential synergies and cost savings
resulting from the acquisition of Lochard; and (iii) the effects of
government regulation on Parkmead's or Lochard's business.
Such forward looking statements involve risks and uncertainties
that could significantly affect expected results and are based on
certain key assumptions. Many factors could cause actual results to
differ materially from those projected or implied in any forward
looking statements. Due to such uncertainties and risks, readers
are cautioned not to place undue reliance on such forward looking
statements. Parkmead and Lochard disclaim any obligation to update
any forward looking or other statements contained herein, except as
required by applicable law.
Not a profit forecast
No statement in this announcement is intended as a profit
forecast or profit estimate and no statement in this announcement
should be interpreted to mean that earnings or the future earnings
per share of the Parkmead Group, as enlarged by the acquisition of
Lochard, Parkmead and/or Lochard for the current or future
financial years would necessarily match or exceed the historical or
published earnings per share of Parkmead or Lochard.
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
END
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