20 Mar 2012
Farm-Out Option Agreement and rig update
FOGL, the oil and gas exploration company focused on its extensive licence areas to the South and East of the Falkland Islands, is pleased to announce the execution of an option to enter into a farmout agreement which, if exercised, would provide FOGL with greater financial flexibility in respect of its current and forward programmes.
On 13 January 2012, the Board of FOGL announced that it was continuing to progress discussions in relation to a potential farmout. The Board is pleased to announce that it has granted an industry counterparty an option (the Option) to enter into a Farm Out Agreement (FOA) and an associated Joint Operating Agreement (JOA). The counterparty has completed all technical and commercial due diligence and the FOA and JOA have been fully agreed. For corporate reasons unconnected with the proposed farmout, the counterparty is unable to execute the FOA/JOA at this time, but expects to be able to do so within the next two months and prior to the commencement of FOGL's drilling programme.
Summary terms of the FOA
- The counterparty would farm-in to 25% of the FOGL licence areas and would contribute its pro-rata share of the 2012 drilling programme, comprising two exploration wells
- The counterparty would also pay its pro-rata share of certain historical costs incurred during 2011 related to preparation for drilling this year. The costs incurred are estimated to be $68 million gross
- In addition the counterparty would make a cash contribution of $40 million; $20 million on completion (expected to be prior to the spudding of the Loligo well) and $20 million in 2013.
- FOGL will retain licence operatorship
Terms of Option
- As consideration for the grant of the Option, FOGL will receive an option fee of $6 million which FOGL will retain if the counterparty does not exercise the option before the spudding of the Loligo well (currently expected to be June 2012).
- If the Option is exercised, $3 million of the option fee will be offset against the first $20 million of cash consideration referred to above, whilst FOGL will retain $3 million.
- In the event that the counterparty has not exercised the option prior to an announcement by Borders and Southern on the results of either the Darwin or Stebbing wells and such announcement results in a significant increase in FOGL's share price, then an adjustment mechanism will apply:
- FOGL will have the right to reduce the counterparty's interest to 12.5% in the Southern Licence Area, but with the counterparty paying the same $40 million cash consideration
- The counterparty may elect to remove the Southern Licence Area from the FOA and reduce the overal cash consideration by $10m; or
- The counterparty may elect to pay an additional $10m to increase its interest in the Southern Licence Area back to 25%
The Board of FOGL notes the announcement on 16 March 2012 by Borders & Southern Petroleum plc (B&S) that rig issues which had previously stalled progress on drilling the Darwin prospect had now been addressed and that the company expects another four to five weeks of activity on that well. As a consequence, FOGL now expects to receive the rig around early June following completion of the drilling of B&S's Darwin and Stebbing. This delay has no impact on the contractual arrangement that FOGL has with Ocean Rig to drill two exploration wells, following the completion of the B&S drilling programme.
Tim Bushell, Chief Executive of FOGL, said:
"We are delighted to have agreed favourable farm-out terms which we assess as a two for one promote on the first two wells. This farmout provides further external industry confirmation of the technical case and gives us greater flexibility with respect to our drilling plans
"We look forward to progressing our drilling campaign in the next few months."
There will be a conference call at 11.45 this morning to discuss the farmout option and rig update. The dial in number is:+44 (0) 1452 569 393.
Falkland Oil and Gas
+44 (0) 207 563 1260
Tim Bushell, Chief Executive
Oriel (Nominated Advisor and Joint Broker)
+44 (0) 207 710 7600
David Arch / Gareth Price / Ashton Clanfield
Jefferies Hoare Govett (Joint Broker)
+44 (0) 207 029 8000
Alex Grant / Chris Zeal / Graham Hertrich
+44 (0) 207 831 3113
Ben Brewerton / Ed Westropp