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.
Rose Petroleum plc
("Rose" or the "Company")
Update on McCoy Lease Working Interest Acquisition
Rose Petroleum plc (AIM: ROSE), the Rocky Mountain-focused oil and gas company, is pleased to provide an update on its proposed working interest acquisition in the McCoy lease, a 317-acre leasehold in the Denver-Julesburg Basin ("DJ Basin") in Weld County, Colorado, U.S. (the "McCoy lease" or "McCoy").
On 4 November 2019, the Company announced it had entered into a Letter of Intent ("LOI") with Captiva Energy Holdings II, LLC ("CEH") for the Acquisition of an initial 10% of CEH's 89.5% working interest in the McCoy lease (the "Acquisition"), with an option to acquire up to a further 80% of CEH's working interest in the lease (the "Option").
· Key milestones in the Acquisition process have now been reached, including:
§ CEH has signed a lease amendment with the lessor of the McCoy lease, which allows for the drilling of extended, two-mile lateral horizontal wells across the McCoy lease; and,
§ CEH has elected to support Great Western Operating Company's ("Great Western") pending application for a 1,280-acre Drilling Spacing Unit (the "DSU" or the "Margil DSU") which includes the McCoy lease.
· Under the terms of the Great Western DSU application:
§ two-mile horizontal wells drilled from Great Western's acreage would extend across the McCoy lease
§ McCoy lease working interest owners would participate as working interest owners in the Margil DSU.
· Great Western is one of the DJ Basin's most active upstream operators and will be the majority working interest owner in, and operator of, the Margil DSU.
· Up to twenty-six wells are envisioned to be drilled across the Margil DSU, with 12 wells expected to be drilled in the second half of 2020
· Rose is in substantive discussions with a number of third parties, including potential joint-venture and industry partners, with respect to securing the necessary funding for the Company's participation in the proposed Margil DSU drilling programme.
· The Option for Rose to purchase additional working interest in the McCoy lease (and now the Margil DSU) has been extended to the end of April 2020.
· The Company is also reviewing a number of additional portfolio acquisition opportunities that fit the Company's strict strategic criteria and looks forward to updating the market as opportunities progress.
Colin Harrington, Rose CEO, commented: "These are exciting times for the Company as we look to complete the Acquisition and move closer to our goal of becoming an oil producer in the near term.
We are very pleased to report on CEH's successful conclusion of lease amendment negotiations, and we welcome the opportunity to benefit from the expertise and investment that Great Western will bring as operator of the DSU. CEH and Great Western's progress to date demonstrates the value that strong, basin-focused partners can add.
We are confident of robust economic returns from these two-mile lateral horizontal wells, and upon completion of the Acquisition we look forward to participating in the proposed drilling programme as working interest owners alongside CEH and Great Western.
Rose will continue to update the market on progress as we move towards completing the Acquisition and securing the necessary funding to enable the Company to participate in this transformational opportunity in an optimal way for our shareholders."
Further Details and Acquisition Background:
On 4 November 2019, the Company announced it had entered into a LOI with CEH for the proposed Acquisition of an initial 10% of CEH's 89.5% working interest in the McCoy lease, with an option to acquire up to a further 80% of CEH's working interest in the lease.
Since November, the parties have continued to progress towards completion of the Acquisition, and the Company is pleased to announce that two significant milestones have now been reached.
Firstly, CEH has executed a lease amendment with Weld County Land Investors, Inc. ("WCLI"), the lessor of the McCoy lease, which allows for the pooling of the underlying Niobrara and Codell reservoirs in relation to a potential two-mile horizontal well development across the McCoy lease.
Secondly, on a related front, CEH has elected to support Great Western's 1,280-acre DSU permit application (covering Sections 33 and 34, Township 4 North, Range 68 West, 6th P.M.) for a two-mile horizontal development which will include the McCoy lease. Great Western has submitted permit applications for 26 two-mile horizontal wells to be drilled from the Margil pad in Section 34 and, if drilled, these wells will extend through the McCoy lease.
Rose anticipates the drilling of 12 of the two-mile long horizontal wells (the "Initial Drilling Programme") taking place in the second half of 2020, subject to approval of Great Western's DSU permit applications.
Under this development plan, CEH and Great Western will each hold a working interest in the proposed DSU in proportion to its respective net acreage position. Great Western will be the operator of the DSU and will own a majority of the working interest.
CEH'S McCoy lease will hold an approximate 22.2% working interest in the DSU, and as such, Rose's proposed initial acquisition of 10% of CEH's working interest in the McCoy lease will result in Rose holding an approximate 2.22% working interest in the DSU, rising to a maximum approximate 20.0% working interest should the Option for Rose to acquire up to a further 80% of CEH's working interest in the DSU be exercised in full.
The Board of Rose considers the completion of the lease amendment and confirmation of CEH's participation in the DSU to be highly positive steps towards completion of the Acquisition. Rose's proposed participation in the McCoy lease project is an important part of the Company's strategy of building a balanced asset portfolio in the U.S. Rocky Mountain region, with a project which has near term oil production potential.
CEH's work to make the McCoy lease applicable for inclusion into a two-mile development by Great Western will enable McCoy working interest owners to share in the resurgence seen across the DJ Basin as vertical production is replaced with one- and two-mile horizontal well developments. In addition, Great Western has significant horizontal drilling and operations expertise within the immediate area surrounding the DSU, and as such the Board of Rose believes their participation will help to ensure the successful and timely development of the Initial Drilling Programme.
Great Western Operating Company is a subsidiary of Great Western Petroleum, one of the leading private operators in the DJ Basin with existing gross production of over 50,000 barrels of oil equivalent per day (BOEP/D). The company is a top 100 operator in the United States and the sixth largest producer in the DJ Basin's Wattenberg Field, having drilled and operated more than 600 wells in the region.
Rose is also pleased to announce that CEH has agreed to extend the Option exercise period to expire on 30 April 2020 while the Acquisition is completed and preparations for the Initial Drilling Programme are finalised. Under the terms of the LOI, in addition to the Acquisition, Rose received the Option, originally valid until 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). The Options is subject to Rose demonstrating sufficient means to fund its share of the related McCoy development CAPEX budget for any additional working interest acquired.
Furthermore, the Company is in substantive discussions with a number of third parties, including potential joint-venture and industry partners, with respect to securing the necessary funding to enable Rose to exercise the Option.
Rose's next steps are to work with CEH to finalise the documentation for the Acquisition, to complete a Competent Person's Review ("CPR") to independently confirm the potential of this opportunity, and to finalise the funding package for the Company's participation in the project.
In addition to making significant progress on the Acquisition, the Company is also reviewing a range of other acquisition opportunities that meet the strategic profile set out by the Company in both its 2019 Annual Report and in its shareholder Circular sent to shareholders in November 2019. Key to any future transactions is the requirement to keep dilution to existing shareholders to an absolute minimum. The Company is looking at a number of bespoke funding strategies, alongside its technical appraisal of these opportunities, to ensure it can achieve this objective.
Additional information on the Acquisition was included in the Company's announcement on 4 November 2019 and is also outlined below.
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
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.
The Acquisition has multiple commercial benefits:
§ A near-term, low risk development opportunity alongside CEH, a U.S. based industry partner with a proven track record of successful horizontal development in the immediate area;
§ A significant operating partner in Great Western, one of the DJ Basin's largest and most active operators;
§ An attractive entry cost when compared to similar transactions, with consideration payable in Rose shares at a premium to the most recent Placing Price;
§ A robust, accretive project with strong well economics;
§ Near-term production programme proposed, with drilling anticipated this year; and,
§ Optionality to acquire up to a further 80% of CEH's working interest in the McCoy lease at Rose's sole discretion.
The Acquisition will give Rose access to prime acreage within the prolific DJ Basin resource 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. 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.
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. Under the terms of the Acquisition, 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 access to near-term, low-risk horizontal development drilling exposure that will target the proven Niobrara and Codell reservoirs which both have existing commercial production from horizontal wells on the lands directly off-setting the McCoy lease.
Pending mandatory consents and following completion of the Acquisition, Rose will have the right to participate in the proposed Initial Drilling Programme operated by Great Western, further details of which are set out below. These wells will target the Niobrara and Codell reservoirs.
Reserves and production data will be made public pending completion of a Competent Person's Report ("CPR") and partnership discussions.
The Company estimates that the total CAPEX for a 12 well programme would 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 most recent 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, currently valid up to and including 30 April 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.
As outlined above, the Acquisition (including the Option) is subject, inter alia, to completion of technical and financial due diligence by Rose and execution of a formal sale and purchase agreement. 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.
Related Party Transaction
CEH is indirectly controlled by Origin Creek Energy ("OCE"). The shareholders of OCE include Rick Grant, the Chairman of Rose, and Colin Harrington, the CEO of Rose, who are also directors of CEH and 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.