Connacher's South American subsidiary, Petrolifera, to raise $7 million; plans to acquire two new licenses in Peru
09:00 EST Monday, February 07, 2005
CALGARY, Feb. 7 /CNW/ - Connacher Oil and Gas Limited ("Connacher" - CLL - TSX) announced today that its 61 percent-owned subsidiary, Petrolifera Petroleum Limited ("Petrolifera"), has entered into an engagement letter with a syndicate of investment bankers to raise up to $7 million of new equity from the sale of seven million units from Petrolifera's treasury at a price of $1.00 per unit, by way of a best efforts private placement.
Each unit will be comprised of one common share, one-half share purchase warrant and one right. A full share purchase warrant will entitle the holder to acquire one additional common share from Petrolifera's treasury at a price of $1.50 per common share until the later of twelve months from a going-public transaction (a "Liquidity Event") or eighteen months from the closing date of the financing, which is scheduled to occur on March 8, 2005 or such later date as may be agreed upon by the parties. The right will entitle the holder of the units to receive, at no additional cost, an additional 0.1 unit in the event Petrolifera has not completed a Liquidity Event within seven months of the closing date, but will otherwise expire with no securities issued pursuant thereto.
The transaction will be co-managed by PowerOne Capital Markets Limited ("PowerOne") and Jennings Capital Inc. ("Jennings") and the syndicate will include Dominick & Dominick Securities Inc. ("Dominick & Dominick") and Octagon Capital Corporation ("Octagon"). The agents will receive as compensation cash commissions of seven percent of the gross proceeds (which will be paid from the proceeds of the offering) and non-transferable compensation warrants equal to seven percent of the number of units sold, with each such compensation warrant exercisable by the holder into one unit at a price of $1.00 until the later of 12 months from the Liquidity Event or 18 months from the closing date of the financing. The terms of the units to be issued on exercise of the compensation warrants are identical to those being offered pursuant to the private placement. The compensation payable to the agents will be allocated among the agents on the basis of 40 percent to PowerOne, 40 percent to Jennings, 10 percent to Dominick & Dominick and 10 percent to Octagon.
PowerOne is considered to be a connected issuer of Petrolifera as it, together with its officers, directors and shareholders, and associates of such persons owns approximately 18 percent of the issued and outstanding shares of Petrolifera. PowerOne was involved in negotiating the terms of the offering, which was suggested by Petrolifera.
Assuming this issue is fully subscribed Petrolifera will have 20 million common shares outstanding (basic) and 30.7 million fully diluted and would receive an additional $8.8 million of proceeds if all warrants and options outstanding were exercised. Connacher will not participate in this financing; however, it will retain the right but not the obligation to participate in future Petrolifera financings and to own up to 40 percent of Petrolifera over time.
Proceeds of the offering will be used to fund a portion of Petrolifera's expected $6.2 million 2005 capital programs in both Argentina, where the company owns the Puesto Morales/Rinconada concession; and in Peru, where the company is negotiating the acquisition of two new licenses. In Argentina, Petrolifera is nearing completion of a 144 square kilometer 3D seismic program over its 100 percent-owned Puesto Morales/Rinconada concession in the Neuquen Basin. Once the results are processed and interpreted, Petrolifera expects to drill up to five exploratory and infill wells and conduct several well workovers on its Argentinean acreage during the balance of this year. In Peru, Petrolifera expects to conduct and complete environmental studies and then reprocess seismic and conduct geological studies on the two new licenses being negotiated.
Gross proceeds of the offering in excess of $5 million will be used to repay a portion of Petrolifera's $2.75 million indebtedness to Connacher arising from Petrolifera's 2004 purchase of the Argentinean properties from Connacher. It is expected the balance of the capital program will be funded from cash flow or subsequent financings.
Connacher and Petrolifera were recently qualified to negotiate for new licenses and have a right of first refusal to acquire two significant oil and natural gas licenses covering two large blocks, one in the Maranon Basin and one in the Ucayali Basin of Peru.
Block 106 in the Maranon Basin is comprised of approximately two million acres onshore northern Peru. It is adjacent to and on trend with numerous oil fields, and surrounds the Corrientes Field, which has recoverable reserves in excess of 200 million barrels. An underutilized oil pipeline also crosses the block. A minimum work program of U.S. $25.4 million over the seven year exploratory phase of the license has been agreed for Block 106. This is comprised of U.S. $2.2 million in the first three years for reprocessing of old seismic and acquisition of new seismic; U.S. $10 million in year four (including one well); and U.S. $13.2 million for the remaining three years, including another well. Associated guarantees aggregate U.S. $4.0 million over the seven-year exploratory term, with each period's deposit determined in relation to the work program for that period and recoverable upon completion of that period's work program. The term of an exploitation license which might result upon commercial discovery is 30 years for crude oil and 40 years for natural gas.
Block 107 in the Ucayali Basin onshore central Peru is comprised of approximately 3.2 million acres. It is on trend with and northwest of the giant Camisea natural gas and condensate complex. The reserves for the Camisea blocks are estimated at 16.4 Tcf of natural gas and 850 million barrels of condensate. The agreed minimum work program for Block 107, which is more exploratory in nature, is U.S. $16.4 million over the seven year exploratory term, with associated guarantees aggregating U.S. $2.6 million. The program includes U.S. $6.4 million of studies and primarily seismic in the first six years and a well commitment in year seven. As with Block 106, guarantees are determined in relation to each period's minimum commitment and are recoverable upon completion of the program for that period.
Peru has recently revamped the contractual terms and process for securing new oil and natural gas licenses. These changes were designed to encourage new activity and investment in the country. In Connacher's and Petrolifera's opinion, the terms available and process for securing new licenses are attractive and favorable by international standards, especially for smaller companies. Also, the proximity of the blocks to existing fields combined with favorable geological conditions is attractive.
It is anticipated that negotiations with Perupetro, the Peruvian government agency, will be concluded and that definitive licenses will be issued in approximately 60 days.
Pursuant to an understanding between Connacher and Petrolifera, the licenses will be held by Petrolifera and in exchange for facilitating the transaction and for providing certain back-stop guarantees to Petrolifera during the exploratory phase of the licenses, Connacher will retain a 10 percent carried working interest through the drilling of the first well on each license. Petrolifera will have a right of first purchase of this interest should Connacher elect to sell it at some future date, while Connacher will have a one-time option to convert the interest into a two percent gross overriding royalty at its election following completion of the first well on each license.
In connection with the financing, Petrolifera will appoint Mr. Gary D. Wine to the position of President of the company. Mr. Wine is a geologist with over 25 years of experience, much of which has been concentrated on Peru and Argentina. Mr. Wine is a Petrolifera shareholder and in consideration for his expertise and role in assisting Petrolifera in securing the new blocks, he will receive a three percent gross overriding royalty on the two Peruvian blocks when the licenses are issued. Mr. R. A. Gusella, President and Chief Executive Officer of Connacher, will assume the position of Executive Chairman of Petrolifera, and Mr. Rick Kines, Vice President Finance and Chief Financial Officer of Connacher, will be the Interim Chief Financial Officer of Petrolifera. Connacher also provides managerial and technical support to Petrolifera pursuant to a Management Services Agreement completed in 2004.
An expanded Board of Directors will be proposed for approval by Petrolifera's shareholders at a meeting to be scheduled in the first quarter 2005. It has been agreed that the nominees for the new Board will include the newly-appointed President, three Connacher nominees and two independent nominees to be agreed upon among Connacher, Petrolifera and the agents.
Connacher Oil and Gas Limited is a Calgary-based oil and gas exploration, development and production company. Its principal asset is its Great Divide oil sands project situated southwest of Fort McMurray, Alberta where it holds 101 sections, (64,640 acres) of oil sands leases and, subject to regulatory approval, is proceeding with plans to commence an initial 10,000 bbl/d SAGD project in 2006. It also holds conventional exploratory and producing properties in southwest Saskatchewan at Battrum and Tompkins and at Steelman in southeast Saskatchewan. Connacher is also the largest shareholder of Petrolifera, a private company engaged in oil and natural gas exploration and production activities in South America.