Lochard Energy Group PLC : 07-06-2013: Operational update and offer by the Parkmead Group plc

RNS Number : 5174G Lochard Energy Group PLC
07 June 2013

7 June 2013

("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.

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.

United Kingdom

Reg No 05209284

One Wood Street

London EC2A 7WS UK

Australia

ARBN 57 490 768 001

Reg No 5209284

Suites 6 & 7

61 Hampden Road

Nedlands WA 6009

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.

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
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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 £200,000, 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.

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") 26th 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 £16 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
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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.

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.
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Sameer Pethe
Jonathan Bradfield

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.

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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.

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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.

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