On 29 December 2016, IGas announced that it was in well progressed discussions with a strategic investor in respect of its capital restructuring options. IGas announces that those discussions relate to a potential investment of US$35m of cash equity. The potential investment is dependent on the successful restructuring of the Company's secured and unsecured bonds. Together these transactions (the "Potential Transaction") will result in a new capital structure for the Company. The Company will also seek to raise additional equity funding and existing shareholders will be given the opportunity to participate in this additional fundraising. The placing price is expected to be c.4.5p.
The Company believes that the new capital structure would be sustainable in the current oil price environment and would enable IGas to capitalise on value accretive opportunities whilst also maintaining its valuable carry agreements, for the benefit of all stakeholders. The Potential Transaction would be subject to a number of approvals, including shareholder approvals and secured and unsecured bondholder approvals as well as final approval by the strategic investor.
The Potential Transaction would be expected to result in a significant reduction in gross outstanding debt and a significant dilution of the existing shareholders, the precise extent of which will depend on a range of factors. At the present time the Potential Transaction contemplates that:
(i) the third party outstanding secured bonds (currently US$125.6m) will be restructured via partial re-purchase for cash, a partial equitisation of the secured bonds and the remaining balance to be exchanged into new secured bonds with amended commercial terms and extended maturity; and
(ii) the third party outstanding unsecured bonds (currently US$27.4m) will be fully equitised.
The repurchase and equitisation of secured and unsecured bonds would be subject to certain discounts to the par value of the bonds. The Company owned outstanding secured and unsecured bonds (currently, US$10.5m and US$2.6m, respectively) will be cancelled in full.
Kerogen Capital has proposed a US$35m equity investment in the Company subject to the restructuring of the Company's secured and unsecured bonds on terms satisfactory to Kerogen Capital and agreement on the documentation of the Potential Transaction. The Company and Kerogen Capital will work together to finalise the terms of the Potential Transaction. As previously mentioned, the Potential Transaction would be subject to a number of approvals, including the approvals of Kerogen Capital, both the secured and the unsecured bondholders as well as the shareholders. The terms of the Potential Transaction may require the consent of the Takeover Panel to the Company seeking a dispensation from Rule 9 in respect of the proposed size of the Kerogen Capital equity investment, which will also be conditional, if granted, on a vote of independent shareholders.
There can be no certainty that an agreement will be reached or that any transaction will be forthcoming. As previously announced, the Company expects that it will remain compliant with its daily liquidity covenant until late March 2017, based on current forecasts. As previously disclosed, the Company confirms that its current forecasts project non-compliance with its leverage covenants as at 31 December 2016. The Company's position, following receipt of legal advice, remains that in the event of a breach of the leverage covenants, an equity cure provision exists within the bond agreements, such that a breach can be cured within 25 business days of the delivery of the compliance certificate for that period. For the twelve months ending 31 December 2016, the compliance certificate must be delivered by 30 April 2017, and accordingly the latest date for any equity cure would be early June 2017. The board expects completion of the Potential Transaction would resolve any leverage covenant breaches as at 31 December 2016 and remedy the forecast breach of the daily liquidity covenants either via agreement reached with its stakeholders or via an equity cure.
The Company also announced on 29 December 2016 that it had met with certain of the Company's bondholders and other potential strategic investors to discuss its capital restructuring options and valuation of the Company. During certain of these meetings the following information, which includes non-public information, was provided by the Company in order to progress the discussions.
The Company continues to hold significant cash resources of US$31.8 million as at 27 February 2017, and had a total gross carried shale work programme of c.US$230 million as at 31 December 2016. The average production for 2016 was 2,355 boepd and the Company forecasts net production for 2017 to be c.2,500 boepd.
As previously announced, D&M, one of the world's leading reservoir engineers, has undertaken an analysis of the Company's reserves and resources. This included a NPV10 (pre-tax) valuation of the Company's 2P reserves of US$277m as at 30 June 2016. In addition to this, the Company has applied certain adjustments to the NPV which were outside of the scope of D&M's analysis, including corporate overheads, insurance costs and projected tax charges. The D&M figure has been further adjusted based on a company assumption that c.US$9m of certain produced gas (which D&M had assumed would be available for sale) would be utilised by the Company on its assets to minimise operating costs. In aggregate, these adjustments would indicate an adjusted 2P post tax and corporate cost NPV10 valuation of US$206m, having taken into account NPV adjustments of US$15m for overheads, US$6m for insurance costs, US$41m for estimated future tax charges and US$9m for gas sales, as stated above.
The Company engaged D&M to confirm the impact of alternative oil prices based on market consensus estimates on these 2P NPV10. D&M has estimated that the net impact of market consensus forecast pricing (as at 30 October 2016 being average Brent pricing per barrel of 2017: US$55.0/bbl, 2018: US$63.0/bbl, 2019:US$67.4/bbl, 2020:US$70.0/bbl, 2021:US$71.4/bbl, inflated at 2% pa thereafter) would reduce D&M's pre-tax valuation by c.US$38m and IGas estimates a reduction of c.US$25m on a post-tax basis to US$181m. The Company will continue to update the market as and when appropriate.
Stephen Bowler, CEO of IGas, commented:
"This potential investment recognises the underlying value in the IGas Group, both through its stable production assets, significant Shale acreage and c.US$230m carry from its partners. Upon completion of the Potential Transaction, we would have a capital structure that we believe is sustainable in the current oil price environment and that will enable the Company to capitalise on value accretive opportunities. We look forward to working with Kerogen Capital and our existing stakeholders to finalise the terms of the Potential Transaction."