Columbus Energy Signs SPA for the Acquisition Steeldrum Oil Company

Source: www.gulfoilandgas.com 7/13/2018, Location: South America

Columbus, the oil and gas producer and explorer focused on onshore Trinidad with the ambition to grow in South America, is pleased to announce it has signed a Sale and Purchase Agreement ("SPA") to acquire Steeldrum Oil Company Inc ("Steeldrum") adding current oil production of approximately 200-250 bopd and reserves of 5.6 mmbbl and the Cory Moruga development Project adding recoverable reserves of approximately 1.1 mmbbl to the Columbus portfolio. Steeldrum's assets are all located in southern Trinidad and close to Columbus's existing assets, allowing the Company to utilise existing technical expertise and relationships.

Highlights:

- The Steeldrum acquisition is further delivery of Columbus' growth strategy as outlined in its roadmap last year and consolidates the Company's extensive, well balanced portfolio of assets across the south and south-west of Trinidad.
- The assets acquired through this transaction are:
o 100% operated interest in Innis-Trinity field with production of between 120-150 barrels of oil per day ("bopd") and reserves of 4.0 million barrels of oil ("mmbbl").
o 100% operated interest in South Erin field with production of between 80-100 bopd and reserves of 1.6 mmbbl.
o 83% operated interest in Cory Moruga development project expected to have recoverable reserves of approx. 1.1 mmbbl.
- (Note: Reserve figures quoted above supplied by Streeldrum).
- In addition, the acquisition SPA grants Columbus a first priority use of two rigs at market rates, with one of those rigs being suitable for the Company's planned exploration activities in the South West Peninsula ("SWP").
- The initial consideration for the acquisition of Steeldrum will be paid in Columbus stock through the issuance of 92,743,775 shares, equivalent to 12.5% of the current issued share capital and £4.4 million (approx. US$5.8 million) at the latest closing mid-market price, with certain contingent considerations.
- New Lind Facility established to provide Columbus with access to additional funds, should they be required over the next six months, to support the integration of Steeldrum and accelerate certain operational activities.
o Lind Facility allows Lind to convert any outstanding loans into equity at a share price of 8.1 pence per share.
- The consolidated group, post the Steeldrum transaction, is expected to remain operationally cash flow positive .
- Near term value opportunities to exploit existing and new assets through exploration, the Cory Moruga development project and growing production and revenues at Innis Trinity and South Erin with the adoption of a similar operational strategy to our existing fields.
- Trinidad peak production in Q2 2018 of 648 bopd with a steady 530-575 bopd delivered month on month.
- Cash balance of US$2.4 million at the end of Q2 2018 after $1.11 million of capex investment, abandonment fund contributions, M&A and Spain legacy costs during Q2 2018.
- New technical work on the SWP has been commissioned involving specialist exploration consultants to develop a technical roadmap for de-risking 2019 drilling locations.
- Continuing to work actively on a number of additional acquisition opportunities using strict investment screening criteria.

The Company is also pleased to provide a business update on its activities in Q2 2018 and will be presenting more information on these activities, the Steeldrum acquisition and the rationale for establishing the Lind Facility at today's Annual General Meeting ("AGM").

Leo Koot, Executive Chairman of Columbus, commented:

"The acquisition of Steeldrum is further delivery of Columbus' growth strategy and, on completion, the Company will have a large, well balanced portfolio of assets strung across the south and south-west of Trinidad. The portfolio will include low-risk but highly prospective exploration opportunities in the South West Peninsula, a development project in Cory Moruga and 5 producing oilfields (Goudron, Innis Trinity, South Erin, Bonasse and Icacos). This provides the Company with an excellent opportunity to exploit our existing and new assets through operational excellence and also grow organically through exploration and the Cory Moruga development project. We will also be specifically looking at growing production and revenues in Innis Trinity and South Erin in the near future through the adoption of a similar operational strategy to our existing fields.

"In line with our ongoing focus on capital discipline, we will purchase Steeldrum with shares rather than cash. This also has the benefit of introducing new shareholders to the Company who are experienced investors in oil & gas and who will be aligned with the Company in seeing that the integration of the assets into our portfolio happens in the most efficient way. A final benefit of the transaction is access to a drilling rig suitable for our planned exploration activities in the SWP, a production rig and the integration of a well-respected oil and gas team into the larger Columbus group, a group who are experienced in drilling wells in Trinidad. I am delighted that we have agreed this deal with Steeldrum and we are on track to building a core exploration, appraisal, development and production hub in the south and south-west of Trinidad.

"The Company believes it will be able to assimilate Steeldrum into Columbus using our existing cash resources and the revenues we are generating from our ongoing operations. Nevertheless, the Board considered it prudent to ensure we have access to additional funds to cover any short-term issues that may come our way when integrating the two organisations and when we are seeking to optimise our new assets over the next few months. We are very grateful that Lind has provided a short-term loan facility of up to $3.25 million to support the Steeldrum transaction. This drawdown facility, where Lind can convert any outstanding loans into ordinary shares at 8.1 pence per share, provides us with financial flexibility to optimise the new organisation and deal with any un-expected financial issues and once again demonstrates their confidence in the future potential of our Company. As a result, and due to the financial terms we have agreed, we believe the Lind Facility is accretive for our shareholders as it minimises any equity dilution whilst providing real financial flexibility at minimal cost.

"On the operational front, we have seen steady production performance in Trinidad in Q2 2018 with production averaging 553 bopd, peaking at 648 bopd during the quarter. We have continued to face certain challenges in growing production at Goudron, notably sand production issues which we are actively seeking to address through new artificial lift applications. Our water injection pilot campaign can now be ramped-up through the availability of increased water volumes As well as Goudron production, we have now commenced the reactivation of the Bonasse field with a rig arriving on site within the past few days. We hope to see increasing production in Bonasse throughout 2H 2018 and with the recent signature of the SPA on the Icacos field, we plan to commence a reactivation programme on some shut-in wells in that field in the near future. These are exciting times for Columbus as we expand our production activities on our assets in Trinidad and the Steeldrum acquisition will allow us to expand our programmes even further. We would hope to see gross production across all of our fields grow continually throughout 2H 2018 and continue to grow well beyond that. This will give us much greater financial firepower to progress our exploration portfolio in the SWP in 2019 and beyond.

"We continue to consider a number of other M&A opportunities in Trinidad and elsewhere in South America; these include some small opportunities and others more material in size. We continue to have ambitious growth plans and are hugely excited by our increasing potential as our footprint expands. I believe we have come a long way in the past year on many fronts.

"I look forward to providing our shareholders with further information on the benefits of the Steeldrum acquisition, the Lind Facility and our recent business performance at our AGM which takes place later today."

The Steeldrum Acquisition:

Steeldrum is the parent company for the West Indian Energy Group Ltd and is the owner of the Innis-Trinity field (100% and operator), South Erin field (100% and operator) and the Cory Moruga development project (83.8% and operator), all located in southern Trinidad and close to Columbus's existing assets.

The Innis-Trinity field and South Erin field are currently producing between 120-150 bopd and 80-100 bopd respectively, with remaining 2P reserves of approximately 4 mmbbl and 1.6 mmbbl respectively. The Cory Moruga development is expected to have recoverable reserves of approximately 1.1 mmbbl.

The consideration for the purchase of Steeldrum is the issuance to the Sellers of 92,743,775 shares in Columbus (the "Base Consideration Shares").

Columbus may also pay deferred consideration to the Sellers, as follows:

1- 16,422,434 shares in Columbus following the re-issuance of the Cory Moruga E&P Licence and 16,422,434 Shares following either a positive final investment decision being made to develop the Cory Moruga field or a sale to a third party (the "Cory Moruga Shares"); and
2- 16,920,083 shares in Columbus in the event the Innis-Trinity field is sold to a third party for no less than US$4,200,000 (the "Innis Trinity Shares") - see option held by Predator Oil & Gas Limited, as referred to below.

In the event all of the Base Consideration Shares, Cory Moruga Shares and Innis Trinity Shares vest in the Sellers, the Sellers will hold 18% of the enlarged share capital of the Company. The Sellers are West Indian Energy Holding AS, Rex Caribbean Holding Ltd, Geoffrey Leid, Svein Kjellesvik and Gelco Energy Inc. The Sellers will be subject to certain lock-in arrangements that will prohibit them divesting of their shares for a period of at least 6 months post completion, save for 10% of the Base Consideration Shares.

The Lind Facility:
It was recently stated in the Company's Annual Report, and in various other statements in 2018, that Columbus is fully funded for its 2018 work programmes, is cashflow positive from its operations and management forecast increasing revenues from its operations in Trinidad. This continues to be the case. Whilst the Board of Columbus believes it has the financial capacity to meet the ongoing obligations of the new integrated organisation from existing and forecast cashflows, it still considered it to be prudent to ensure additional funds are available to cover any short-term production growth projects and cash flow issues which may arise. The establishment of such a facility would, in effect, provide an appropriate "financial insurance policy" for the Company for the next six months whilst the new integrated organisation beds-in.

On 12 July 2018, the Company therefore entered into a new short-term Convertible Security facility (the "Lind Facility") with Lind Asset Management VII, LLC ("Lind") which provides the Company with the right, but not the obligation, to drawdown up to US$3.25 million. The Lind Facility has been established to provide Columbus with access to additional funds, should they be required over the next six months, to support the Steeldrum transaction, including costs associated with integrating the two companies or accelerating certain operational activities. The consolidated group, post the Steeldrum transaction, is expected to be operationally cash flow positive. The Lind Facility allows Lind to convert any outstanding loans into equity at a share price of 8.1 pence per share.

In summary, the Lind Facility provides the Company with the following:

- The right to drawdown funds as follows:
o up to US$2.25 million of convertible loans for a period of up to 180 days after execution of the Lind Facility (in two tranches of US$1.0 million and US$1.25 million);
o a further US$1.0 million of convertible loans, in tranches of US$0.5 million each, subject to mutual agreement with Lind and the Company having a minimum market cap of £25 million;
- Should the Company not exercise its drawdown rights within the 180-day period, the agreement will lapse and no funds will be available;
- After any first drawdown, there is a 120-day repayment free window before repayment of the loans over a 20-month period from free cashflow from the Company's current and new operations, or monthly repayments may alternatively be made in equity at the Company's election at the prevailing price at the time of payment;
- In addition, Lind has received 5,472,136 share options, which they can exercise at a share price of 8.1 pence, and will receive additional options alongside any drawdowns on the same exercise terms. Lind also has the right to convert any loans outstanding into ordinary shares at a share price of 8.1 pence per share during the two-year period of the Lind Facility;
- The Company has paid an up-front commitment fee of US$35,000 for the first US$1 million available for drawdown. Apart from legal fees incurred to establish the Lind Facility, no other payments have been made to Lind at this stage and no other payments are due if the Lind Facility was to lapse;
- Following any drawdowns, the amounts drawn-down are secured against the assets of Columbus in a manner similar to the previous security agreements with Lind until fully repaid and carry a 0% interest rate, although there is a 8.5% face value uplift per annum on any loans drawndown.

Key Highlights in Q2 2018:
- Continued cash flow positive position from operations as per the Company Roadmap and conditions enhanced for cash flow growth from production.
- SWP acreage position consolidation progressed in the form of the submission of the Bonasse Private Petroleum License in the name of Columbus Energy Bonasse Ltd and the signing of the Sale and Purchase Agreement to take on 100% of the Icacos Field and Leases.
- Solid oil production performance delivering steady cashflow and base for future growth:

o Trinidad peak production in Q2 2018 of 648 bopd with a steady 530-575 bopd delivered month on month.
o Average Trinidad production per month as follows: April 574 bopd; May 532 bopd, June 553 bopd.
o Bonasse field reactivation of production in the form of twice monthly sales in May and June.
- Cashflow positive position maintained from operations with gross revenues of US$3.01 million during quarter delivering US$0.94 million operating netback after payment of operating costs, workovers and well interventions, royalties and SPT (compared to US$2.64 million and US$0.70 million respectively in Q1 2018).

- Cash balance of US$2.4 million at the end of Q2 2018 after $1.11 million of capex investment, abandonment fund contributions, M&A and Spain legacy costs during quarter.

- Outstanding loan balances reduced to US$0.59m.

Outlook
- All planned 2018 activities fully funded from production revenues and available cash, although impact of Steeldrum acquisition may introduce additional financial pressures in the short term. The new Lind Facility will provide an ability to drawdown funds to deal with any such pressures if they arise.

- Bonasse field reactivation of production has recently commenced in earnest with the mobilisation of a workover rig to site to perform further re-activations and production enhancements on the 10 available wells. Rig activities commencing week beginning 16 July 2018.

- Following acquisition of 100% of Icacos Field, assumption of operations duties is in progress from the Operator, to allow well optimisation activities and planning for legacy well missed-pay, oil production testing activities to commence in Q3.

- Goudron Field Water Injection is set to increase to over 1,000 barrels of water per day ("BWPD") in 2H 2018 from produced water resources, allowing enhanced speed of pressure responses at target wells to achieve faster oil production response evaluation during the pilot phase.

- Goudron Field well responses to optimisation programmes continues to justify expectations of the growth potential of the field. Managing sand production in successful well stimulations has led to a shift in completion technology away from conventional rod pumps with a multi-strand approach including Progressive Cavity Pump installation and new sand screen technology applications being deployed.

- New technical work on the SWP has been commissioned involving specialist exploration consultants to develop a technical roadmap for de-risking 2019 drilling locations.

- Continuing to work actively on a number of additional acquisition opportunities using the following strict investment screening criteria which is not exclusive: onshore; operatorship, easy export routes, mature oil provinces in the Caribbean or South America; close to infrastructure; funded in a manner which is accretive for Columbus' current shareholders.

DETAILED INFORMATION

Steeldrum Acqusition - Sale and Purchase Agreement

The SPA will be entered into by the Company and Columbus Energy (St Lucia) Limited (a wholly owned subsidiary of the Company). Columbus Energy (St Lucia) Limited will the purchaser under the SPA, the Company issuing the Base Consideration Shares and, if applicable, the Cory Moruga Shares and the Innis Trinity Shares on behalf of the purchaser. The SPA is subject to certain regulatory, joint venture partner and third-party approvals. Completion of the transaction is expected in Q4 2018.

Steeldrum is also the parent company of Talon Well Services Ltd ("Talon"), which owns a drilling rig, suitable for the Company's planned exploration activities in the South West Peninsula, and a production rig located in Trinidad. The purchase of Talon is not part of the transaction and the parties will separate Talon from the combined entity prior to completion. However, the SPA grants Columbus a first priority use of the two rigs at market rates.

Steeldrum currently engages Gelco Energy Consultants to provide Managing Director services for the Steeldrum group. Post completion of the transaction, the Company will continue with these arrangements on terms commensurate with the current Columbus management team.

The Company is aware Predator Oil & Gas Limited ("Predator") is party to a farm-in into the Innis Trinity field, owned by FRAM Exploration (Trinidad) Ltd ("FRAM") and ultimately owned by Steeldrum. That farm-in is unaffected by today's announcement.


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Related Categories: Accounting, Statistics  Acquisitions and Divestitures  Asset Portfolio Management  Economics/Financial Analysis  General  Industrial Development  Insurance  Investment  Mergers and Acquisitions  Risk Management 

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