Challenger Energy Announces Saffron Project Update and Funding Term Sheet

Source: 7/14/2021, Location: South America

Challenger Energy, the Caribbean and Atlantic margin focused oil and gas company, with production, appraisal, development and exploration assets across the region, has provided an update in relation to the logging of the Saffron-2 appraisal well as part of the broader Saffron project in the South-West Peninsula of Trinidad, and the entry into an associated term sheet for a potential Convertible Loan Note funding of up to US$17.5 million, to fund the future development of the Saffron project.


- Logging of the Saffron-2 well has been completed. In total, approximately 1,400ft of reservoir sands have been intersected across the Upper, Middle and Lower Cruse formations. Based upon assessed net to gross measurements (NTG) this yields over 300ft of net oil-bearing reservoir sands (net pay)

- Across the Lower Cruse formation (the primary reservoir of interest based upon the Saffron-1 discovery well and the final reservoir unit to be drilled out) 63ft of net oil-bearing reservoir sands (net pay) has been measured, with a further 70ft of potential net oil-bearing reservoir sands indicated

- The drill rig has been released, well completion activities are underway, and perforation / production testing of the well is on track to commence on or around 23 July 2021. Based upon the Saffron-1 discovery well, the prognosed production rate from Saffron-2 is in the range of 200 - 300 bopd

- There has been continued progress with respect to securing additional sources of funding for development of the Company's assets. In particular, a Term Sheet was entered into in June 2021 with Arena Investors LP for a potential Convertible Loan Note funding of US$10 million (and up to US$17.5 million) which, if concluded, would provide funds for drilling of future production wells as part of the first phase of a development of the Saffron project

Eytan Uliel, Chief Executive Officer, commented:

'I am pleased to advise that logging of Saffron-2 - the first well drilled by Challenger Energy onshore Trinidad - has been completed, with oil-bearing sands identified in all reservoir sections of interest, consistent with pre-drill estimates and those indicated from the Saffron-1 discovery well. We now head toward production testing later this month, and once Saffron-2 is online and a degree of production history is established, we can then work with the authorities in Trinidad to plan how best to execute a broader development of the Saffron field.

In terms of funding, known production capacity translates to de-risked cashflow potential that can sustain less dilutive sources of capital. In this regard, we are pleased to have taken the first tangible steps, by entering into a term sheet with a leading provider of debt and hybrid-debt capital to energy companies. We are working to conclude a funding on mutually acceptable terms, with a view to having capital available once we have production data from the Saffron-2 well and have been able to assess development options and schedule for a broader Saffron development. I look forward to updating shareholders of our progress.'

Saffron-2 Appraisal Well Drilling Update

The Saffron-2 well has been successfully drilled to a depth of 4,567ft and logged with a full formation evaluation suite. All well sections have now been cased and cemented ready for a production completion to be installed, subsequent production testing, and longer-term future production.

The well, in the South-West Peninsula of Trinidad is a twin of the Saffron-1 well, and encountered similar Upper, Middle and Lower Cruse reservoirs to Saffron-1. The expectation (based upon the Saffron-1 discovery well) is of production rates in the range of 200 - 300 bopd. Challenger Energy has a 100% operating interest in the well and the broader Saffron project.

Initial results of the log interpretation have identified over 1,400ft of gross reservoir sands, with in excess of 300ft of net oil-bearing reservoir sands (net pay), as follows:

- Upper Cruse - 131ft of reservoir sand and 27ft of net pay (20% NTG)

- Middle Cruse - 1,066ft of reservoir sand and 217ft of net pay (20% NTG)

- Lower Cruse - 223ft of reservoir sand and minimum 63ft net pay (28% NTG), with a potential further 70ft net pay (60% NTG) indicated

Following logging the drill rig was released off hire and is demobilising from site. All other service providers have departed and all SOBM (synthetic oil-based mud) has been safely removed from site and returned to the vendor.

Operations are now focussed on the installation of equipment to ready the well for production testing. The Challenger #1 workover rig is mobilising to site in order to run perforating guns to penetrate each of the potential oil-bearing horizons and install the completion string. Requisite surface equipment (pipes, valves, tanks) has been purchased and is simultaneously mobilising to site to be ready for hook-up as soon as the completion operations have concluded.

Production testing is expected to commence on or around 23 July 2021.

Term Sheet for Convertible Loan Notes

Further to the Company Update of 29 June 2021, the Company has continued to make good progress on securing additional sources of funding, in particular in relation to a potential Saffron development.

In response to recent speculation, the Company is pleased to advise that it signed a term sheet in June 2021 (the 'Term Sheet') with Arena Investors, LP ('Arena') for a Convertible Loan Note funding of US$10 million (and up to US$17.5 million) ('Loan Notes'). If concluded, this will provide funding capacity for ongoing development of the Company's projects, including in particular the drilling of an additional three production wells as part of the initial phase of development of the Saffron project.

Arena is a global investment firm with principal offices in New York and London and ~US$2.2 billion of capital under management. Arena has a resources finance platform that originates and invests in secured, reserve-based loans for middle-market oil and natural gas exploration and production companies, generally focussed on debt investment opportunities that do not typically attract the attention of conventional bank or commercial finance lenders.

The key terms of the Loan Notes as contemplated in the Term Sheet include:

- Facility structure: Fixed-price convertible loan

- Face value: US$18.9 million

- Issue discount: 92.5% of face value (US$17.5 million net proceeds)

- Tranche 1: US$10.8 million face value, drawn-down immediately (US$10.0 million net proceeds)

- Tranche 2: US$8.1 million face value (US$7.5 million net proceeds), drawable upon the Company achieving certain agreed operational milestones

- Use of proceeds: Tranche 1 would fund development drilling, including in particular three Saffron production wells as part of the initial phase of development of the Saffron project, as well as repayment of and cancellation of any existing conditional convertible notes outstanding. Tranche 2 would allow the company to drill further Saffron production wells and/or further production wells in the broader Challenger asset portfolio

- Coupon: 12% per annum, payable quarterly - 5% payable in cash and 7% payable in kind

- Term: principal due after two years, unless converted prior Conversion option: may be converted by Arena, in whole or in part, at any time during the term

- Conversion price: 4.2p per share

- Security: first priority mortgage lien and priority security interest on all of the tangible and intangible assets of the Company

- Financial covenants: none

- Fees: 3%, and warrants over 20% of the face value, exercisable for 36 months at 4.83p per share

In accordance with the Term Sheet, the Company and Arena are working collaboratively to seek to agree and enter into definitive legal documentation, with the Term Sheet having provided an exclusivity period until 30 July 2021 for this purpose. The Term Sheet is non-binding and is subject to normal pre-conditions for transactions of this kind, including completion of satisfactory due diligence by Arena, and therefore there can be no assurances that the Company and Arena will enter into definitive documentation.

The Company's intent is to have funding in place immediately following the completion of production testing of the Saffron-2 well, so as to enable the expedient development of the Saffron field.

Development of Saffron

Subject to successful production testing of Saffron-2, and subject to approval of a requisite development plan by the authorities in Trinidad, the Company will seek to develop the Saffron field in a phased approach. The initial phase will involve drilling between five to nine production wells at an estimated capital cost of US$12 - US$20 million, the pace of which will largely depend on permitting and rig availability. This initial program of activity is projected to achieve an average daily production of 1,000 - 1,500 bopd which, based on a US$60/bbl oil price, could generate annualised net operating cashflows of up to US$12 million going forward.

Thereafter, the current anticipated full-field development for the Saffron project could ultimately comprise up to 30 wells in total, with a projected peak production of approximately 4,000 bopd, potential generating annualised net operating cashflows of up to US$25 million. Following a successful first phase of development of the Saffron project, the Company expects that it will be able to fund the balance of the overall field development from ongoing cash flow generated from Saffron field production. Accordingly, the facility contemplated under the Term Sheet is expected to be sufficient to fund the first phase of development of the Saffron project.

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