Berkshire Hathaway’s CalEnergy Resources Limited (“CER”) has signed a deal with Independent Oil and Gas plc (“IOG”) for a farm out of 50 percent of IOG’s Southern North Sea assets.
• IOG has signed binding definitive agreements with CER to farm out 50 per cent of its Southern North Sea assets, comprising all of the Company’s upstream assets (except for the Harvey licences), as well as the Thames Pipeline and associated Thames Reception Facilities (the “Farm-out”).
• The consideration payable by CER comprises:
o £40 million initial cash payment
o up to £125 million by way of a development carry representing 80 per cent of the costs associated with IOG’s retained 50 per cent interest, comprising:
• up to £60 million of development costs for Phase 1
• up to £65 million of development costs for Phase 2
o £0.50/MCF royalty on CER’s interest in Goddard production above 70 BCF gross up to a cap of £9.75 million.
• CER will receive a royalty of 20.2 percent of IOG’s Phase 1 revenues up to a cap of £91 million.
• CER will have the option, within three months of the Harvey appraisal well completion, to farm in to 50 per cent of the Harvey licences in consideration for:
o £20 million additional cash payment
o an uncapped royalty of £0.95/MCF on CER’s net Harvey gas production (equivalent to £61.3 million if Harvey produces IOG’s 129 BCF Best Estimate Prospective Resources).
• IOG and CER have also signed an Area of Mutual Interest (“AMI”) agreement to pursue further business development opportunities in the scope of the Thames Pipeline on a 50:50 basis.
• IOG is planning to issue a Euro-denominated Senior Secured Bond (“Bond”) of approximately £70 million to fund its share of Phase 1 costs. There is no additional external funding requirement expected for Phase 2.
• Upon Farm-out and Bond completion, IOG and CER will submit notice of Core Project Phase 1 Final Investment Decision (“FID”) to the Oil and Gas Authority (“OGA”).
• IOG has also entered into agreements to repay and restructure its existing financing arrangements with London Oil and Gas (“LOG”)
• IOG will retain Operatorship of the Core Project.
The Core Project comprises 410 BCF, of 2P+2C reserves and resources across six discovered Southern North Sea (SNS) gas fields. IOG will pay CER a royalty of 20.2% of its net revenues from the Phase 1 fields only (i.e. 10.1 per cent of gross Phase 1 revenues, net of National Transmission System entry charges and applicable marketing fees), up to a cap of £91 million over field life.
In addition, IOG will receive an effective royalty interest equating to £0.50/MCF on CER’s 50 percent share of production from certain sections of the Goddard Field after 70 BCF gross has been produced from the field up to a maximum royalty of £9.75 million.
© 2019 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance