By John Lee.
ShaMaran Petroleum has announced that it has signed an agreement with a subsidiary of French major TotalEnergies S.E. to acquire its affiliate (TEPKRI Sarsang A/S) holding an 18% non-operated participating interest in the Sarsang Production Sharing Contract in the Kurdistan Region of Iraq for an initial consideration of USD 155 million plus working capital adjustments amounting to USD 14.2 million as of January 1, 2021.
Shares in the company were up 16 percent on the news.
An additional contingent consideration of USD 15 million is payable in the future as more fully described below. The Acquisition is transformative to ShaMaran's production, reserves and financial profile and delivers on the Company's focused and disciplined strategy for growth by targeting this opportunity that is accretive to the Company, its shareholders and its bondholders.
- Adds immediate incremental participating interest production of approximately 5,000 bopd of light crude oil;
- Is expected to double ShaMaran's Q2 2021 average net production of 11,090 bopd following the completion of the processing facility expansion at Swara Tika field by mid-2022;
- Enhances ShaMaran's oil reserves through the addition of high API and low sulphur oil that achieves a low discount to Brent; and
- Provides a low cost structure with life-of-field operating expenditure anticipated to be approximately USD 5.60/boe.
The Sarsang block is on the northern border of the Company's Atrush block and is comprised of two producing fields: Swara Tika and East Swara Tika. At Swara Tika, an expansion project is well underway with the addition of a new 25,000 bpd processing facility which is expected to lift gross production to approximately 50,000 bopd by mid-2022. Through the Acquisition, ShaMaran will add strong cash flow and a production growth trajectory underpinned by its interests in two cash-positive PSCs with three producing fields in the same vicinity.
Following a successful closing of the Acquisition, the Company's Q2 2021 average net production of 11,090 bopd is expected to double in second half of 2022 after the facility expansion at Swara Tika is completed. Additionally, the Sarsang crude is of high quality and enjoys one of the lowest price discounts to Brent in Kurdistan. In connection with the new facility being commissioned by mid-2022, the Sarsang block will also be connected to the Atrush feeder pipeline for future pipeline export and will thereby have a permanent pipeline connection to the export market.
The Acquisition is highly accretive and transformative to ShaMaran as it grows from a single asset company to a multi-field producer and paves the way for future growth opportunities for ShaMaran.
ShaMaran's President and Chief Executive, Dr. Adel Chaouch, said:
"We are delighted that we have agreed the acquisition of the TotalEnergies' non-operating interest in Sarsang, a high-quality producing asset with strong operational and financial fit to ShaMaran's business. This is a strategic transaction for ShaMaran delivering value to equity and debt holders and strengthening the financial profile of the Company.
"Upon completion, this acquisition will add immediate material production and cash flow to ShaMaran and will provide significant value enhancement. It demonstrates our continued commitment to Kurdistan and diversifies our existing production base.
"Sarsang has an attractive discovered reserves base with a strong track record of safety and sustained production. As a neighboring field to the Atrush field, becoming a partner in the Sarsang field presents opportunities for potential integration synergies with Atrush operations.
"We would like to thank TotalEnergies for their commitment in the negotiations of this acquisition and look forward to a constructive partnership in the future with the Sarsang operator, as well as a continued and trusted relationship with the Kurdistan Regional Government of Iraq."
ShaMaran has agreed to acquire 100% of the shares of TEPKRI Sarsang A/S ("TEPKRI"), a subsidiary of TotalEnergies, which holds an 18% non-operated participating interest in the Sarsang PSC. The Acquisition has an effective date of January 1, 2021.
ShaMaran will pay an initial consideration of USD 155 million upon closing of the Acquisition before working capital and related adjustments and an additional contingent consideration of USD 15 million in the future, as follows:
- The initial consideration of USD 155 million is divided into (i) an upfront cash payment of USD 135 million payable upon closing and (ii) a deferred consideration of USD 20 million structured as a vendor finance in the form of a 5.5% convertible promissory note issued to a subsidiary of TotalEnergies with a 12-months' maturity from the date of closing.
- An additional contingent consideration of USD 15 million is payable in the future upon (i) cumulative gross production from the Sarsang PSC reaching 130 MMbbls and (ii) subject to Brent crude oil prices averaging at least USD 60/bbl for a twelve months' period.
ShaMaran expects to receive significant positive cash flow upon closing of the Acquisition based on 2021 cash flows at current oil prices.
The Company intends to finance the Acquisition through the issue of new debt, equity and by utilizing the Company's cash balance.
The "change of control" of TEPKRI resulting from the Acquisition is subject to regulatory and exchange approvals in Canada, the Kurdistan Region and Sweden.
The Company intends to issue an up to USD 300 million new 4-year bond to refinance existing debt and raise new capital for the Acquisition. Subject to the closing of the Acquisition, USD 175 million of the currently outstanding USD 180 million ShaMaran 2023 bond (after the USD 5 million repayment due in late 2021) will exchange at 102% of par into the proposed new bond at par value. In aggregate, USD 185.7 million (including the USD 7.2 million amount described below) will be issued to refinance the existing debt into the new bond upon closing of the Acquisition and up to USD 114.3 million will be issued for cash to finance the Acquisition and other general corporate purposes. Cash proceeds from the new bond will be placed in an escrow account and only released upon satisfaction of the closing conditions to the Acquisition. The existing debt that is proposed to be refinanced into the new bond includes USD 7.2 million of the total USD 22.8 million debt currently owed by the Company to Nemesia S.à.r.l. (a private company ultimately controlled by a trust the settlor of which is the Estate of the late Adolf H. Lundin) ("Nemesia"). The USD 15.6 million balance will remain outstanding as described below.
The Company and its advisors have engaged with a majority of bondholders that prior to the date of this news release have pre-committed to vote in favour of the conditional refinancing of the existing bond through a written summons and resolutions, as well as necessary waivers for the issuance of the new bond and other financial matters relating to the existing bond.
The Company has also obtained strong interest for the contemplated new bond from a group of existing and new bond investors. Book-building for the contemplated bond will be launched imminently together with a summons for written resolution to refinance the existing outstanding bond conditional on closing of the Acquisition.
The Company intends to raise USD 30 million of additional equity capital to fund the Acquisition, which the Lundin family, as ShaMaran's largest shareholder, has agreed to support by Nemesia providing a USD 30 million equity underwriting. The new equity is expected to be issued through a rights issue in eligible jurisdictions in connection with the Acquisition in order to provide all shareholders to whom subscription rights may be lawfully issued with a proportionately equal opportunity to participate.
Further information on the contemplated rights offering will be announced in due course. The offering will be conditional on, inter alia, approval of the Acquisition by the TSX Venture Exchange, the approval of the Kurdistan Regional Government ("KRG"), the filing of a rights offering circular or prospectus in Canada and in Sweden and other regulatory approvals. It is anticipated that the rights offering would be commenced as soon as practicable following receipt of KRG approval for the Acquisition.
The Lundin family underwriting will be by way of a stand-by commitment, meeting the requirements of applicable securities laws, to acquire shares not subscribed for by others pursuant to subscription rights issued in the offering.