Nighthawk announced Wednesday that its wholly owned subsidiary, Nighthawk Production LLC, entered into an acquisition agreement with Running Foxes Petroleum Inc. to acquire a further 25 percent working interest in the Jolly Ranch Project in the Denver-Julesburg Basin, Colorado from RFP.
Following completion of the Acquisition Agreement, which is expected to occur on Jan. 23, 2012, Nighthawk Production LLC will hold a 75 percent working interest in, and will be operator of, the Jolly Ranch Project.
In addition, Nighthawk has been informed that RFP has signed a separate letter of intent and has entered into exclusive discussions with a third party, independent of Nighthawk, to sell the 25 percent balance of its working interest in the Jolly Ranch Project by 30 April 2012.
The Acquisition and the associated fundraising as described in this announcement are conditional, amongst other matters, on the passing of certain resolutions of shareholders of the Company and on admission to trading on AIM of the ordinary shares of 0.25p each in the capital of the Company to be issued pursuant to the Acquisition and such fundraising and such admission becoming effective in accordance with the AIM Rules for Companies.
Stephen Gutteridge, Chairman of Nighthawk, said: "This acquisition will propel Nighthawk to a position of majority partner and operator of a potentially major early stage US shale oil play, with funding available to press ahead with further development. We enter the New Year as a fundamentally different company with transformed prospects and a clear break with the past."
Principal Terms of the Acquisition
On Dec. 23, Nighthawk Production LLC, a wholly owned subsidiary of the Company, entered into the Acquisition Agreement with RFP to acquire a further 25 percent working interest in the Jolly Ranch Project, subject to certain conditions set out in the Acquisition Agreement. Following the Acquisition, Nighthawk and its subsidiaries will own a 75 percent working interest in, and will become operator of, the Jolly Ranch Project.
The initial consideration for the Acquisition is $12.5 million, to be satisfied as to $8.5 million in cash and $4 million through the issue by the Company of 102,236,422 new Ordinary Shares at a price of 2.5p per share. On completion of the Acquisition, assuming full subscription for the Ordinary Shares in the Open Offer, but before the impact of the Proposed Placing, RFP would hold approximately 14.1 percent of the enlarged issued share capital of the Company.
In addition, in the event of a sale or disposal by the Company of all or a portion of its working interest in the Jolly Ranch Project to a third party within five years, the Company will pay RFP a portion of the cash proceeds which it receives in connection with such sale or disposal up to a maximum aggregate amount of $5 million.
The Ordinary Shares received by RFP in part-consideration will be subject to lock-in arrangements whereby RFP has undertaken that, subject to certain exceptions, it will not sell or otherwise dispose of, or agree to dispose of the shares for a period of 12 months following Completion. RFP has also agreed orderly marketing provisions for a further 12 months.
In addition, on Completion the existing options to subscribe for 1,250,000 Ordinary Shares at a price of 53p held by Steven Tedesco, the CEO of RFP, will be cancelled and warrants to subscribe for 1,250,000 Ordinary Shares at a price of 5p per share at any time on or before the third anniversary of Admission will be issued to him.
On Completion, Nighthawk has also agreed to assign all of its rights, title and interest in the properties owned by it in the Cisco Springs Project in Grand County, Utah, USA for nil consideration.
Subject to the satisfaction of the conditions relating to the Acquisition, Completion is expected to take place on Jan. 23, 2012.
RFP has agreed to make available to Nighthawk the services of appropriately experienced and qualified personnel on a transitional basis. RFP will invoice the Group on a monthly basis. These transitional arrangements will remain in effect for one year from Completion with no minimum or maximum commitment by Nighthawk.
Nighthawk has been informed that RFP has entered into exclusive discussions to sell its remaining 25 percent working interest to a third party with completion no later than April 30, 2012. In the event that this transaction does not complete by that date, Nighthawk has agreed to pay RFP an additional $1 million.
Rationale for the Acquisition
Following the Acquisition, Nighthawk will be in a position to control the speed and method of development at Jolly Ranch going forward. A number of lessons have been learnt from the progress to date which will be applied in seeking to improve the performance of the asset from existing and new well bores. By controlling the development, the directors of the Company believe that Nighthawk will be able to deliver greater value to shareholders by focusing on a number of key development factors, including well design and drilling operations, logging and well completion design and the increased use of horizontal wells. Of the multiple shale formations present on the Jolly Ranch Project, principally within the Pennsylvanian formations, the Cherokee shales will be the primary objective during the first phase of development as operator.
In order to assist in this objective, the board of Directors recruited Chuck Wilson as Chief Operating Officer in August 2011. Chuck has strong experience of managing drilling and completions in shale oil operations similar to those at Jolly Ranch and the forward work program has been designed under his guidance.
Potential Impairment of Jolly Ranch Project
The aggregate potential Acquisition consideration of $13.5 million implies a gross value for the Jolly Ranch Project of approximately $54 million. In Nighthawk's audited consolidated accounts for the year ended June 30, 2011, Nighthawk carried its 50 percent working interest in the Jolly Ranch Project at approximately $46 million, being the total investment by the Company into the project to that date, which implied a gross value of approximately $92 million. Whilst the Directors are firmly of the opinion that the Jolly Ranch Project is materially undervalued, it is likely that the Company will impair the value attributed to the project in its consolidated balance sheet upon publication of its interim results for the period to Dec. 31, 2011 in line with best practice accounting guidelines. This does not detract from the Directors' opinion that the value of the Jolly Ranch Project will only be enhanced by Nighthawk gaining operatorship of the asset and implementing a program of workovers, scientific work and new wells.
Focused Operations and Development Plan
Nighthawk will focus the first phase of development as operator on the Cherokee formation as well as testing the Niobrara formation in the north of the acreage currently held. This focused development plan is a culmination of the work undertaken to date by the Group and the work by other operators in the vicinity of the Jolly Ranch Project.
The Company's proposed work program assumes the deployment of up to $7 million during 2012 in the development of the Jolly Ranch Project. Of this amount, it is intended that approximately $800,000 will be assigned to workovers on a selection of the existing wells, together with additional scientific work, such as seismic check shots and reinterpretation of existing 3D seismic surveys. Investment of $6.2 million is planned to be deployed in drilling up to five new wells, four vertical and one horizontal side track. The initial phases of this work program will be fully funded by the issue of the £10 million convertible loan notes. Additional funds raised through the Open Offer and Proposed Placing will be invested to complete the 2012 work programme and potentially fund further work in early 2013.
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