Melrose Resources to Acquire Merlon Petroleum

Melrose Resources has entered into a conditional agreement to acquire the entire common stock of Merlon Petroleum Company, a private US corporation, for a cash consideration of $265 million (adjusted for net working capital less debt).

It is intended that the purchase price will be funded entirely through a $320 million loan facility being made available to the Company by Bank of Scotland Corporate.

Merlon is an oil and gas exploration and production company with interests in Egypt and in the USA. Merlon is the Company's partner and the operator of its properties in the Nile Delta region of northern Egypt. Merlon owns the balance of the working interests of 50% in the El Mansoura and South East El Mansoura exploration concessions and in nine development leases in the Nile Delta. The Acquisition will, therefore, result in Melrose owning 100% of the working interests in all of these concessions and leases. In addition, Melrose will take over operatorship of these interests. The concessions cover an area of approximately 5,400 km2 in the Nile Delta.

Over the last five years Merlon and Melrose have achieved significant exploration success on these concessions with discoveries of over 1 Tcfe of gross recoverable reserves. 3-D seismic has been acquired over a large proportion of this acreage and three multi-prospect exploration plays have already been established with the deeper exploration potential still remaining to be targeted. The Acquisition will significantly increase Melrose's exposure to the exploration potential that has already been identified and to further plays that may be established in the future.

Based on information currently available to Melrose, net entitlement proved plus probable reserves attributable to Merlon's interests in Egypt as at 31 December 2005 are estimated by Melrose to be approximately 125 Bcf of gas and 1.3 MMbbls of oil and condensate. Average net daily production from these interests in the year ended December 31, 2005 amounted to 16.6 MMcfpd of gas and 158 bpd of oil and condensate.

In addition, Merlon also owns working interests in, and is operator of, certain oil and gas properties in the onshore Gulf coast area of Texas, USA. These interests, which cover an area of 18,000 net acres, include nine producing gas wells. Average net daily production from these interests in the year ended 31 December 2005 amounted to 13.5 MMcfpd of gas and 150 bpd of oil and condensate. Based on information made available by Merlon to Melrose, the net proved reserves attributable to Merlon's interests in the USA as at 31 December 2005 were estimated to be 10.7 Bcf of gas and 175 Mbbls of oil and condensate. The US assets will complement and add size to Melrose's existing US onshore asset base in Texas and New Mexico. These assets will balance Melrose's predominantly oil producing portfolio with significant gas production and will add exploration upside.

The Acquisition is conditional, inter alia, on approval by the shareholders of both Melrose and of Merlon. As soon as practicable, the Company intends to send an explanatory circular to its shareholders and to convene an Extraordinary General Meeting at which, inter alia, an ordinary resolution to approve the Acquisition will be proposed. Shareholders holding a majority of the outstanding voting stock of the Company and Merlon have given irrevocable undertakings to vote in favor of the Acquisition. The Acquisition is expected to close in mid-June 2006 or as soon as possible thereafter.

Melrose has paid Merlon $4.75 million to fund in part a break fee to be paid by Merlon to a previous bidder. In the event that Melrose does not complete the Acquisition under certain circumstances, primarily having to do with failure on its behalf, Melrose will forfeit the $4.75 million paid to Merlon. In addition, a refundable deposit of $11.25 million will shortly be paid by Melrose: this deposit is refundable in all circumstances if the Acquisition is terminated prior to closing. Both the break fee and the refundable deposit will be applied to the purchase consideration on closing of the Acquisition. Should the directors of Merlon, in exercising their fiduciary duties, accept a better offer at any time prior to the closing of the Acquisition, Merlon is obliged to pay Melrose a termination fee of $7.35 million.

Commenting on this, Robert Adair, Chairman, said:

'I am very pleased to be able to announce this acquisition which will bring a step-change in our reserve base, production and cash flow in Egypt. Our operations in Egypt have made great progress over the last few years and we are particularly excited by the exploration potential that remains to be exploited on the concessions. We have worked very closely with Merlon for a number of years and our exploration and operations staff in Edinburgh will complement the team that Merlon has established in Cairo. The acquisition cost is underpinned by the value of the proved and probable reserves and I believe that the exploration upside offers the opportunity to add substantial value for Melrose shareholders.'