By Kiana Wilburg
Local oil and gas exploration company, CGX Energy Inc., has inked an agreement with its major shareholder, Frontera Energy Corporation (FEC), to pursue Joint Ventures (JVs) in both its Corentyne and Demerara offshore blocks.
This news was jointly released on Tuesday by both companies which are traded on the Toronto Stock Exchange.
In a move which is being seen as one of the most successful comebacks in the business, CGX announced that the JV sets it firmly on the path to restructure and address its debt and recapitalize so as to accelerate its drilling programmes on its Corentyne and Demerara offshore exploration blocks.
The agreement comes at a time when USA oil giant, ExxonMobil recently announced that its discovered reserves in the basin are now more than five billion barrels as a result of its latest discovery, the Pluma-1 well, being approximately two miles from CGX’s Corentyne block.
Against this backdrop, a recapitalized CGX Energy will proceed to drill offshore Guyana in the near term, providing more exploration activity in the basin, diversifying the commercial interests in the sector, and inserting a Guyanese-led exploration competitor into the basin.
Importantly, the proposed joint venture which must be approved by the Government of Guyana before it can be finalized, establishes CGX as the operator of the company’s planned wells with technical assistance being provided by its proposed partner, Frontera.
This means that CGX will be able to continue its industry-leading approach to the engagement of local content in the pursuit of its exploration activities.
JOINT VENTURE TERMS
The deal announced yesterday, according to Professor Suresh Narine, represents the first in a series of steps designed to provide it with significant working capital and liquidity. Coming as it does against the backdrop of severe financial hardship, this announcement is being heralded by the industry as a major success.
Under the terms of the proposed farm-in, Frontera and a wholly owned subsidiary of CGX, CGX Resources Inc., will enter into a farm-in joint venture agreement covering CGX’s two shallow water offshore Petroleum Prospecting Licenses in Guyana, the Corentyne and Demerara Blocks.
Upon completion of the agreement and receipt of Government of Guyana and regulatory approval for the farm-in, Frontera will acquire a 33.33% working interest in the two blocks in exchange for a US$33.3 million signing bonus.
Frontera has agreed to pay one-third of the applicable costs plus an additional 8.333% of CGX’s direct drilling costs for the initial exploratory commitment wells in the two blocks.
Pursuant to the letter agreement, Frontera and CGX have agreed to arrangements to provide additional financial support for CGX. Upon the closing of the JV Agreement, CGX will repay Frontera approximately US$17 million of debt which is currently in default and owing to Frontera.
This debt will be extended to March 31, 2019 and is expected to be repaid earlier by way of an offset against the U.S$33.3 million signing bonus payable to CGX referred to above.
Frontera will extend its April 25, 2018 bridge loan through September 30, 2019 (which loan is currently in default with principal outstanding of U.S$8,861,339 plus interest), and will seek regulatory approval to amend the terms to provide Frontera the ability to have the outstanding principal amount of the loan repaid in CGX common shares, at a conversion price of the U.S. dollar equivalent of CDN$0.29 per share, at any point on or before maturity of the loan.
This option will allow CGX to enhance its liquidity. Frontera will also agree to guarantee an equity financing of CGX of up to U.S.$20 million, the terms of which CGX expects to announce within the next two weeks. No proceeds from the financing will be payable to Frontera. This financing will enable CGX to settle its U.S.$7,904,037 of liabilities with Japan Drilling Co., Ltd. as disclosed by CGX in its October 31, 2018 press release.
The companies further stated that the cumulative effect of the transactions if successfully completed would satisfy approximately U.S$34.5 million of CGX’s existing indebtedness and provide CGX with approximately U.S$27.5 million of net cash.
As a result of these transactions, Frontera could increase its ownership of outstanding common shares of CGX from its current ownership of approximately 45.6% (or 50,351,929 shares) to up to approximately 77.5% if no other shareholder participates in the equity financing and Frontera elects to exercise the conversion right attached to the bridge loan.
Like Professor Narine, Gabriel de Alba who is the Chairman of the Board of Directors of Frontera, said he is excited about the new strategic joint venture in Guyana. His partner, Richard Herbert, who is the Chief Executive Officer of Frontera, was keen to share that Offshore Guyana has emerged during the last few years as one of the most exciting exploration areas in the world.
Herbert said that CGX’s offshore exploration blocks have been significantly de-risked by exploration activity in the basin to date and contain multiple play types which offer significant opportunity.
He said, “Once executed, our farm-in agreement with CGX will give the Company a direct interest in the significant exploration potential of both the Corentyne and Demarara Blocks. We look forward to building on our relationship with CGX and the people of Guyana as Frontera expands its medium- and long-term opportunity set in the north Andean region of South America and the Caribbean.”
CGX WELL PERFORMANCE
CGX Energy Inc., which just celebrated its 20th anniversary on August 10, 2018 at the Umana Yana with the naming of its next exploration well (Utakwaaka) by the Aleluya Religious Group from Amococopai, Region Seven, is one of the more well-known oil and gas exploration companies operating in the Guyana Basin.
The company is widely regarded as Guyana’s indigenous oil company. It was one of the earlier pioneers in the basin. The company is the only operating oil and gas exploration company with Guyanese management and a Guyanese Executive Chairman, Professor Suresh Narine.
The company holds three oil and gas concessions in Guyana -Corentyne and Demerara, which are offshore in shallow water on the continental shelf and Berbice (62% owned) which is onshore in Region Six.
The company has drilled three onshore exploration wells and two offshore wells. All of its onshore wells had petroleum “shows” but none proved to have productive commercial potential. CGX in October 2018 re-opened it exploration activities on its onshore block with the completion of a major geochemical study over a significant portion of its Berbice Block.
The company’s fully owned Eagle Shallow well also did not yield commercial volumes of hydrocarbons, although it did provide indication of an active petroleum system in the Guyana basin. CGX drilled the Jaguar well (25% working interest) together with partners YPF, Tullow and Repsol, but that well needed to be plugged and discontinued as high pressures of gas were encountered.
The data from these wells have apparently been very instrumental in calibrating the basin, however, and is thought to have played a major role in the successes enjoyed by Exxon Mobil and its partners.
The company was also interrupted during the drilling of another offshore well in 2008, when its drilling rig was boarded by a Surinamese gunboat, during a period when neighboring Suriname claimed some of Guyana’s maritime territory.
CGX Energy took a pivotal decision then to financially support Guyana’s legal representations to the United Nations Law of the Sea tribunal, which was ultimately successful.
This act of partnership with the people and Government of Guyana was instrumental in CGX being seen by most Guyanese as Guyana’s Indigenous Oil Company.
According to CGX officials, the company’s on-going sector-leading Corporate Social Responsibility (CSR) activities and in particular, its work with Guyana’s Indigenous Peoples, have kept it very relevant as a company fully engaged in the social and cultural fabric of Guyana.
FINANCIAL DISTRESS & MOVING FORWARD
In 2012, on the backs of a non-producing Eagle Shallow well, and a plugged and discontinued Jaguar well, the company entered a phase of financial distress.
Oil prices plummeted from US$120 a barrel to less than US $30 a barrel. CGX, like most other oil and gas companies, faced significant financial challenges and the company was forced to borrow heavily to stay afloat and to default on several service payments, leasing to increased debt.
Despite these challenging times, and during which many larger companies filed for bankruptcy, CGX not only held on but also kept all of its local employees. Although several of its overseas offices saw massive reductions in staff, the company’s local workforce was retained. Furthermore, the company kept its most important CSR activities going.
At the beginning of 2017, with massive restructuring having occurred across the industry, including with the company’s major shareholder Pacific Rubiales Energy, Professor Narine assumed the role as Executive Director of the company’s Guyana operations and shortly thereafter, assumed the Executive Chairmanship of the company.
Narine has previously been Co-Chair of the Board of Directors with a short stint in 2013 as Executive Chairman during when the company was negotiating its way out of financial distress. CGX was able in December of 2017 to re-negotiate its exploration programme with the Government of Guyana, during which the company relinquished 25% of both its Demerara and Corentyne blocks to the Government.
With the financial support of its major partner, who was restructured and renamed Frontera Energy Corporation, the company started to aggressively address its new work programs and entered into a restructuring of some of its creditor debt.
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