Faroe Acquires Operated Interests in Ketch and Schooner Fields

Faroe Petroleum, the independent oil and gas company, announces the conditional acquisition of a 60% operated interest in the Ketch Field and a 53.1% operated interest in the Schooner Field in the UK Southern North Sea gas basin from Tullow Oil SK Limited, a subsidiary of Tullow Oil plc, for an initial consideration of £35m.

The Ketch and Schooner Fields are located in Block 44/28b, and Blocks 44/26a and 43/30a in the UK sector of the Southern North Sea, 150 kilometres from the Theddlethorpe Gas Terminal on the Lincolnshire coast. The Ketch Field was discovered in 1984 and the Schooner Field in 1987, with first gas from Schooner in 1996 and Ketch in 1999. Both fields, developed by then-operator Shell, are multi-well developments with ‘normally unmanned’ platforms, currently managed by a third party Duty Holder. Gas is exported via the Caister Murdoch facilities to the Conoco-operated Theddlethorpe Gas Terminal where it is sold into the National Grid.

At 1 January 2014 the remaining Proven and Probable Reserves for the Interests were estimated by the Company to be 34 Bcf of gas and 0.3 mmbbl of condensate, equating to 5.9 mmboe in total, net to Faroe.

The initial consideration for the Acquisition, is £35 million payable to Tullow Oil in cash, which is to be funded from the Company’s existing reserve based lending debt facility. The actual sum payable at completion will be reduced to take into account net income attributable to the Interests from the effective date of 1 January 2014. Further consideration of up to £10 million will be paid to Tullow if up to 10 Bcf gross (6 Bcf net to Faroe) of incremental gas is produced from a specific reservoir compartment on the Schooner field recently developed by the 2013 SA11 well. In addition, Faroe has identified several potential areas for investment in these assets, in order to further enhance reserves and value and to extend field life, certain of which are the subject of contingent royalties. In the event that the Schooner joint venture pursues the exploration and subsequent development of the Schooner C and Schooner Far NW targets, royalty payments will become due to Tullow Oil as to 50p/mscf on the first 250 Bcf gross production from the Schooner C area and 50p/mscf on the first 100 Bcf of gross production from Schooner Far NW area, up to a maximum potential £92.2million. For such royalty payments to be paid in full, approximately 35mmboe net to Faroe would have to be produced from the Schooner C and Schooner Far NW areas, compared to the current 5.9mmboe of net Proven and Probable reserves.

The estimated average 2014 production from the Interests is expected to be between 3,000 and 4,000 boepd net to Faroe. This raises the Company’s guidance for full-year Economic Production for the year ended 31 December 2014 to between 7,000 and 10,000 boepd.

The Acquisition is expected to complete before year end and is subject to UK regulatory approval.

Graham Stewart, Chief Executive of Faroe Petroleum, commented:

“We are very pleased to announce this acquisition, funded entirely from existing resources and debt facilities, which significantly boosts and diversifies our oil and gas cash flow generation.

“Ketch and Schooner are good quality producing fields, well known to the Company as they are located in one of our core areas and offer significant upside potential in the form of increasing reserves, production and field life. The transaction is highly tax efficient for us, providing shelter for both past and future tax losses in the UK and is in line with our strategy to grow our production portfolio to continue the efficient funding of Faroe’s busy and highly successful exploration programme.

“This is our first move into operating producing assets. This transaction gives us the opportunity to add value to these fields over time, and both assets offer numerous possibilities and options to grow. Nevertheless, our clear strategic focus on exploration will remain unchanged going forward.

“Elsewhere, drilling activities continue in our exploration and appraisal programme with the drilling of the Pil side-track (Faroe 25%) in the Norwegian Sea, following the significant Pil discovery and associated successful production test. In addition drilling continues at the Butch East exploration well (Faroe 15%), located adjacent to the Butch Main discovery (Faroe 15%) in the Norwegian North Sea, with results expected in the coming weeks.”

Press Release, April 30, 2014; Image: Tullow