FOGL Acquires Desire Share Capital. Announces Farm-Out Contracts

The boards of Falkland Oil & Gas Limited (“FOGL”) and Desire Petroleum plc (“Desire”) announce that they have reached agreement on the terms of a recommended combination of FOGL with Desire (the “Combination”), pursuant to which FOGL will acquire the entire issued and to be issued share capital of Desire in exchange for FOGL Consideration Shares.

The Combination is to be effected by way of a Scheme of Arrangement of Desire under Part 26 of the Companies Act.

The boards of FOGL and Desire believe that the Combination will diversify the activities of the two companies, resulting in a balanced portfolio with enhanced long-term prospects, a strong balance sheet and improved financing options.

FOGL has also signed heads of agreement (“Heads of Agreement”) with Premier and Rockhopper with respect to a farm-out of licences PL004a and PL004c (the “Licences”) (the “Farm-Out”). Premier and Rockhopper will farm-in to the Licences and, in exchange, will fund the Combined Group’s share of the cost of two exploration wells, one on each of the Licences. Completion of the Farm-Out is subject to, inter alia, the Scheme becoming effective, any required approvals from the Falkland Islands Government and completion of definitive documents in respect of the Farm-Out.

The Combination and the Farm-Out together will enable the execution of an enhanced drilling programme of five wells in the next drilling campaign, including:

-two wells in the South Falkland Basin, partnered with Noble Energy and Edison International; and

-three wells in the North Falkland Basin, one of which will target the Zebedee prospect.

The next drilling campaign is expected to be fully funded from existing cash, the Farm-Out and other previously completed farm-out agreements.

Overview of the Combination

Under the terms of the Combination, Scheme Shareholders will be entitled to receive 0.6233 FOGL Consideration Shares for each Desire Share.

Following the Combination becoming effective, FOGL Shareholders will own 60 per cent. of the Combined Group’s issued share capital, with Desire Shareholders owning the remaining 40 per cent.

The Combined Group will be a balanced, focussed E&P company with exposure to all known major hydrocarbon plays in the Falklands.

As at 30 June 2013, the aggregate cash balances of FOGL and Desire were approximately US$170 million.

Based on the price of a FOGL Share of 28.50 pence, being the Closing Price of a FOGL Share on 2 October 2013, the Combination values the entire issued share capital of Desire at approximately £61 million, and each Desire Share at 17.76 pence.

Thisrepresents a premium of approximately 45 per cent. over the Closing Price of 12.25 pence per Desire Share on 2 October 2013, being the last practicable date prior to this announcement.

Following implementation of the Combination, the management team of the Combined Group will comprise Tim Bushell as Chief Executive Officer and Colin More as Exploration Director. Richard Liddell, Non-Executive Chairman of FOGL, will continue as Non-Executive Chairman of the Combined Group. In addition to Mr. Liddell, the Board of the Combined Group will comprise Timothy Jones (Non-Executive Director of FOGL), David Hudd (Non-Executive Director of FOGL), Tim Bushell and Colin More, as well as Stephen Phipps (Desire’s current Chairman), Ian Duncan (Desire’s current Chief Executive Officer) and Robert Lyons (a current Non-Executive Director of Desire) who will all join the Board of the Combined Group as Non-Executive Directors.

Stephen Phipps, who controls 10.7 per cent. of the issued share capital of Desire, has entered into a conditional lock-in agreement with FOGL for a period of six months following completion of the Combination in respect of the FOGL Consideration Shares issued to him (and those persons associated with him) on completion of the Combination.

The Desire Directors, who have been so advised by Peel Hunt LLP, consider the terms of the Combination to be fair and reasonable. In providing its advice, Peel Hunt LLP has taken into account the commercial assessments of the Desire Directors.

Accordingly, the Desire Directors unanimously recommend Desire Shareholders vote in favour of the Scheme and the resolutions at the Court Meeting and the Desire General Meeting (or in the event that the Combination is implemented by means of a Takeover Offer, to accept or procure acceptance of the Takeover Offer), as the Desire Directors have irrevocably undertaken to do (or procure that those persons connected with them so do) in respect of their entire beneficial holdings in Desire, amounting to, in aggregate, 37,405,557 Desire Shares, representing approximately 10.9 per cent. of the issued ordinary share capital of Desire. These undertakings include an undertaking from the Chairman of Desire, Stephen Phipps, who controls 10.7 per cent. of the issued ordinary share capital of Desire. The irrevocable undertakings remain binding in all circumstances, including in the event of a higher offer, unless the Scheme lapses or is withdrawn and/or the Panel does not require FOGL to proceed with the Scheme.

The Combination is conditional on, inter alia, certain approvals by Desire Shareholders and the sanction of the Scheme by the Court. In order to become effective, the Scheme must be approved by a majority in number of the Scheme Shareholders voting at the Court Meeting representing not less than 75 per cent. in value of the Scheme Shares held by the Scheme Shareholders present and voting in person or by proxy. In addition, special resolutions approving the Scheme and the related Capital Reduction must be passed by Desire Shareholders representing at least 75 per cent. of the votes cast at the Desire General Meeting.

The Combination is also conditional on the FOGL Shareholders approving, by way of ordinary resolution, the issue of the FOGL Consideration Shares at the FOGL General Meeting.

The FOGL Directors believe that the Combination is in the best interests of FOGL and FOGL Shareholders as a whole and accordingly intend to unanimously recommend that FOGL Shareholders approve the resolutions to be proposed at the FOGL General Meeting as they have irrevocably undertaken to do in respect of their own beneficial holdings totalling 720,185 FOGL Shares, representing approximately 0.23 per cent. of the FOGL Shares.

FOGL has received irrevocable undertakings to vote in favour of the resolutions to be proposed at the FOGL General Meeting from the FOGL Directors in respect of their entire beneficial holdings in FOGL, amounting to, in aggregate, 720,185 FOGL Shares, representing approximately 0.23 per cent. of the issued ordinary share capital of FOGL. FOGL has also received an irrevocable undertaking to vote in favour of the resolutions to be proposed at the FOGL General Meeting from Erebus Limited (a subsidiary of Falkland Islands Holdings plc of which David Hudd, one of the FOGL Directors, is also a director), in respect of its holding of 12,825,000 FOGL Shares, representing approximately 4.01 per cent. of the issued ordinary share capital of FOGL. Accordingly, FOGL has received irrevocable undertakings to vote in favour of the resolutions to be proposed at the FOGL General Meeting in respect of a total of 13,545,185 FOGL Shares, representing approximately 4.23 per cent. of the issued ordinary share capital of FOGL.

The Scheme is also subject to the Conditions set out in Appendix I to this announcement, including any required approvals from the Falkland Islands Government.

The Combination is not conditional upon completion of the Farm-Out.

It is expected that the Scheme Document, containing further information about the Combination and notices of the Court Meeting and Desire General Meeting together with the Forms of Proxy, will be posted as soon as reasonably practicable and that the Combination and the resolutions required to implement the Scheme will be put to Desire Shareholders at the Court Meeting and the Desire General Meeting in November 2013, with the FOGL General Meeting being held around the same time. Subject to the satisfaction or, where relevant, waiver of all relevant Conditions (as set out in Appendix I), the Scheme is expected to become effective by 31 December 2013.

Overview of the Farm-Out

FOGL has signed Heads of Agreement with Premier and Rockhopper with respect to the Farm-Out of the Licences in which Desire currently holds working interests of 92.5 per cent. and 75 per cent. respectively. Completion of the Farm-Out is conditional on,inter alia, the Scheme becoming effective, receipt of any approvals required from the Falkland Islands Government and entry into and completion of definitive documentation in respect of the Farm-Out.

Following implementation of the Combination, any required approvals being received from the Falkland Islands Government and the completion of definitive documentation in respect of the Farm-Out, Premier and Rockhopper will farm in to the Licences and as a result of this, the Combined Group’s working interests in PL004a and PL004c will both be reduced to 40 per cent.

In exchange for aggregate working interests of 52.5 per cent. in PL004a and 35 per cent. in PL004c, Premier and Rockhopper will fund the Combined Group’s share of the cost of two exploration wells, one on each of the Licences. It is anticipated that these two wells will be included in the next drilling campaign. The Heads of Agreement provide that the Combined Group will retain operatorship of the Licences until the second carried exploration well is plugged and abandoned.

Commenting on the Combination, Tim Bushell, Chief Executive of FOGL, said:

“This combination is a compelling opportunity to consolidate the portfolios of FOGL and Desire, diversifying the risk profile for both companies’ shareholders and enabling the combined group to move forward with an active, long-term programme for growth in the Falkland Islands. Specifically, this transaction provides FOGL with access to Desire’s interests in the North Falkland Basin (including the Sea Lion area) which we believe are highly complementary to our existing exploration portfolio in the South.

“The farm-out to Premier and Rockhopper, which will reduce the combined group’s working interests in PL004a and PL004c to 40 per cent., is a prudent piece of portfolio management and allows us to participate in a more extensive exploration programme due to the drilling carry we have agreed, while retaining control through operatorship until both wells have been drilled.

“FOGL is in a strong financial position and these transactions will enhance the company’s opportunity set and offer new and exciting potential opportunities to deploy capital and create value for both companies’ shareholders.”

Commenting on the Combination, Stephen Phipps, Chairman of Desire, said:

“We have for a number of months been seeking additional investment into our North Falkland Basin licences and are pleased that this process has concluded with the combination with FOGL. Not only do Desire shareholders retain material interests in Desire’s highly prospective exploration acreage, but we also benefit from the farm-out with Premier and Rockhopper, exposure to FOGL’s upcoming programme in the South Falkland Basin, a strong balance sheet and expert partners. We are entering an extremely exciting period in the Falklands with shareholders in the combined group now having fully funded, material exposure to five wells across three basins, testing three different play types.”

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Press Release, October 03, 2013