IOG holds off Skipper drilling plans due to low oil price
Independent Oil and Gas (IOG) has informed that the Skipper appraisal well, in the UK North Sea, has been delayed until there is greater stability and clarity in the oil market.
According to IOG, this decision has been made following recent oil price movements and bad weather in the North Sea, and the company believes that it is in the best interests of shareholders.
The company recently hired Transocean’s John Shaw semi-submersible drilling rig to drill the Skipper appraisal well. The rig was previously scheduled to start drilling operations in late January or early February 2016.
The existing timetable for drilling Skipper in 1Q 2016 requires the announced loans and contractor deferral funding to be repaid by IOG at the end of 2016.
IOG now says it considers this refinancing risk to be increased due to the very weak commodity prices and negative market sentiment towards oil and gas.
“Moreover, the very bad weather in the North Sea has increased concerns that significant delays could be encountered or a sub-optimal well result may be achieved. Therefore, the Board believes that drilling in a more favourable weather window with at least some improvement in market sentiment would be prudent,” IOG explained in a statement on Wednesday.
Regarding the new schedule for drilling the well, IOG only said it expects it to be drilled later this year.
To achieve this revised timetable, IOG will need agreement from its principal lenders and contractors and agreement from the OGA to extend the Skipper licence beyond March 30, 2016. These critical discussions are ongoing, said the company.
Proposed £10 million additional funding
To facilitate this rescheduling and also to provide capital for potential acquisitions, London Oil and Gas Ltd (LOG), one of IOG’s lenders, has agreed terms in principle with IOG to provide a further £10 million ($14.4M) of convertible debt funding. This funding is subject to the execution of legally binding documentation which is expected to be completed shortly.
The further loan funding would be in addition to the existing £2.75 million and £0.8 million loans from LOG, as announced on December 7, 2015 and December 11, 2015 respectively, both of which remain undrawn as certain conditions precedent to their drawdown have yet to be satisfied.
The contemplated additional financing agreements envisage that LOG would also potentially provide access to significant additional funds for acquisitions and developments. Reaching a position acceptable to LOG with certain existing creditors of IOG will be a Condition Precedent to the new loan. The £10 million loan would be secured against IOG’s assets and fully convertible at LOG’s election into IOG ordinary shares at a conversion price of 10p, IOG said.
£3 million of this new funding would specifically cover G&A and licence fees for the next 30 months.
“The Board is therefore confident that subject to this agreement proceeding and the Company being able to drawdown on the sums committed, IOG will obtain immediate working capital and have financial security until at least mid-2018,” the company noted.
Given IOG’s current inability to drawdown on the existing loans from LOG, in the event that IOG is unable to close this additional funding deal with LOG and draw down on the sums committed in short order, the company says it will have an urgent funding requirement.
The £7m balance of the proposed funding would be used to add value to the IOG portfolio, both organically and via acquisitions. The downturn in the oil and gas market creates significant opportunities and IOG states it is reviewing several potential acquisitions that could add materiality and diversity to its current portfolio.
It is proposed that the loan would need to be drawn in full within three years of completion. Each drawing would then need to be converted into ordinary shares in IOG three years after drawing. If committed, the funding would not be able to be used for debt repayments, IOG noted.
Subject to completion of the loan agreement and satisfactory regulatory due diligence, IOG will invite two members of the LOG team to join the board.
Mark Routh, CEO of IOG, commented: “Upon completion, this £10 million funding deal with LOG would be a major milestone for IOG, ensuring that we would be in the best possible position not only to survive this severe industry downturn but also to capture some of the opportunities that it creates.
“Whilst it has been a very difficult decision, it has undoubtedly become prudent to postpone the Skipper appraisal well given the significant further oil market weakness in recent weeks, as well as unsettled weather conditions in the North Sea.
“We very much appreciate the support to date from our various stakeholders and are now working hard to get the loan funding fully documented and to enable the Skipper well to be rescheduled to the earliest feasible date.”