Central Petroleum acquires Mereenie stake from Santos for $37.4M

Central Petroleum Ltd. has agreed to acquire a 50% interest in the Mereenie oil and gas field from Santos Ltd. and assume operatorship of the field in the Northern Territory’s Amadeus Basin in Australia.

The move will increase Central’s operations and enable Central and Santos to maximize the amount of gas available for the proposed Northern Territory–East Coast gas pipeline (NEGI). The acquisition is subject to regulatory approvals and completion of the expansion to the existing Macquarie Bank debt facility which are normal for such transactions. The acquisition is immediately value accretive to Central, with an increase in free cash flow and a reduction in unit production costs, and enables Central to be cash positive even without NEGI.

By taking on operatorship of Mereenie, Central will become the common operator across all three conventional gas fields producing in the Amadeus Basin. This creates immediate operating efficiencies and provides employment opportunities in and around Alice Springs by utilizing local services and resources. This acquisition will increase Central’s oil production to over 500 barrels of oil per day (bopd) and contracted gas sales to over 4 petajoules per annum or PJ/pa (equity accounted).

Under the agreement, Central will pay $34.7 million (AUD 45 million) in cash to Santos, structured as $27 million (AUD 35 million) on financial closure of the deal and the balance $7.7 (AUD 10 million) to be paid in June 2016.

In addition, Central will free-carry Santos under a $7.7 million (AUD 10 million) work program prior to NEGI aimed at increasing 2P reserves at Mereenie to 280 PJ (Pre-NEGI Work Program). Central will also grant an option to Santos to cause a transfer of certain permits in the Amadeus Basin plus other financial arrangements.

Conditional on the NEGI pipeline project proceeding, Central will pay Santos a NEGI bonus payment of $11.6 million (AUD 15 million) and commit to free-carry Santos under a $42.5 to $57.9 million  (AUD 55 to 75 million) NEGI Work Program to develop the Mereenie field for production into the NEGI pipeline.

The financing will be through a credit approved increase in the existing Palm Valley and Dingo debt facility with Macquarie Bank. Under this expanded debt facility, the interest rate will be reduced relative to the existing loan by 170 basis points. Central will cancel the 15 million options previously issued to Macquarie Bank and issued 15 million new options with an exercise price of $0.1545 (AUD 0.20) and an exercise period of 48 months.

A further 15 million options with the same terms will be issued to Macquarie Bank should the full debt facility limit of $69.5 million (AUD 90 million) be drawn. The new total debt facility of $69.5 million (AUD 90 million) ensures that financial closure of the deal is not subject to any equity raise. Should NEGI proceed, Central expects to have new revenue generation through new bankable Gas Sales Agreements and so it is envisaged that the contingent NEGI funding can be recovered by conventional bank debt.

The mutual objective of the joint venture is to maximize gas reserves at Mereenie and volumes available for NEGI to create a market for presently discovered conventional gas and provide exploration incentive to surrounding acreage. The company says that there are are two viable routes for the NEGI pipeline. While the northern route appears to be the shortest, additional transportation tariffs charged for existing pipelines before and after NEGI suggest the Moomba route could be the preferred option if Central’s exploration and appraisal program is successful. The primary objective of the $7.7 million (AUD 10 million) Pre-NEGI Work Program (which forms part of the acquisition consideration) is to confirm reserves and deliverability that can be dedicated from Mereenie to underpin the NEGI gas sales and transportation contracts.

Central has engaged Netherland, Sewell & Associates, Inc. (NSAI) to review existing data in the light of the prospect of NEGI going ahead and the company remains confident that the review together with workovers should enable the target of 280 PJ to be reached. The work will also identify a series of gas target zones for reserve and resource additions.

Under the existing farm-out arrangements, Santos remains operator in the Southern Amadeus Basin joint venture and North West Mereenie joint venture, enabling a higher degree of focus on the vast acreage.

Under this deal, the Amadeus Basin acreage has been further rationalized with Santos having the right to acquire a 50% interest in EPA 111 and EPA 124 and Central assuming the acreage in the area of EP82 to the North of the Dingo Field to add to Central’s existing holdings in RL 3 & RL 4 (Ooraminna).

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