AIM-listed Urals Energy, the independent exploration and production company with operations in Russia, has agreed to purchase the entire share capital of Arctic Oil Company ('ANK') from ArcticMorNefteGazRazvedka ('AMNGR'), a subsidiary of Zarubezhneft, a Russian State owned oil company. The acquisition will be made by Urals Energy's subsidiary, Arcticneft.
ANK's sole asset is the central part of the Peschanoozerskoe oil field on Kolguyev Island. The eastern and western parts of the Peschanoozerskoe field are already owned by Arcticneft.
ANK produces 340 bbls/day and has recoverable reserves registered with the Russian State Authorities of 16 million barrels of C1 plus C2, equivalent to 2P. These reserves figures have not been reviewed in accordance with the AIM Guidance Note for Mining, Oil and Gas Companies and the Company plans to have a review of ANK's asset within the Peschanoozerskoe oil field undertaken, in addition to the Company's other assets, in accordance with an appropriate Standard in an updated Competent Person's report to be undertaken later this year.
For the year ended 31 December 2015, ANK recorded audited loss before tax of approx. Russian Rouble 56 million on sales of approx. Russian Rouble 180 million. In respect of ANK's reported losses, the Board believes that Urals Energy will be able to reduce ANK's selling costs and general and administrative costs post-acquisition, as the operations of the two companies are combined. The audited total assets of ANK as at 31 December 2015 were approx. Russian Rouble 360 million, with non-current assets being approx. Russian Rouble 138 million. Given that Urals Energy is acquiring ANK on a cash free/debt free basis, the Directors view non-current assets as being the most appropriate indication of the value of the assets being acquired.
By acquiring ANK, Urals Energy will be able to achieve significant economies of scale through combining the operations of ANK with its existing operations on Kolguyev Island. The Directors believe that the Company's combined production on Kolguyev Island will be approximately 1,000 bbls/day, and estimates that the Company's average operating costs per barrel will be reduced (assuming that the current exchange rate for the Russian Rouble remains constant). With the increase in production, the Board expects that Arcticneft will be able to make two rather than one shipment of crude oil each year, and therefore should improve its cash flow. By combining the underdeveloped reserves of the total area, Urals Energy intends to bring forward plans to expand production as soon as market conditions allow, and will be able to do so with improved economics.
The Company has entered into a Sale and Purchase Agreement with AMNGR, which is governed under Russian law, with arbitration at the Moscow Court of Arbitration. The Company will pay AMNGR a cash consideration of Russian Rouble 100 million (approx. US$1.56 million), equivalent to US$0.09 per barrel of recoverable reserves, on a cash free/debt free basis. The consideration will be adjusted for any net working capital at closing, which is expected to be on 31 August 2016. In addition Urals Energy has agreed that, in the event that the Company decides to sell its newly combined operations on Kolguyev Island within two years, then the Company will pay AMNGR the equivalent to 20% of the increase in value of the Company's combined operations on Kolguyev Island over US$6 million, less any capital expenditure incurred in the intervening period.
The Board of Urals Energy anticipates that the majority of the current contractors at ANK will not have their contracts extended as they expire over coming months, thus providing short term cost savings.
As the closing of the acquisition is expected on 31 August 2016, and with the Company expecting to receive the proceeds for its recent tanker shipment from Petraco on 8th September, the cash consideration of Russian Rouble 100 million is to be financed by a short term loan from Kamchatcomagroprombank ('KKAPB'), a bank in which Mr Shvets, the shareholder of Adler SA, the Company's largest shareholder, is a board member and shareholder with 15.4% of the issued share capital. The principal terms of the KPGBank loan are as follows:
- principal: Russian Rouble 100 million
- term: 31 December 2016
- interest margin over Central Bank Rate: 6%, equivalent to a total of 17% on an annualised basis
- security: crude oil produced by ANK
The Board believes these terms compare favourably with possible terms from other banks, especially as credit is generally difficult to obtain, as a result of the current financial market conditions in Russia. The Company is in discussion with banks for a longer-term corporate development loan to finance the new combined operation.
Mr Shrager, Urals Energy's Chairman, said: 'This is an acquisition that we have trying to achieve for some years, since the synergy benefits are significant to Urals Energy. ANK represents a very small part of the portfolio of the Russian State Oil company, Zarubezhneft, and we have been able to reach an agreement which shares the benefits of bringing the operations into one entity. While Arcticneft has traded at broadly breakeven, ANK has been loss making for some time.
With the cost savings that we will be able to make, the combination will be cash generative and the acquisition cost should be recovered in up to 18 months at current price for oil, taxes and the exchange rate between the US$ and the Russian Rouble. We anticipate that cash flow through the year will also be improved. The big prize, though, will be the ability to exploit our increased proven undeveloped reserves as part of a combined development plan. Nevertheless, we will have to wait for market conditions to improve. In the meantime, with workovers, reductions in overall head-count, and improved practices, we believe that production can be increased steadily and profitably.'