PetroTal Corp. has executed final agreements with PETROPERU S.A. to complete the restructuring (the "Arrangement") of the contingent liability referenced in PetroTal's June 12, 2020 press release and to extend the oil sales contract with Petroperu ("Oil Sales Contract") for an additional two years.
- Oil sales to Petroperu under the Oil Sales Contract for deliveries through the Northern Oil Pipeline ("ONP") have been extended for an additional two years beyond December 23, 2020 ;
- At PetroTal's expense, Petroperu will place commodity price hedges on all oil sold through the ONP, after the oil is delivered by PetroTal to Pump Station # 1 at Saramuro, which will substantially limit PetroTal's exposure to the impact of oil price fluctuations in the period until Petroperu ultimately sells the oil from the Bayovar port;
- The amount of the contingent liability at November 30, 2020 was $16.6 million. PetroTal will pay this amount to Petroperu over three years in equal monthly instalments, with interest at an annual rate of 6.12%. The amount can be prepaid at any time, without penalty and is expected to be prepaid following successful completion of the contemplated bond issue announced on January 12, 2021;
- Based on the current Brent oil price forward curve, when the physical oil sales are arranged by Petroperu, which is expected over the next six months, this will result in PetroTal receiving payments from Petroperu totalling approximately $26.1 million; and,
- The Company continues to develop an alternative export route through to the Atlantic, based on the success of the first 106,000 barrel pilot in December 2020, and PetroTal has now arranged a second 200,000 barrel pilot in February 2021, FOB Bretana.
Pursuant to the Arrangement, PetroTal and Petroperu have agreed to resolve the entire contingent liability that arose due to the significant reduction in oil prices in early 2020, on a one-time basis that will result in the obligation being paid evenly over a three year period, together with interest at an annual rate of 6.12%. From the total of 2.4 million barrels of oil that gave rise to the contingent liability, approximately 575,000 barrels were sold between July and November 2020, and the remaining 1.8 million barrels of oil are either in the pipeline or storage tanks.
Based on the average oil price for November 2020, the contingent liability was $16.6 million. The actual liability or asset value will be determined based on the future Brent oil price when the remaining 1.8 million barrels of oil are sold. For reference, assuming the physical oil sales are completed by Petroperu over the next six months based on the current Brent forward curve, PetroTal will receive payment from Petroperu of approximately $26.1 million.
As part of the security package, the production facilities of PetroTal at Bretana have been pledged to Petroperu as security under the Arrangement and additional security will be pledged pursuant to a trust agreement that is expected to be finalized within 30 days. Along with the contractual monthly repayments, PetroTal may make additional pre-payments to facilitate an earlier payout, without penalty and PetroTal expects to prepay the Arrangement following successful completion of the contemplated bond issue announced on January 12, 2021. Once Petroperu has been repaid in full, the security arrangements will terminate, and all pledged production facilities and other security will be released back to PetroTal.
As noted above, PetroTal is expected to continue to benefit from higher projected oil prices when the oil volumes that have been sold to Petroperu under the Oil Sales Contract and the oil swap contract are sold by Petroperu, which is expected to occur by the end of Q2 2021.
Amendments to the Oil Sales Contract
In order to solidify the long-term operating and commercial relationship between PetroTal and Petroperu, the parties have amended certain terms of the Oil Sales Contract. The key changes are:
- Extension of the term for an additional two years, effective from December 23, 2020 ;
- Given the extended time for Petroperu to realize the export sales, future invoices submitted by PetroTal will be due 240 days from when PetroTal delivers the oil at Saramuro;
- PetroTal will continue to have the ability to immediately factor future invoices, at a nominal rate, and therefore cash flow is expected to remain largely unaffected by this longer invoice period;
- The initial differential at the time Bretana oil is sold to Petroperu has been adjusted to $6 per barrel (previously $4 per barrel). If the actual differential is less than the initial $6 per barrel at the time the oil is physically sold 8 to 12 months later, then PetroTal will recapture the difference as revenue, and if the actual differential is higher than $6 per barrel then PetroTal will pay the difference. As a reference, the first cargo of Bretana oil was sold in July 2020 with a differential of $1.39 per barrel to Brent and, a second cargo (of three oil blends), was sold in November 2020 with a differential of $4.25 per barrel to Brent. As the basis for ongoing price determination, the differential for each subsequent physical sale by Petroperu will be utilized for prevailing invoices;
- Future value fluctuation settlements will occur at the date the physical oil is sold by Petroperu;
- To minimize the future price differential, Petroperu will use their best efforts to sell the Bretana oil at the best market conditions;
- Petroperu will hedge future sales of the Bretana oil sold into the ONP to limit price exposure, at the Company's expense; and,
- Once Petroperu has been repaid in full and the securities are released, PetroTal will fund an escrow reserve account with a pledge in favor of Petroperu for $2.5 million (to be increased up to $6 million by monthly installments of $0.55 million) to secure the financial costs associated to the hedge and future price differential.
Update on Third-Party Sale of Shares
On December 14, 2020, the Company announced that it had been informed by Gran Tierra Resources Ltd. ("GTRL"), a control person of PetroTal, that GTRL had entered into a private purchase and sale agreement with Remus Horizons PCC Limited ("Remus") in respect of the purchase by Remus of 218,012,500 common shares of PetroTal currently held by GTRL.
On January 18, 2021, GTRL informed PetroTal that the purchase and sale agreement has been terminated. PetroTal was not a party to the agreement and would not have received any proceeds from the transaction had it been completed.
Manuel Pablo Zuniga-Pflucker, President and Chief Executive Officer, commented:
"PetroTal is pleased to finalize this agreement with Petroperu that effectively deals with the legacy contingent liability and ensures that PetroTal is substantially protected against future oil price volatility through hedging arrangements. Petroperu's pipeline and refinery network are important elements of PetroTal's ongoing Bretana oil field development, and the Company embraces the strong working relationship it has with Petroperu. In addition to the Company's recently announced successful pilot oil export through Brazil, this agreement with Petroperu that ensures future oil sales into the ONP, along with settlement of the contingent liability, significantly enhances PetroTal's operations."