Horizon Announces Initial Closing of Acquisition in Poland

Source Press Release
Company Horizon Petroleum Ltd.San Leon Energy Plc 
Tags Asset Deals, Deals, Upstream Activities
Date August 21, 2019

Horizon Petroleum Ltd. (the “Company” or “Horizon”) (TSXV: HPL) is pleased to announce that following its recent qualification with the Polish Government to conduct oil and natural gas activities (press release dated May 1, 2019), it has completed the acquisition (the “Acquistion”) of two of the five concessions to be acquired, as previously announced in Horizon’s press release dated September 19, 2017, from subsidiaries of San Leon Energy plc (“San Leon”). Most importantly, the Bielsko-Biala concession, containing the Lachowice natural gas discovery, is one of the concessions acquired. The acquisition of the other three concessions, under similar but separate transactions, are expected to close within 60 days. The closing of the Acquisition shows Horizon continues to make progress on it’s business plan of developing a natural gas production company focused on opportunities in Europe.

Highlights of the Acquisition

The Acquisition consists of operated concessions (100% working interest) containing a number of undeveloped natural gas discoveries in proven basins. The Lachowice discovery in the Bielsko-Biala concession is the most advanced of these discoveries and has the following attributes:

  • Probable Undeveloped Reserves (2P) of 36 Billion cubic feet equivalent (Bcfe) (6.0 million barrels of oil equivalent, (MMBoe)) valued at US$98 million Net Present Value discounted at 10% before taxes (NPV10 BTAX)
  • Risked Best Estimate Contingent Resources (2C) of 171 Bcfe (28.5 MMBoe) valued at US$398 million (NPV10 BTAX)
    • Unrisked Best Estimate Contingent Resources (2C) of 249 Bcfe (41.4 MMBoe)
  • Risked Best Estimate Prospective Resources of 123 Bcfe (20.6 MMBoe)
    • Unrisked Best Estimate Prospective Resources of 487 Bcfe (81.2 MMBoe)
  • An anticipated phased development plan, consisting of a new vertical well expected to be drilled in Q2 2020, targeting facility-constrained natural gas sales of 3.0 million cubic feet equivalent per day (MMcfe/d) by early 2021
    • Two horizontal or highly deviated wells expected to be drilled in Q4 2021, targeting an increase in production to 17.5 MMcfe/d by Q1 2022
    • Drilling to continue, targeting production increases to over 30 MMcfe/d thereafter

Deal Terms

The terms agreed and previously announced by Horizon and San Leon were for Horizon to pay San Leon consideration at closing of US$900,000 in cash (net) (the “Cash Consideration”), C$1,000,000 in Horizon shares (the “Share Consideration” and collectively with the Cash Consideration, the “Consideration”), and a 6% Net Profits Interest (“NPI”), plus closing cost adjustments. Horizon and San Leon originally agreed that San Leon would transform the concessions to new concession agreements prior to closing. However, due to delays in this process, Horizon has agreed to take responsibility for the completion of the transformation of the concessions, and in exchange, the parties have agreed that payment of the Consideration will be made contingent upon the transformation of the Biesko-Biala concession. The transformation of the concessions involve the conversion of the Bielsko-Biala and Cieszyn concessions to the new Polish concession structure and the completion of the award of the three remaining concessions to Horizon. These transformations are expected to occur by the end of 2019 or early 2020. In the event that the transformation of the Bielsko-Biala concession is not completed, Horizon will not pay the Consideration to San Leon. Payment of the Consideration is subject to a number of additional conditions, including the transformation of the concessions, final approval of the TSX Venture Exchange, Horizon's ability to raise sufficient funds to pay the Cash Consideration and the potential need for shareholder approval for issuance of the Share Consideration.

Discussion of Reserves and Resources

APEX Global Engineering Inc. (“APEX”) prepared an independent reserve and resource evaluation (the “Reserve Report”) on the Lachowice conventional natural gas field in the Bielsko-Biala concession in southern Poland with an effective date of January 31, 2018. The Reserve Report was prepared in compliance with the standards set out in National Instrument 51-101 of the Canadian Securities Administrators and the Canadian Oil and Gas Evaluation Handbook (COGE Handbook). APEX assigned the Probable Reserves and Contingent and Prospective Resources to the Lachowice field, which at 10,561 acres represents approximately 1.5% of the total lands to be held under the concessions (see Table 1 below). The reserves and resources assigned are subject to significant risks. Please refer to the Risks section at the end of this press release.

Table 1: Concession Acreage

Concessions      Acreage 
    km2      Acres 
Bielsko-Biala      804.6      198,821 
- Lachowice field      42.7      10,561 
Buchowice (under application)      927.0      229,067 
Cieszyn      325.8      80,507 
Kotlarka      212.4      52,473 
Prucise      758.1      187,331 
Total Acreage      3,028      748,198 
             

Tables 2, 3 and 4 below summarize APEX’s estimates of Horizon’s conventional natural gas reserves and resources, subject to closing the Acquisition. The volumes shown are attributable to Horizon’s 100% working interest, before deduction of any associated royalty burdens. The economic values presented are shown after deduction of the associated royalty burdens, the NPI, operating and capital expenses, but before any attributable income taxes. Table 5 summarizes the commodity pricing used in the economic evaluations.

Table 2: Probable Reserves in Lachowice Field

Probable Reserves  PIIP1  Recoverable
Sales 
Before Income Taxes (US$MM), Discounted at 
0%  5%  10%  15%  20% 
Conventional Natural Gas (Bcf)  49  34.4           
Natural Gas Liquids (MBbl)  344  261.7           
Total Bcfe  51.2  36.0  263  153  98  67  48 
Total MMBoe  8.5  6.0           
               

Table 3: Contingent Resources – Development Unclarified in Lachowice Field

Contingent Resources - Development Unclarified  Discovered PIIP2  Unrisked Contingent
Resources - Dev. Unclarified 
Chance
of Dev. 
Risked
Contingent
Resource (2C) -
Dev. Unclarified 
Before Income Taxes (US$MM), Discounted at 
1C  2C  3C  1C  2C  3C  (%)  0%  5%  10%  15%  20% 
Conventional Natural Gas (Bcf)  309  422  583  169  238  339  68.6%  163.5           
Natural Gas Liquids (MBbl)  2,276  3,110  4,298  1,248  1,756  2,499  68.6%  1,206.2           
Total Bcfe  323  441  609  177  249  354  68.6%  170.7  1,341  688  398  249  165 
Total MMBoe  53.8  73.5  101.5  29.5  41.5  59.0  68.6%  28.5           

Note 2: There is no certainty that it will be commercially viable to produce any portion of the resources.

Table 4: Prospective Resources in Lachowice Field

Prospective Resources  Undiscovered PIIP3  Unrisked Prospective Resources  Chance of 
Dev. 
Average Chance 
of Disc. 
Risked Prospective 
Resources - Best 
Estimate 
Low Estimate  Best Estimate  High Estimate  Low Estimate  Best Estimate  High Estimate  (%)  (%) 
Conventional Natural Gas (Bcf)  544  778  1133  329  466  673  68.6%  36.9%  118.0 
Natural Gas Liquids (MBbl)  4,007  5,448  7,933  2,501  3,547  5,121  68.6%  36.9%  897.8 
Total Bcfe  568  811  1181  344  487  704  68.6%  36.9%  123.4 
Total MMBoe  94.6  135.2  196.8  57.3  81.2  117.3  68.6%  36.9%  20.6 

Note 3: There is no certainty that any portion of these resources will be discovered. If discovered, there is no certainty that it will be commercially viable to produce any portion of the resources.

Table 5: Commodity Pricing

       
Year  APEX Commodity Price Forecasts 
Natural Gas  Natural Gas Liquids 
(US$/MMBTU)  (US$/Mcf)  (US$/Bbl) 
2019  7.56  8.08  67.00 
2020  7.56  8.08  72.00 
2021  7.56  8.08  76.50 
2022  7.71  8.25  78.03 
2023  7.87  8.42  79.59 
2024  8.02  8.59  81.18 
2025  8.18  8.76  82.81 
2026  8.35  8.95  84.46 
2027  8.51  9.12  86.15 
2028  2% thereafter 

NOTES: 
Natural gas transportation at 0.20 US$/Mcf included 
Natural gas heating modifier at 109.56% 
Natural Gas Liquids price is based on Sproule forecast (Jan. 31, 2018)

Lachowice Development Plan

Horizon is currently in the process of finalizing its development plan for the Lachowice natural gas discovery. It is currently anticipated that the development plan would begin with a new vertical well offsetting the Lachowice-7 location. Due to delays in the qualification process for Horizon taking operatorship of the concessions and the concession transformation process with the Polish government, Horizon is now targeting to drill and test the well in Q2 2020, with first production to occur by Q1 2021, with natural gas sales initially facility-constrained at approximately 3.0 MMcfe/d. The wells will produce natural gas under primary drive via the natural fractures and the matrix porosity within the reservoir. The project is considered pre-development and is expected to cost approximately US$7.5 million to first production. In previous disclosure, Horizon stated it was targeting first production from the Lachowice field by the second half of 2019. Horizon's ability to achieve its revised target of Q1 2021 depends on its ability to raise additional capital to pay the Cash Consideration and the entering into of a joint venture agreement, as more particularly described below, or to obtain other satisfactory funding.

A new horizontal or highly deviated well and a horizontal or highly deviated re-entry of the new vertical well (targeting >300 m natural gas column) would then be drilled commencing in Q4 2021, targeting an increase in production to 17.5 MMcfe/d at a new processing facility expected to be operational in Q1 2022. Drilling would continue targeting production increases to over 30 MMcfe/d thereafter. Operating netbacks are expected to be approximately US$6.80 per thousand cubic feet (Mcfe), based on current pricing, see Non-GAAP measures at the end of this Press Release. Timing of the development is subject to receipt of all regulatory approvals.

Horizon continues to work towards closing the joint venture contemplated by the letter of intent (“LOI”) with a private European entity (the “Farmee”) as previously announced on August 18, 2018. Under the terms of the LOI, the Farmee has agreed to fund 100% of the capital expenditures required to bring the Lachowice field to first production, with Horizon continuing as operator. In return, the Farmee will receive 50% of the equity in the Horizon subsidiary that will hold the Bielsko-Biala Concession. Horizon and the Farmee will agree on the drilling and development program to bring the Lachowice field on production. The LOI is subject to a number of conditions, including a financing condition, as outlined in Horizon’s August 18, 2018 press release. Should the Farmee not be able to raise necessary funds for development, Horizon will consider other partners for the development, and/or proceed on a 100% working interest basis.

Horizon does not currently have the funds committed to achieve its development plans as described in this Press Release.

Corporate

Horizon is currently examining options for improving the Company’s trading liquidity, access to new equity capital in Europe and its profile alongside its international E&P peers. As part of these deliberations, Horizon may consider listing on another exchange, such as the London Stock Exchange. In the event the Company decides to undertake an additional listing, it expects to execute a plan within the next 6-12 months.

Source: EvaluateEnergy® ©2020 EvaluateEnergy Ltd