Frontera Resources Corporation (London Stock Exchange, AIM Market – Symbol: FRR), an independent oil and gas exploration and production company, today announces a private placement of Convertible Notes and gives an operational update.
- $46.5 million raised through a private placement of convertible unsecured notes due May 2012.
- Frontera may issue up to a further $20 million of Notes within 30 days of closing.
- Net proceeds essential to support Frontera’s development and exploration projects in Block 12, Georgia.
Operational Update – Taribani Field Unit
- Zone 9 development program to begin with re-entry and re-completion of Dino #2 well in Q2, followed by two new development wells in 2007.
- Reservoir objectives situated at approximately 2,300 meters.
- Key service contracts awarded and signed for dedicated drilling rig and other associated services.
- Eight further wells planned for 2008.
- Specialized Frac-Pack completions designed to enhance recovery and manage sediment control during production operations.
Operational Update – Basin Edge Play Unit
- Drilling at Basin Edge “C” Prospect, Lloyd #1 well, to commence in early Q3, 2007 to evaluate multiple objectives, with a primary Cretaceous target situated at approximately 2,700 meters.
- Based on further interpretation of seismic data, Frontera continues to believe the “C” Prospect to be approximately 20% larger than originally mapped.
- Site preparation and road construction are currently progressing ahead of rig mobilization.
Operational Update – Mirzaani Field Area Production Unit
- Q1 2007 oil sales totaled U.S. $1.1 million.
- Study completed and program designed to enhance existing production and book additional reserves through re-entries of existing wells and new drilling within the field from undeveloped locations within the shallow Shiraki age reservoir objectives at depths from 400 meters – 1,500 meters.
- Two new wells and up to five re-entries scheduled during Q3/Q4; drilling rig contracted.
Operational Update – Mirzaani Field Area Exploration Unit (Mirzaani Deep Prospect)
- To accelerate testing of this important prospect in parallel with ongoing operations in other business units, an effort is underway to seek a farmout partner to undertake new drilling within the next twelve months.
Steve C. Nicandros, President and Chief Executive Officer, commented:
“Today’s announcement signals the continuation of an aggressive drilling campaign for Frontera. The sustained strong oil price environment provides a compelling economic rationale for us to remain very focused on progressing the continuation of work programs across our primary business units within Block 12. Implementing aggressive and thorough technical work programs to realize the significant value that our historical investment has identified requires sustained financial resources – particularly when services and materials are in high demand. I am very pleased that we are now able to commit to the substantial programs that are essential to ensure that we have the ability to maintain uninterrupted operations within desired timelines. Through this, we are well positioned to achieve our growth objectives and realize shareholder value from our outstanding portfolio.”
The Company intends to announce its financial results in respect of the year ended 31 December 2006 within the next two weeks.
Frontera Resources Corporation
Vice President Investor Relations
and Corporate Communications
London Office: +44 207 2628235, Mobile: +44 (0) 786-407-5834 (Weeks of 7.5.07 and 14.5.07)
Houston Office: (713) 585-3216 (Thereafter)
Brunswick Group LLP
Patrick Handley / Mark Antelme
+44 207 4045959
SUMMARY OF CONVERTIBLE NOTE FINANCING
- The Notes have been issued at par by Frontera and will bear interest at 10%, payable quarterly in arrears either in cash or in kind at the sole discretion of the Company.
- The Notes have been privately placed with a number of institutional and private investors, including certain funds and accounts managed or advised by DDJ Capital Management LLC (“DDJ”). Raymond James and Associates assisted the Company as an introducing agent for a portion of the placement.
- The Notes are not admitted to the AIM market of the London Stock Exchange (“AIM”) or listed or dealt in on any stock exchange.
- The Notes are convertible into fully paid $0.00004 cents common shares of Frontera (“Common Shares”) at the option of the holder at a conversion price of U.S. $1.67 per share, which represents a premium of 7.5% over the closing price on May 4, 2007 of £0.78 per Common Share (May 4, 2007, exchange rate: £1 = $1.994). However, if the Sale Price (as defined in the section headed “Further Information on the Notes” below) of Common Shares is at or below $1.30 for 10 out of any 20 consecutive Trading Days (as defined in the section headed “Further Information on the Notes” below) at any time in the 12 months following closing of the issue of the Notes, the conversion price will be reset to $1.30 per share.
- $10 million of the proceeds from the Notes will be placed into a separate escrow account from which 50% of the funds will be released to Frontera when the Sale Price of Common Shares exceeds the conversion price for at least 20 consecutive Trading Days and the remaining 50% being released when the Sale Price of Common Shares exceeds two times the conversion price for at least 20 consecutive Trading Days.
- In addition, the escrow funds may be released to Frontera at any time upon joint written instructions of Frontera and the representative of the Purchasers. DDJ has been appointed as the representative.
- The Notes will be automatically converted into Common Shares if the Sale Price of Common Shares exceeds two times the conversion price for at least 20 consecutive Trading Days.
- Any investor who converts its notes into Common Shares before May 8, 2008 will receive an additional payment equal to one year of interest on the amount of Notes converted. At the Company’s option, this payment can be made in cash or Common Shares.
- Frontera has the right to sell an additional $20 million worth of the Notes through private placement within 30 days of the closing, which took place on 8 May, 2007.
USE OF PROCEEDS
The proceeds of the issue of the Notes, together with Frontera’s 2006 year-end net cash position of $21.4 million, will be deployed to advance current work plans within existing Business Units, and to continue work throughout Frontera’s extensive inventory of existing undeveloped fields and undrilled prospects throughout Block 12. Proceeds will be used specifically to:
Taribani Field Unit – Advance a contemplated twenty well development program of Zone 9. Three wells scheduled in 2007 with an additional eight wells contemplated in 2008.
Basin Edge Play Unit – Drill and test the Basin Edge “C” prospect and conduct further geophysical work further defining Basin Edge “B” and “C” prospects.
Mirzaani Field Area Production Unit – Undertake re-entry of existing wells and conduct new drilling operations within undeveloped portions of the field to increase existing production and book additional reserves.
Mirzaani Field Area Exploration Unit – Support of ongoing farmout effort and subsequent joint operations to drill and test the Mirzaani Deep Prospect.
Block 12 Area-Wide Field/Prospect Inventory Development Unit – Continued development and prioritization of extensive inventory of prospects within Block 12, consisting of 19 identified prospects and leads and five undeveloped fields.
(Further information on the Notes follows the Operational Update section of this press release.)
Taribani Field Unit
The Taribani Field is a large, undeveloped oil field covering an area of approximately 80 square kilometers with productive horizons situated in Miocene and Pliocene age reservoirs. These reservoirs are situated at depths between 2,200 meters and 3,500 meters. The independent consulting firm of Netherland, Sewell & Associates has assigned 118 million barrels of P3 reserves from Zones 9, 14, 15 and 19 within the field. Additionally, Netherland, Sewell & Associates has assigned as much as 36 million barrels of unrisked resource potential associated with five deeper horizons in the field.
Frontera committed to developing Zone 9 as a consequence of drilling operations at the Dino #2 well in 2006, when it began work to determine whether sustainable commercial production could be established from four undeveloped oil bearing horizons in the Taribani Field. As expected, during the drilling of the Dino #2 well, the Pliocene age oil-bearing reservoir interval, Zone 9, was encountered from 2,300 meters to 2,311 meters. In addition, a previously unmapped oil bearing reservoir interval was encountered above Zone 9 from 2,275 meters to 2,285 meters. Historically, twelve wells had evidence of oil when perforated in Zone 9, with the best well, #23, exceeding 700 BOPD during initial production.
Frontera is shortly to commence the execution of a thirty-six month, 20-well program within Zone 9 which represents approximately 17 percent of the identified reserves within these four zones at Taribani. The first well of the program will begin with re-entry and re-completion of the Dino #2 well late in Q2, 2007, followed by two new development wells this year, the first of which, T-#45, will commence in July. Eight new wells are contemplated for 2008. A dedicated drilling rig has been contracted for this program and is currently being mobilized to the field.
Of the two new wells that are scheduled for development in 2007, one will be drilled at a location approximately 900 feet up-dip on the Taribani Field structure from wells that encountered the lowest known oil in the field at this horizon. This location has been identified as a result of processing, interpreting and integrating approximately 40 kilometers of new 2D seismic data, acquired in late 2005, into the existing 3D mapping of the field. The new data revealed the Taribani Field to be a larger structure than previously thought and confirmed important new drilling locations high on the structure.
Frontera has designed solutions to address possible formation sediment flow issues associated with oil production from Zone 9, including the drilling of conventional vertical wells with the addition of Frac-Pack completions. This is anticipated to achieve similar production/recovery results obtained from drilling short-reach horizontal wells. Additional sediment control will come from the application of packing technology, where screens are installed and gravel is pumped into the well as a slurry to trap the reservoir formation sediment before it can enter the well and cause obstruction.
Plans are also underway to continue operations in the deeper horizons of Zones 14, 15 and 19 objectives of the Taribani Field in sequence with Frontera’s plans to focus first on Zone 9. Analysis has shown that horizontal well completions are likely best suited for these different reservoir types with the application of completion techniques that will likely utilize expandable liners and screens, together with other fit-for-purpose applications, in order to control sediment flow. Timing of future operations within these deeper horizons is currently being finalized.
Basin Edge Play Unit
Frontera’s Basin Edge Play Unit is located along the northern border of Block 12 and represents one of the newest and potentially most prolific exploration plays in the oil rich geological province of the Upper Kura Basin.
Frontera’s objectives within the Basin Edge Play Unit remain focused on commercially accessing the unrisked resource potential estimated by the independent consulting firm of Netherland, Sewell and Associates to be in excess of one billion barrels of oil within two major prospects (“B” and “C”).
“C” Prospect – In June 2006, Frontera successfully completed acquisition of a new 80 square kilometer 3-D seismic survey over the Basin Edge Play Unit’s “C” prospect. Processing and interpretation results of this data confirmed that the prospect is approximately 20% larger than initially estimated and provided new detailed imaging of its lateral and vertical limits, as well as the extensions of fault blocks and possible fracture systems within the prospect. The data also confirms that the prospect had a structural height of approximately 1,000 meters and, most significantly, the primary target Cretaceous reservoirs have been identified on the basis of seismic attributes at depths that could occur from 2,000 meters to 3,700 meters. The use of amplitude with offset technology (AVO) in the processing of the new data also suggest the possible presence of hydrocarbons within structural closure in what is interpreted as being a clastic section.
Utilizing this new information, drilling of the first well at the “C” prospect – the Lloyd #1 well – is expected to commence in early July. Designed to evaluate multiple horizons, the Lloyd #1 will target final completion in the Cretaceous reservoir targets at a total depth of approximately 2,700 meters. Procurement of services and equipment necessary for the drilling campaign is nearing completion while site preparation and road construction is underway ahead of mobilizing a drilling rig during Q2.
“B” Prospect – During the first half of 2006, Frontera also completed acquisition of approximately 170 kilometers of 2D seismic data over a second large prospect within the Basin Edge Play Unit, known as the “B” prospect. Since this time, interpretation of this data is underway with an objective of undertaking further geophysical work and drilling operations over the next twelve to twenty-four months.
Mirzaani Field Area Production Unit
The Mirzaani Field Area Production Unit is comprised of three underdeveloped and undeveloped, shallow Pliocene-age fields with targeted normal pressure reservoirs situated between 400 meters and 1,500 meters deep. One of these fields, the Mirzaani Field, currently produces at nominal production levels sufficient to yield annual revenues of approximately $2 million per year. Frontera is currently pursuing work programs designed to develop untapped portions of this field to increase production and book additional reserves. To this end, two new wells are scheduled to be drilled during the second half of 2007, with up to five additional re-entries of existing wells.
Mirzaani Field Area Exploration Unit
The Mirzaani Field Area Exploration Unit is an area of new prospectivity situated beneath the existing shallow, Pliocene-age fields. The company completed interpretation of 105 kilometers of 2-D seismic data acquired in 2005 to further delineate previously mapped prospects beneath the Mirzaani Field, including a primary focus on the Mirzaani Deep Prospect. This prospect is believed to contain Miocene-age, Sarmatian reservoirs similar to those found in the nearby Taribani Field, situated at depths of approximately 2,500 meters.
In order to accelerate testing of this important prospect in parallel with ongoing operations in other business units, an effort is underway to seek a farmout partner with which to undertake new drilling operations within the next twelve months.
In addition, analysis of new seismic data acquired to the south of the Mirzaani Field has continued to confirm a previously identified feature called the Mirzaani South Prospect. This structure is in the “foot wall” of the same fault that sets up the Mirzaani Deep Prospect and the shallower Mirzaani Field, and will remain in Frontera’s inventory for future drilling.
Block 12 Area-Wide Field/Prospect Inventory Development Unit
Throughout 2006, Frontera continued Block 12 Area-Wide Field/Prospect Inventory development and prioritization of an extensive inventory of prospects within Block 12, including 19 identified prospects and leads and five undeveloped fields. This constantly evolving inventory provides the basis for a significant core area of potential reserve replacement and reserve additions for many years to come.
Related party transaction
Certain funds and accounts managed by DDJ Capital Management LLC (“DDJ”) purchased an aggregate of $21 million of the Notes. These funds and accounts in aggregate own 10,763,552 Common Shares representing approximately 15.3% of Frontera’s issued shares. Prior to this Placement, funds and accounts managed by DDJ also owned warrants to purchase a further 1,950,000 Common Shares. After this Placement, DDJ now owns 22.8% of Frontera fully-diluted share capital (assuming all outstanding options are exercised and prior to any sales of Notes associated with the over-allotment). Stephen E. McGregor, a director of the Company, through SEM Consulting, LLC (SEM), will be paid a commission pursuant to SEM’s 2001 consulting and advisory agreement with Frontera. While the actual amount will not be finally determined until the over-allotment is subscribed, the amount paid to SEM will not exceed 2% of the face amount of the Notes. Mr. McGregor also purchased an aggregate of $0.5 million of the Notes. Spyros Karnessis, a director of Frontera, also purchased an aggregate of $5 million of the Notes. For these reasons, the transaction is classified as a related party transaction for the purposes of the AIM rules for companies.
Accordingly, as required by the AIM rules for companies, the directors of Frontera (with the exception of Messrs. McGregor and Karnessis who abstained) consider, having consulted Frontera’s nominated adviser, Morgan Stanley & Co. International plc., that the terms of the transaction are fair and reasonable insofar as its shareholders are concerned. Morgan Stanley & Co. International plc has placed reliance in this matter on the commercial assessments by Frontera and its directors of the private placement of the Notes on the terms agreed.
FURTHER INFORMATION ON THE NOTES
By a note purchase agreement, dated May 8, 2007, Frontera agreed to issue and sell up to $67 million aggregate principal amount of 10% Convertible Notes due May 2012 (the “Notes”). $46.5 million of Notes have been issued to the purchasers named in the agreement and up to a further $20 million of Notes may be issued and sold within 30 days after the initial issue of Notes to purchasers who execute a joinder agreement (all of such purchasers being the “Purchasers”). Members of the public are not entitled to purchase additional Notes and this announcement is communicated to them for the purposes of information only.
This announcement does not constitute an offer to sell or a solicitation of an offer to purchase Notes. In the United Kingdom any sale or issue of the additional $20 million of Notes will be exclusively to investment professionals (within the meaning of Article 19(5) of the Financial Service and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) (“FPO”) and high net worth companies, unincorporated associations etc (within the meaning of Article 49 of the FPO) who are also qualified investors for the purposes of section 86 of the Financial Services and Markets Act 2000. Such persons are together referred to as “Relevant Persons.” No person other than Relevant Persons contacted by Frontera may participate in any sale or purchase of additional Notes or rely on any communication relating to them.
Interest is payable on the principal amount of the Notes at a rate of 10% per annum from the date each Note is issued until maturity (unless earlier converted, redeemed or repurchased). Interest is payable quarterly in arrears on each March 1, June 30, September 30 and December 31 or the next succeeding business day with the first interest payment date being June 30, 2007. Interest is payable in cash or, at Frontera’s option in its sole discretion, by issuing additional Notes on the relevant interest payment date in the aggregate principal amount of the interest to be paid.
If an event of default (as defined in the note purchase agreement) occurs and is continuing Frontera is obliged to pay interest (in cash or in further Notes) on any overdue principal or interest on a quarterly basis at the higher rate of 13% per annum.
The sale and purchase of $46.5 million of Notes was closed on May 8, 2007 (a further $20 million may be issued within 30 days of the May 8th closing.) On the closing Frontera deposited $10 million of the proceeds in a segregated account with J P Morgan Chase Manhattan Bank N.A. on the terms of an escrow agreement. The deposit, together with all earnings, interest, income and gains of any kind (“escrow funds”) are to be retained in the segregated account subject to the terms of the escrow agreement. Provided no event of default is continuing the escrow funds are to be released to Frontera as follows:
(i) $5 million will be released to Frontera after the Sale Price of Common Shares exceeds the conversion price for at least 20 consecutive trading days; and,
(ii) the balance will be released to Frontera after the Sale Price of Common Shares exceeds two times the conversion price for at least 20 consecutive trading days.
In addition the escrow funds may be released to Frontera at any time upon the joint written instructions of Frontera and the representative of the Purchasers. DDJ has been appointed as the representative. If an event of default occurs and is continuing the escrow funds are to be distributed to the Purchasers pro rata according to the principal amount of Notes held by each Purchaser.
Earnings, interest, income or gain of any kind accrued or earned on the escrow funds are to be distributed to Frontera quarterly.
Pursuant to the note purchase agreement Frontera has given representations and warranties and covenants to each of the Purchasers about various matters including the Notes, Frontera, its subsidiaries and its and their business and assets.
The notes will be convertible into fully paid Common Shares at the option of the holder at a conversion price of $1.67 per share. However, if the Sale Price of Common Shares on AIM is at or below $1.30 for any 10 days in 20 consecutive Trading Days at any time in the twelve months following closing of the initial issue of the Notes, the conversion price will be reset to $1.30 per share. The notes will automatically convert into Common Shares if prior to maturity (unless earlier redeemed or repurchased), the Sale Price exceeds two times the conversion price for 20 consecutive Trading Days.
If, at the time of Conversion, Common Shares are admitted to dealings on the AIM market of the London Stock Exchange PLC (“AIM”), Frontera has agreed to apply for the Common Shares issued on conversion to be admitted to dealings on AIM. Frontera has agreed to comply with all requirements of London Stock Exchange PLC in connection with such application.
Any investor who converts its notes into Common Shares before May 8, 2009 will receive an additional payment equal to one year of interest on the amount of Notes converted. At the Company’s option, this payment can be made in cash or Common Shares.
Frontera has agreed not to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except in accordance with the terms of the note purchase agreement and the Notes and to cancel all Notes acquired by it pursuant to any payment, prepayment or purchase of Notes pursuant to any provision of the agreement, and not to issue Notes in substitution or exchange for any such cancelled Notes.
The note purchase agreement provides for events of default. On the occurrence of an event of default the holders of a 50% or more of the outstanding notes (excluding any notes held or owned by Frontera) may during the continuance of the event of default serve notice declaring all or any part of Frontera’s obligations immediately due and payable. Events of default include in summary: failure of Frontera to pay any principal, when due, and the failure to pay any interest, fees or expenses or its other obligations with respect to the Notes when due, and such failure continues for 10 days thereafter; any representation or warranty made by Frontera proves to have been false or incorrect in any material respect on any date on or as of which it was made, and Frontera fails to cure the effect of such false or incorrect representation or warranty within thirty days after receipt of written notice from the Purchasers (other than Frontera) holding 50% or more of the Notes; and certain events with respect to Frontera any of its subsidiaries or Frontera Eastern Georgia Ltd including, in summary, bankruptcy, insolvency reorganisation or relief of debtors; failure to comply with certain covenants which continues for 30 days after receipt of written notice; certain categories of default in respect of indebtedness.
Upon a change of control (as defined in the note purchase agreement) each Purchaser has the right to require Frontera to purchase such Purchasers’ Notes at a purchase price in cash equal to 150% of the principal amount thereof plus accrued and unpaid interest if any to the date of purchase.
“Change of control” means the occurrence of any one of the following: (1) any “person” or “group” of related persons (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 and the rules and regulations (“Exchange Act”) ) is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that such person or group shall be deemed to have “beneficial ownership” of all shares that any such person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total voting power of the voting stock of Frontera (or its successor by merger, consolidation or purchase of all or substantially all of its properties and assets) (for the purposes of this clause, such person or group shall be deemed to beneficially own any voting stock of Frontera held by a parent entity, if such person or group “beneficially owns” (as defined above), directly or indirectly, more than 50% of the voting power of the voting stock of such entity); (2) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of Frontera (together with any new directors whose election by such Board of Directors or whose nomination for election by the stockholders of Frontera was approved by a vote of 66 2/3% of the directors of Frontera then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors then in office; (3) the sale, conveyance, lease, assignment, transfer or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the properties and assets of Frontera and its Subsidiaries taken as a whole to any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act); or Schedule II – 5 (4) the adoption by the stockholders of Frontera of a plan or proposal for the liquidation or dissolution of Frontera.
“Sale Price” means, on any date, the closing sale price per share, or if no closing sale price is reported, the average bid and asked prices or, if more than one in either case, the average of the average bid and average asked prices, on such date as reported in transactions for the principal securities exchange on which the Common Shares are traded without reference to after-hours or extended market trading. If the Common Shares are not listed for trading on a securities exchange and not reported by the London Stock Exchange on the relevant date, the “sale price” shall be the last quoted bid price for Common Shares in the over-the-counter market on the relevant date as reported by the National Quotation Bureau or similar organization. If the Common Shares are not so quoted, the “sale price” will be the average of the mid-point of the last bid and asked prices for the Common Shares on the relevant date from each of at least three nationally recognized independent investment banking firms selected by Frontera for this purpose. If the Sale Price of the shares of Frontera’s Common Shares is quoted in a currency other the United States dollars, then the Sale Price shall be converted to United States dollars as of the date of determination using an exchange rate for such currency to United States dollars quoted by Bloomberg or any successor entity at the close of trading on such date of determination.
“Trading Day” means a day during which trading in securities generally occurs on the London Stock Exchange or, if the applicable security is not listed on the London Stock Exchange, on the principal other securities exchange on which the applicable security is then listed or, if the applicable security is not listed on a securities exchange, on the principal other market on which the applicable security is then traded.
Morgan Stanley & Co. International -plc, is acting exclusively for Frontera and is not acting for any other person and will not be responsible to any person other than Frontera for providing the protections afforded to its clients or for providing advice on the transactions or arrangements referred to in this announcement. The Notes are being offered only to accredited investors in reliance on an exemption from the registration requirements under the Securities Act of 1933.
Notes to editors:
1. Frontera Resources Corporation is an independent Houston, Texas, U.S.A.- based international oil and gas exploration and production company whose strategy is to identify opportunities and operate in emerging markets around the world. Frontera has operated in Georgia since 1997 where it holds a 100 per cent working interest in a production sharing agreement with the government of Georgia. This gives Frontera the exclusive right to explore for, develop and produce oil and gas from a 5,060 square kilometer area in eastern Georgia known as Block 12.
2. The reserve information herein was determined by the independent consulting firm of Netherland, Sewell & Associates in accordance with the petroleum resource definitions adopted by the Society of Petroleum Engineers (SPE), World Petroleum Council (WPC) and the American Association of Petroleum Geologists (AAPG) in 2000.
3. This release contains certain forward-looking statements, including, without limitation, expectations, beliefs, plans and objectives regarding the potential transactions, potential drilling schedule and ventures discussed in this release, as well as reserves, future drilling, development and production. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are future exploration and development results, availability and performance of needed equipment and personnel, seismic data, fluctuations in oil and gas prices, weather conditions, general economic conditions and the political situation in Georgia and neighboring countries. There is no assurance that Frontera’s expectations will be realized, and actual results may differ materially from those expressed in the forward-looking statements.
For more information, please see www.fronteraresources.com.