ADV.L Regulatory News (ADV)

17 December 2020

Advance Energy plc

("Advance Energy" or the "Company")

Reverse Takeover Transaction and Suspension of Trading

Conditional Acquisition of indirect interest in the Buffalo Oil Field

Advance Energy plc (AIM:ADV), the energy company seeking growth through acquisition or farm-in to non-operated interests in discovered upstream projects, is pleased to announce that the Company and its wholly owned subsidiary, Advance Energy TL Limited ("AETL") have entered into a subscription agreement (the "Buffalo Subscription Agreement") with Timor-Leste Petroleum Pty Ltd ("CVNA") (a subsidiary of Carnarvon Petroleum Limited (ASX:CVN, "Carnarvon")) pursuant to which AETL will subscribe for equity such that AETL holds up to 50% of the total equity interest in Carnarvon Petroleum Timor, Unipessoal Lda (a subsidiary of CVNA incorporated in Timor-Leste, "JVCo") for a consideration of up to US$20 million (the "Transaction"). JVCo has a 100% working interest in the production sharing contract for offshore petroleum operations in Timor-Leste, Contract Area TL-SO-T 19-14 originally between Autoridade Nacional do Petroleo e Minerais Timor-Leste on behalf of the Ministry of Petroleum and Mineral Resources and JVCo (the "PSC"), which includes the Buffalo Oil Field ("Buffalo Oil Field").

The Directors of Advance Energy consider the Transaction to represent a transformational, value enhancing transaction for shareholders, which is fully aligned with Advance Energy's growth strategy. The Buffalo Oil Field is a proven oil field that produced 21 MMbbls over 5 years in the early 2000s. AETL's subscription in JVCo will be applied to funding the drilling of the B-10 appraisal well and certain PSC related costs (described below), to appraise the independently certified 2C (probable contingent) oil resource of 31.1 MMbbls, with the intention for drilling to take place in late 2021.

To fund the Transaction, Advance Energy will be seeking to carry out a placing to new and existing investors ("Placing") to raise sufficient funds to finance AETL's subscription in JVCo and required working capital. As such, the Transaction is conditional, inter alia, on a successful fundraising. Directors of Advance Energy intend to participate in the Placing.

The parties have also agreed that, provided Advance Energy raises at least US$10 million for subscription funds, a sliding scale of equity in JVCo (as set out below) will be issued to AETL, and CVNA may elect to fund (or introduce third parties to fund) the additional balance required for the B-10 appraisal well. If CVNA makes this election, AETL will have a further option to participate and provide such funding in exchange for additional equity up to 50% of the JVCo.

Assuming drilling success at the B-10 appraisal well and, among other things, the parties agreeing a field development plan, Advance Energy has agreed to source and arrange development financing up to first oil, which is expected to be primarily in the form of debt.

The Transaction is classified as a reverse takeover pursuant to the AIM Rules for Companies and accordingly the Company's shares will be temporarily suspended from trading on AIM as of 07:30 a.m. today. The Company's ordinary shares will remain suspended from trading on AIM until such time as either an Admission Document setting out details of the proposed Transaction is published or confirmation is given that the Transaction is not proceeding. Further, completion of the Transaction is subject to approval by Advance Energy's shareholders at a general meeting to be convened in due course ("General Meeting"). The Admission Document, which will include a notice of General Meeting, is expected to be issued in due course.

Key Highlights

· Earning up to a 50% beneficial interest in a proven oil field with material resources

o Independently certified 2C oil resource of 31.1 MMbbls

· Partnering with established Operator for low execution risk

o Carnarvon Petroleum (ASX:CVN) group companies operate the Buffalo Oil Field

o Highly capable operator with experienced in-house E&P team

· Exposure to material upside potential in 2021 with limited risk

o Appraisal well is intended to convert the 2C resources to 2P (proved and probable) reserves following re-certification

o Previous operators (BHP and Nexen Petroleum Australia Pty. Ltd) produced 21 MMbbls from the Buffalo Oil Field over five years with no material decrease in reservoir pressure

Further announcements will be made in due course, as appropriate.

Leslie Peterkin, Chief Executive Officer, commented:

"We are delighted to have agreed this potentially transformative transaction with Carnarvon to acquire up to a 50% indirect interest in the Buffalo Oil Field. This asset reflects our stated strategy perfectly. The teams at Advance Energy and Carnarvon believe the Buffalo Oil Field holds material unrealised value that can be unlocked through re-development. The Advance Energy team will now aim to further build on our ambitious growth strategy. Members of the Advance Energy team intend to demonstrate their confidence in the Transaction by aligning with shareholders through participation in the Placing. We look forward to updating the market in due course."

Enquiries:

For further information, please visit www.advanceplc.com and @advanceplc on Twitter

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This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No 596/2014 ("MAR"). Upon the publication of this announcement via Regulatory Information Service, this inside information is now considered to be in the public domain.

Qualified Person's Statement

Leslie Peterkin, the Company's Chief Executive Officer, has approved the technical information contained in this announcement. Mr Peterkin has served the E&P sector during the past two decades as a senior Interim Manager and Advisor, initially in Australasia and more recently, based in Geneva, covering Europe, MENA, Central Asia and Africa. Key roles were as Woodside's Director Browse LNG Development and MOL's SVP Operations & Development. Mr Peterkin entered the sector joining Shell International's Petroleum Engineering stream in the early 1980s with a variety of international postings. A decade with international independent oil companies followed. Mr Peterkin studied Physics at St. Andrews University, where a 1st Class Honours was followed by a PhD. Mr Peterkin is a member of the Society of Petroleum Engineers.

About the Buffalo Oil Field

Licence details

The PSC is wholly within Timor-Leste waters. Until the Australian federal government and government of Timor-Leste ratified the Maritime Boundary Treaty in 2019, the Buffalo Oil Field sat exclusively in Australian commonwealth waters.

History

The Buffalo Oil Field was developed by BHP between 1999 and 2002, when Nexen Petroleum Australia Pty. Ltd assumed operatorship. Eight wells were drilled in the field and in the 5 years that the field was on production, the peak rate was 45,000 bopd from two wells. These same two wells were the best producers on the field, delivering ±8 MMbbls each. The total of four producing wells delivered 21 MMbbls before the field was closed-in and production ended in 2004. The last well drilled in the field in mid-2002 showed only 50 psi pressure depletion, confirming the infinite aquifer acting on the oil column. The API of the Buffalo crude is 53o API.

B-10 Appraisal Well

It is intended that the B-10 appraisal well will be drilled in late 2021 and is targeting the hitherto undrilled crest of the Buffalo structure to establish the remaining oil column in the field, which is expected to be up to 60m. Once drilled and logged the well will be suspended for future use and completion as a development well, if successful. The current estimated cost of the well is in the region of US$20 million.

Transaction

The Transaction has been structured as a subscription by AETL for equity in JVCo pursuant to the Buffalo Subscription Agreement. The incorporated joint venture between CVNA and AETL in JVCo will be governed by the terms of an equity holders agreement (the "Buffalo Equity Holders Agreement") which, together with other ancillary documents, will be entered into at completion of the Buffalo Subscription Agreement. Further details of the Buffalo Subscription Agreement and the Buffalo Equity Holders Agreement are set out below.

Buffalo Subscription Agreement

In accordance with the terms of the Buffalo Subscription Agreement, in consideration for AETL subscribing for equity in JVCo at a subscription amount of US$20 million, AETL will be issued with 50% of the equity in JVCo.

AETL's right to be issued equity in JVCo is granted in accordance with a sliding scale as follows:

The subscription funds would be used for the purpose of the B-10 appraisal well costs and the costs of permit administration and geological and geophysical studies to be carried out under the PSC in respect of the contract year ending 26 May 2021.

If the AETL subscription amount is less than US$20 million, CVNA may elect to fund (or arrange for a third party to fund) the shortfall (Balance Funding). This election must be made by CVNA within 90 days of completion of the issue of the first tranche of equity to AETL, and AETL has the right to match the Balance Funding. If AETL matches the Balance Funding, it will be issued with additional equity in JVCo up to 50% of the issued equity.

The Buffalo Subscription Agreement is subject to the following conditions:

· Advance Energy obtaining funding for the B-10 appraisal well of at least US$10 million;

· Timor-Leste Government approvals relating to the Buffalo Subscription Agreement and the Equity Holders Agreement;

· Advance Energy obtaining consent of its shareholders in general meeting in accordance with Rule 14 of the AIM Rules for all matters contemplated by the Buffalo Subscription Agreement; and

· the placing agreement to be entered into in connection with the Placing becoming unconditional.

Each Party must use all reasonable efforts to satisfy the conditions precedent by 28 February 2021. Either party has the right to terminate the Buffalo Subscription Agreement if, at any time after 28 February 2021, it becomes apparent, acting reasonably and after consultation with the other party, the conditions to completion are unlikely to be satisfied by 31 March 2021.

Pursuant to the Buffalo Subscription Agreement, CVNA has given customary interim period covenants in relation to conduct and control of the business of the JVCo and the operation of the PSC from the date of signing the Buffalo Subscription Agreement until completion. These covenants enable AETL to consult with CVNA and develop the most appropriate work program and budget for the development of the Buffalo Oil Field.

Following the drilling of a successful B-10 appraisal well and, among other things, the parties agreeing a field development plan, AETL would be obliged to source and arrange funding for the re-development of the Buffalo Oil Field which is estimated to cost in the region of US$100 million ("Development Capex"). It is anticipated that around 70% of the Development Capex would be funded by a loan from a third party lender to JVCo and around 30% of the Development Capex would be funded by a loan from AETL or another member of its group. Any third party debt financing will be paid in priority to all other loans to JVCo and prior to any dividends. The Buffalo Subscription Agreement grants extensions to the due date to satisfy this funding obligation if, either on the date the loan agreements are due to be entered into, there is a material adverse change, or, AETL anticipates, acting reasonably, that there will be a material adverse change on the latest date for sourcing and arranging such funding. The latest date for sourcing and arranging such funding is 180 days after the field development plan is agreed for the Buffalo Oil Field.

Advance Energy has guaranteed the obligations of AETL under the Buffalo Subscription Agreement (other than the obligation to procure Development Capex) as and when they fall due. CVNA has given customary representations and warranties consistent with an investment in a newly incorporated entity. Such representations and warranties reflect that JVCo was recently incorporated on 15 August 2018.

JVCo Financials

In the 10 months to 31 October 2020, JVCo incurred a net loss of US$322,669. As at 31 October 2020, JVCo had gross assets of US$1,177,644 and total liabilities of US$1,651,417. All figures are unaudited.

Buffalo Equity Holders Agreement

The Buffalo Equity Holders Agreement (which is in agreed form) will be entered into between AETL, CVNA and JVCo on completion of the Buffalo Subscription Agreement. The purpose of the Buffalo Equity Holders Agreement is to regulate the relationship between AETL and CVNA, as equity holders in JVCo, for the purpose of exploring, appraising, developing and producing hydrocarbons within the geographical area of the PSC, including the Buffalo Oil Field. It establishes a regime for the approval of work programs and budgets and authority for expenditure, as well as for cash calls in proportion to each equity holder's equity in JVCo to fund operating expenditure, general and administrative costs and any additional costs that are not funded pursuant to the Buffalo Subscription Agreement.

The Buffalo Equity Holders Agreement is a life of field agreement and runs for the duration of the underlying PSC until such time as the Buffalo Oil Field is decommissioned. It defines the respective rights and obligations of the equity holdings, including resolution and management of any disputes, as well as obliging the sharing and dissemination of information to the equity holders and regulating the conduct of board meetings and equity holders meetings. The Buffalo Equity Holders Agreement also sets out a pre-emptive right regime which will apply in the event that either CVNA or AETL wish to transfer their equity, except in respect of a transfer to an affiliate.

Day to day management of JVCo is vested in the JVCo board, which will comprise two directors appointed by each of AETL and CVNA (irrespective of the percentage holdings of AETL and/or CVNA) and one Timor-Leste national agreed on by AETL and CVNA. The parties have agreed that a number of material decisions require unanimous board approval of directors appointed by voting equity holders (which would include the AETL and CVNA appointed directors but not the Timor-Leste director for any of these purposes), including any disposal, termination or variation to the terms of the PSC, abandonment of a producing well, final investment decision on the re-development of the Buffalo Oil Field, approval of the field development plan and entry into any offtake agreement.

Any decision not specifically identified as a unanimous decision can be passed by directors appointed by at least two voting equity holders, who are not related, who together hold at least 65% of the voting equity in issue.

JVCo is appointed as the Operator under the Petroleum Sharing Contract and the Buffalo Equity Holders Agreement sets out the rights and duties of the Operator, including performing joint operations, preparing and implementing proposed work programs, budgets and AFEs, liaising with the Timor-Leste Government, reporting to equity holders and maintaining the joint account. The Buffalo Equity Holders Agreement also sets out agreed standards for the Operator's performance of obligations.

If either equity holder defaults in either its payment obligations or in performing its material obligations under the Buffalo Equity Holders Agreement (which may include the obligation on AETL to procure the Development Capex) or suffers an insolvency event, and such default remains unremedied after the prescribed cure period, a suspension of certain rights will apply to the defaulting equity holder's equity and the non-defaulting party may elect to purchase the defaulting equity holder's equity at 75% of fair market value.

The Buffalo Equity Holders Agreement can only be terminated prior to the decommissioning of the Buffalo Oil Field where JVCo is wound up (which requires the unanimous approval of the equity holders), where there is only one equity holder in JVCo or where otherwise unanimously agreed by the equity holders.

Temporary Suspension of Trading

As mentioned above, by virtue of its size, the Transaction constitutes a reverse takeover in accordance with Rule 14 of the AIM Rules for Companies. Accordingly, at the request of the Company, the Company's ordinary shares will be suspended from trading on AIM with effect from 7:30 a.m. today and will remain so until either the publication of an AIM Admission Document setting out, among other things, details of the Transaction or until confirmation is given that the Subscription Agreement, and associated discussions, have been terminated.