Challenger Energy Regulatory News (CEG)

1 November 2021

Challenger Energy Group PLC

("Challenger Energy" or the "Company")

Interim Results for Six Months to 30 June 2021

CEG, the Caribbean and Atlantic margin focused oil and gas company, with exploration, production, appraisal and development assets across the region, announces its interim results for the six months ended 30 June 2021. The interim results and CEO commentary are appended in full below.

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Notes to Editors

 Challenger Energy is a Caribbean and Atlantic margin focused oil and gas company, with a range of exploration, appraisal, development and production assets and licences, located onshore in Trinidad and Tobago, and Suriname, and offshore in the waters of The Bahamas and Uruguay. In Trinidad and Tobago, Challenger Energy has five (5) producing fields, two (2) appraisal / development projects and a prospective exploration portfolio in the South West Peninsula. In Suriname, Challenger Energy has on onshore appraisal / development project. Challenger Energy's exploration licence in each of Uruguay and The Bahamas are highly prospective, and offer high-impact value exposure within the overall portfolio value.

 Challenger Energy is quoted on the AIM market of the London Stock Exchange. 

https://www.cegplc.com 

Chief Executive Officer's Report to Shareholders

The dominant themes of the first half of 2021 were the safe and successful completion of the drilling of the Perseverance-1 well in The Bahamas, the ongoing integration of the oil production business acquired in August 2020 in Trinidad and Tobago, and the implications of these two activities on the financial position of the Company.

Perseverance-1 Drilling in The Bahamas

The drilling of Perseverance-1 in The Bahamas commenced on 20 December 2020 and was completed in February 2021. An exposition on the technical nature of and learnings from the Perseverance-1 drilling campaign was set out in the recently published 2020 Annual Report (as provided to shareholders on 30 September 2021), the summary highlights of which are as follows:

· The Perseverance-1 well was drilled offshore at a location approximately 20 miles from the Bahamas-Cuba maritime border, in water depth of approximately 518 meters.

· The well was drilled safely and without incident, despite the adverse and ever-changing impacts of the global pandemic, with stringent (and costly) Covid-19 management protocols operating effectively throughout the drilling campaign.

· Well operations were also successfully carried out despite attempts by environmental activists to derail the Company's Government-approved operations - both through the Bahamian court system (a process which ultimately did not succeed), and through concerted efforts to undermine the reputation of the Company and its staff by harassment of itself, service providers and the public in the press, on social media and various other means. Overall, whilst these attempts failed to halt drilling operations, they did impact the Company's access to previously established financing options in the lead-up to and during the drilling campaign.

· The successful completion of Perseverance-1 represented the first exploration drilling in The Bahamas since the mid-1980s, and the first test of any prospect located in deeper waters off the shallower water carbonate banks. The well reached a depth of 3,905 meters, having intersected five Albian, Upper Aptian, and Mid-Aptian horizons of interest.

· Following completion of drilling operations, the well was plugged and secured in accordance with international and BSEE (Bureau of Safety and Environmental Enforcement) standards.

· The well did not result in a discovery at the drilling location, with the source quality and migration interpreted as being the primary reason for this well outcome.

· However, post-well petrophysical analysis of the well logs confirmed high quality reservoirs down to the base of the well, with no significant deterioration in porosity with depth, indicating the potential for high deliverability reservoirs in the deeper underlying Jurassic formations.

· The technical findings from Perseverance-1 thus support a forward program focused on deeper Jurassic horizons. As such, the Company has initiated a farm-out process to seek a suitable partner for the next phase of activity in The Bahamas. In parallel, in March 2021 the Company notified the then Government of The Bahamas of its intent to renew the four southern licences into a third 3-year exploration period. A new Government was elected in The Bahamas in September 2021, and the Company is engaging with the new administration on the renewal process.

Activities in Trinidad & Tobago

In August 2020, the Company completed the acquisition of Columbus Energy Resources Plc ("Columbus"), which significantly expanded the Company's business through the addition of a portfolio of assets in Trinidad and Tobago and Suriname, including five oil fields in active production in Trinidad.

During the first half of 2021, work focussed on the task of integrating and operating those assets. In particular, and as was noted in the 2020 Annual Report, on assuming control of the assets the Company encountered low field activity levels, poor morale amongst staff, inadequate policies and procedures, poor-record keeping, local suppliers who had not been paid for some time and a business reputation in-country that was suffering. Therefore, throughout the first half of 2021, the Company engaged in an intensive program of work designed to "right the ship". In addition to substantially increasing field activity, this also included a comprehensive review of all assets leading to a restructuring of the Trinidadian organisation, so as to further drive cost efficiencies and allow for more effective work across the portfolio. Focus has also included restoring morale within the staff base, initiating a process to restore confidence with local suppliers, regulators and communities, progressively paying off creditors and unpaid liabilities inherited from Columbus, and improving Health, Safety, Environmental and Social (HSES) governance and performance across the operations.

These activities, seeking to drive a step change in performance of both assets and the organisation, have been affected by the continual impact of Covid-19 through the period. In particular, Trinidad and Tobago has been largely shut to international entry for the entirety of the period, such that until very recently senior management have been unable to visit the country and lead change in person. Notwithstanding these constraints:

· The Company's revenue in Trinidad from oil sales in the period, net of Government-take and other deductions, was $2.3 million. This represents an increase of 28% as compared to the comparable period in 2020 for Trinidad pre-acquisition revenues. Coupled with cost reductions achieved in-country during the period, this has meant that during the period operations in Trinidad have reached a point of being self-sustaining / cash-flow breakeven, and with the Company projecting the Trinidadian business to become free cashflow generative in 2022.

· In February 2021, following an extensive program of preparatory work, the Company was recommended for STOW-TT ("Safe to Work in Trinidad & Tobago") certification, which was officially conferred in August 2021 for a two-year duration. STOW certification provides a standardised, independent system for certifying operators and contractors with respect to Health, Safety and Environmental delivery, which Heritage Petroleum Company Limited (the state-owned entity) requires of all contractors/operators (and which certification had not previously been achieved by Columbus).

Finally, during the first half of 2021, preparations were also made for the drilling of the Saffon-2 appraisal well in the Southwest Peninsula of Trinidad, as a follow-on to the Saffron-1 discovery made in March 2020. Saffron-2 was successfully drilled to total depth (TD) of 4,567 ft in June 2021, encountering multiple oil-bearing horizons in the Upper Cruse, Middle Cruse and Lower Cruse reservoir zones. Subsequent production tests proved the ability to flow high-quality oil from the Lower Cruse reservoirs, although sustained production from these reservoir units has not yet been achieved due to technical and mechanical issues encountered in this zone - work continues to develop engineering solutions that could in turn pave the way for a future Saffron development.

The 'Corporate Reset'

Following the expansion of the asset base of the Company as a result of the acquisition of Columbus in August 2020 and then the non-commercial outcome of drilling in The Bahamas in February 2021, a range of measures were implemented to 'reset' the Company's business operations, with a revised strategic focus on increasing oil production and thus cashflow from the asset base. These measures included:

· a change of Company name (to Challenger Energy Group PLC) to remove the sole identifier of The Bahamas, given the expanded business operations in multiple jurisdictions,

· a share consolidation whereby the existing ordinary shares of the Company were consolidated on the basis of 1 for 10;

· an agreed early conversion of part of the Conditional Convertible Notes then on issue, as part of a desire to "clean-up" the balance sheet;

· in May 2021, the raising of approximately £6.9 million through the issue of new equity, via an Open Offer to existing shareholders and a placing of Open Offer Shares not taken up;

· a transition of the Board and senior management of the Company - as a consequence of which I assumed the role of CEO in May 2021 and joined the Board as an executive director; and

· initiating of a comprehensive cost savings exercise with a view to reducing the Company's overhead by 20% - 30%.

Several of these items required shareholder approval, which shareholders provided at an EGM on 17 May 2021.

Financial Review

In financial terms, the Company's activities through the first half of 2021 have not produced the positive, value-creating outcome hoped for. Quite simply, technical results below expectation on two successive wells in The Bahamas and Trinidad (and substantial cost increases), coupled with inherited debts from Columbus has placed the Company in a stressed financial position.

Key financial events and outcomes of note are as follows:

· In The Bahamas, as noted, the Perseverance-1 well did not result in a commercial discovery at the Perseverance-1 location. At the same time, as a result of various issues during the course of drilling, the eventual cost of the well was approximately $10 million more than initially budgeted, with a final cost of approximately $45 million.

· In Trinidad and Tobago, as noted, rising oil prices, a focus on cost control, and sustained baseline production meant that in-country operations achieved a position of being breakeven on a monthly basis. However, approximately $2.7 million was injected into the Trinidadian operations over the course of 9 months to 30 June 2021 to address part of the unpaid creditors and liabilities inherited from Columbus, a further $2.5 million of capital has thus far been paid in respect of drilling of the Saffron-2 well, and approximately $3.5 million remains owing in-country, in respect of both the Saffron-2 drilling campaign and historic creditor balances inherited at the time of the Columbus acquisition in 2020.

· Since May 2021, an aggressive program of cost-cutting, so as to "right-size" the Company, has seen the overhead cost base reduced to approximately $200,000 per month - a reduction of 70% compared to the peak in February 2021, and far exceeding the initial target set of 20% - 30% established. However, overhead costs through the first half of 2021, including a number of sizeable one-off expenses required as cost-cutting measures were implemented, aggregated to a total of $4.8 million, which was funded from available cash resources.

The net effect of the above, as shareholders will note from a review of the interim accounts, is that as at June 2021 the Company had cash resources of $7 million and total reported payables and borrowings of approximately $23.3 million. As at 30 June 2021, these could in broad terms be categorised as follows:

· approximately $10.1 million in respect of invoices remaining to be paid by the Company as at 30 June 2021 for the drilling of Perseverance-1, and a further approximately $2.4 million that remains owing in respect of direct funding financial instruments relating to the drilling of that well. (note: these amounts were not present in the recently published 2020 Annual Report as they were incurred in the 6 months to 30 June 2021, with a "Finance Costs" charge of approx. $5m having been recognised in the Statement of Comprehensive Income in these Interim Financial Statements associated with these funding instruments);

· approximately $3.5 million representing amounts due to various suppliers in Trinidad and Tobago as at 30 June 2021 (note: these in-country creditor balances are largely being managed in accordance with agreed payment deferrals and instalment plans, and these amounts are owed by various Trinidadian subsidiaries, such that the payment of these amounts is not guaranteed by the Company);

· approximately $6.5 million representing the full amount of various legacy licencing and other payables in Trinidad and Tobago (note: these amounts are owed by various Trinidadian subsidiaries the payment of which are not guaranteed by the Company, portions of these amounts are disputed, and $4.5 million of this aggregate amount can be avoided by the forfeiture of certain non-productive assets); and

· approximately $0.8 million in respect of outstanding convertible notes, accruing interest at the rate of 12% per annum, and repayable on 31 December 2023 if not converted sooner (note: as described above, as part of the corporate reset, approximately $3.4 million of outstanding convertible notes were converted to equity on an agreed basis, thus reducing the outstanding balance of notes considerably).

Given the above, and as was noted in the 2020 Annual Report, the Group currently estimates that it has a need for, in aggregate, approximately $15 million in funding in order to continue to meet its obligations as and when they fall due over the coming 12 months or, in the alternative, achieve creditor settlements that would reduce the amounts payable, and thus have the same economic effect. The Company remains focused on this process and believes that a successful conclusion is achievable in the necessary timeframe. As a consequence, the 2020 Annual Report was prepared on a going concern basis, and the Company has continued to prepare these interim financial statements on the same basis.

Post-Reporting Date Adjustments

Post-Reporting Date (and as at the date of this report) the above-noted financial position has changed in two aspects of note:

· The aggregate liability position has reduced by a net of approximately $1 million - the relatively small level of reduction reflective of the fact that creditor payments made since 30 June 2021 have been offset by cost increases (and hence new creditor balances being incurred) in relation to the Saffron-2 well; and

· The Company's cash resources have reduced to approximately $3.0 million ($2.4 million if working capital funds in Trinidad are excluded) as a result of approximately $4 million in cash outflow since 30 June 2021, summarised as (i) approximately $1m in respect of costs paid in relation to the drilling of Saffron-2 in Trinidad after 30 June 2021; (ii) approximately $1 million in partial creditor payments in accordance with agreed payment and deferral arrangements, and (iii) around $2 million in various corporate and other costs, including one-off costs to effect various redundancies and other expenses associated with reducing go-forward overhead costs substantially.

It is worth noting that the Company had anticipated an inflow of funds to ameliorate this position from two sources, neither of which, unfortunately, have materialised as previously anticipated: (i) approximately $1.8 - $2.6 million in projected revenues from Saffron-2 production - the inability to sustain production from the Lower Cruse reservoirs has meant that Saffrron-2 as yet has not contributed materially to cashflow, and (ii) $3 million from the draw-down of further convertible notes - the Company elected not to draw these funds given the high cost of those notes and legal complications arising from the Company being required to provide first-ranking security to the provider of those funds, if drawn.

Therefore, as at the date of this report (31 October 2021), the Company's financial position can be expressed in summary terms as:

· $3 million of cash resources ($2.4 million if working capital funds in Trinidad are excluded);

· ongoing monthly overhead in the order of $200,000 per month (with no further one-off expenses to come);

· Trinidadian operations that are approximately cashflow breakeven, and on course to become cash-flow generative in 2022; and

· total liabilities (payables, borrowings and other) of approximately $22m million comprising:

(i) approximately $12 million remaining to be paid in respect of the drilling of Perseverance-1,

(ii) approximately $2.5 million due to various suppliers in Trinidad and Tobago in respect of both legacy payables and the Saffron-2 well,

(iii) approximately $6.5 million representing the full amount of various legacy licencing and other payables in Trinidad and Tobago (albeit partially disputed and of which $4.5 million can be avoided by the forfeiture of certain non-productive assets), and

(iv) approximately $0.8 million in respect of outstanding convertible notes not due until the end of 2023.

The counterparties to the majority of the payables referred to in item (i) and (ii) - mainly various suppliers, contractors and financiers - have worked collaboratively with the Company over the past months to agree various rearrangements, payment stand-stills, and interim partial payment plans so as to afford the Company time to pursue its broader business agenda. This process is continuing, with discussions ongoing in relation to a creditor restructuring coupled with a recapitalisation plan.

However, as noted in the recently published 2020 Annual Report, the Company's ability to meet all of its anticipated obligations over the 12 months from the date of the 2020 Annual Report is dependent on this outcome - that is, successfully completion of a process to definitively address the outstanding payables / liabilities position and secure additional funding for ongoing operations and work-programs in 2022, and in so doing place the Company on a stable, debt-free footing for the future. It should be noted that if the Company is unsuccessful in achieving its restructuring and recapitalisation plan there is a risk to the Company continuing as a going concern. - further information on going concern is set out in Note 1 to these Interim Accounts.

Outlook for the remainder of 2021 and into 2022

As noted above, the Company is presently operating with a balance sheet characterised by an unacceptably high level of historic liabilities and payables. The immediate priority during the remainder of 2021 is for this to be addressed.

However, beyond this immediate hurdle, the Company has a clear opportunity to rebuild value, particularly in the context of continued rising oil prices. The current level of (significantly reduced) corporate overhead means that the Company, if unburdened of its current payables overhang should be able to operate on a self-sustaining basis in 2022, relying on just the existing baseline production,.

Beyond this, the Company has clear work programs defined over the coming years on its core producing assets in Trinidad. Executing those work programs will require capital expenditure, but the timing and quantum of that capital expenditure is discretionary, and that capital expenditure is expected to result in increased production. Execution of these work programs and production results in line with expectations could see the addition of 300 - 500 bopd production over the period 2022-2023 which, assuming $65 per barrel realised oil price, could see the Company's business generating significant operating cash flows for reinvestment into continued production growth.

Beyond this, incremental upside value can be achieved through a successful Saffron development in Trinidad, a successful WNZ development in Suriname, expanded in-fill drilling work program in existing fields, and successful farm-out arrangements in each of The Bahamas and Uruguay.

Summary

I very much wish my inaugural reports to shareholders would have been in the context of more positive business outcomes, but unfortunately the Company is labouring from the poor technical results and cost overruns of two successive drilling campaigns, as well as the assumption of debts and unpaid liabilities incurred by the previous management of Columbus. Each of these situations in isolation would, in the ordinary course of events, be manageable, but in combination present a significant burden to overcome, further exacerbated by the circumstances and complications prevailing over the last 18 months - including the legal challenge by environmental groups in The Bahamas, and the persistent adverse impacts of Covid-19. The inability thus far to offset these negative outcomes with positive developments elsewhere in the broader business portfolio means that the Company is now in a position where over the near-term it will need to pursue a creditor restructuring and recapitalisation plan.

The Board expects to be able to complete this plan, which, if successful should result in the Company being well positioned for the future, with a largely debt-free balance sheet and a portfolio of assets in active production, and a rising oil price environment. Definitively dealing with matters in the balance of 2021 will mean that Challenger Energy will then have a clear "runway" in 2022 to focus on the core business of any hydrocarbon company: maintaining and enhancing existing production, finding new sources of oil, and then growing portfolio wide production in a way that is both profitable and cashflow generative. As I commented in the 2020 Annual Report, I hope that once we have completed the task of clearing away the legacy of the past 18 months, 2022 can mark the first steps in restoring value in this Company. We will update shareholders as we progress toward that objective.

It has undoubtedly been a difficult year for your Company, and most definitely not what shareholders had hoped for. In this context, on behalf of the Board and staff of Challenger Energy, I would especially like to thank shareholders for their continued support.

Yours sincerely,

Eytan Uliel

Chief Executive Officer

31 October 2021

Financial Statements

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFOR THE SIX MONTHS ENDED 30 JUNE 2021

* Loss per share for the 6 month period to 30 June 2021 is stated after the effects of the 1 for 10 share consolidation which took effect on 28 May 2021.

All operations are considered to be continuing (see note 2).

The accompanying accounting policies and notes form an integral part of these financial statements. 

CONSOLIDATED STATEMENT OF FINANCIAL POSITIONFOR THE SIX MONTHS ENDED 30 JUNE 2021

CONSOLIDATED STATEMENT OF CASH FLOWSFOR THE SIX MONTHS ENDED 30 JUNE 2021

The accompanying accounting policies and notes form an integral part of these financial statements.

STATEMENT OF CHANGES IN EQUITYFOR THE SIX MONTHS ENDED 30 JUNE 2021

STATEMENT OF CHANGES IN EQUITY (CONTINUED)FOR THE SIX MONTHS ENDED 30 JUNE 2021

NOTES TO THE FINANCIAL STATEMENTS FOR THE INTERIM PERIOD ENDED 20 JUNE 2021

NOTES TO THE FINANCIAL STATEMENTS FOR THE INTERIM PERIOD ENDED 30 JUNE 2021

NOTES TO THE FINANCIAL STATEMENTS FOR THE INTERIM PERIOD ENDED 30 JUNE 2021

(*) Intercompany balances and transactions between Group entities have been eliminated.

(**) Sales revenues were derived from a single customer within each of these operating countries.

NOTES TO THE FINANCIAL STATEMENTS FOR THE INTERIM PERIOD ENDED 30 JUNE 2021

(*) Property, plant and equipment includes leasehold improvements.

NOTES TO THE FINANCIAL STATEMENTS FOR THE INTERIM PERIOD ENDED 30 JUNE 2021

NOTES TO THE FINANCIAL STATEMENTS FOR THE INTERIM PERIOD ENDED 30 JUNE 2021

NOTES TO THE FINANCIAL STATEMENTS FOR THE INTERIM PERIOD ENDED 30 JUNE 2021

Options and warrants

Share options have been granted to Directors, selected employees and consultants to the Company.

The Group had no legal or constructive obligation to repurchase or settle any options in cash. Movements in the number of share options and warrants outstanding during the year are as follows:

The fair value of the warrants and options granted in the period was estimated using the Black Scholes model.