IOG.L Regulatory News (IOG)

15 Jul 2009 07:00



PRESS RELEASE

15 July 2009

ISLAND OIL & GAS PLC 

 ("Island" or "the Company")

FUNDING AND CORPORATE UPDATE

Island Oil & Gas Plc, (LSE: IOG) ("Island" or the "Company"), today provides a funding and corporate update.

The Board of Island has been reviewing various options available to the Company to raise equity funds:

- to progress monetisation of the Celtic Sea gas assets;

- to fund the future development of its Moroccan licences over the next 24 months; and

- to provide additional working capital to the Company. 

As set out in the Interim Results, for the period ended 31 January 2009, Island has existing cash flow and no bank debt. Having reviewed the various equity funding options available to the Company, including testing the equity market with a funding roadshow to institutional investors, the Board has decided that in order to preserve cash it is making significant reductions in the company's costs and is curtailing uncommitted expenditures. 

Island has a "hard" asset base, including discovered hydrocarbons, capable of rationalisation leaving Island with an attractive, focused business with good growth potential in Morocco in particular. The potential to raise organic capital through asset sales to reduce the dependency on external finance in the future is high. In this respect the Board believes that monetisation of the Celtic Sea gas assets offers the best and earliest opportunity to achieve this objective. Initial expressions of interest have already been received from several interested parties and the Board will focus on developing these to a stage where a sales process can be concluded in a timely manner and in the best interests of all shareholders.

In order to accelerate the monetisation of the Celtic Sea gas assets, the Chairman has indicated that he is prepared to provide a loan of £500,000, on terms and conditions to be agreed, to the Company to continue its operations in the short term.

To secure its developing licence position in Morocco (Sidi Moussa, Foum Draa and Zag Exploration Licences), Island, through its wholly owned subsidiary Island International Exploration BV ("IIEBV") has put up funds for certain bank guarantees to the Government of the Kingdom of Morocco, as required under the licence terms and conditions. Companies in which directors Mr. Benitz and Mr. Griffiths have a beneficial interest, Longreach Oil and Gas Ventures Limited ("Longreach") and Celtex Exploration Services Limited ("Celtex") respectively, are providing the necessary funds to IIEBV, by means of loans secured on the licence interests, to enable it to satisfy the required bank guarantees. Discussions around the terms of such funding are expected to be agreed shortly following the change in circumstances created by the absence of new funds from an equity raising. 

Other forms of company restructuring, mergers and acquisitions, have not been ruled out and will be investigated by the Board over the coming months.

Celtic Sea Gas Assets - Strategically significant assets in the context of Ireland's security of supply issues

The strategic importance of gas storage in Ireland has been emphasised by recent news flow addressing the issues surrounding security of European gas supply. Governments are looking to gas storage facilities as a means of providing essential sources of strategic reserves. Demand for gas storage is rising as supply issues in Continental Europe become a key issue. This is even more significant for Ireland, which not only lies at the end of the European gas network, but who's storage facilities fall far short of the European Union's recommendation of 3 months of consumption. The global growth of LNG trade will also create a requirement for additional gas storage capacity as attempts to hedge against regional and seasonal price fluctuations gather momentum. 

Island's Celtic Sea gas assets have the potential to make a significant contribution to security of supply and are attractive to potential purchasers of the assets based on:

Old Head of Kinsale and Schull Gas Storage Potential

Island, as previously announced, has a potential 10 to 15 bcf gas storage project in the Celtic Sea in its undeveloped Old Head of Kinsale gas field. This is based on a P90 in-place gas estimate of 49 bcf. There is further, as yet not quantified, gas storage potential in the undeveloped Schull gas field based on Island's previously announced in-place P90 gas estimate of 52 bcf.

The discovered and tested gas at Island's Old Head of Kinsale gas field, 25 kilometres southeast of the Kinsale gas field, is located in reservoirs directly analogous to those forming the SW Kinsale storage facility. The presence of potential cushion gas and the ability to provide cash flow through drawdown of depletion gas prior to conversion to gas storage operations in the view of the Island Board makes this a potentially valuable asset for early monetisation by the Company. 

Recent transactions in depleted gas storage development assets suggests a valuation potential of £2.2 million per bcf. The Old Head of Kinsale gas field, as an undepleted reservoir, offers significant financial advantages, in terms of available cushion gas and initial depletion gas, compared to depleted gas storage opportunities

Summary

The completion of the above funding arrangements will assist Island to accelerate its previously announced strategy of monetising its Celtic Sea gas assets, which should provide the foundations for the future growth of the Company's Moroccan business activities. 

The Company's Celtic Sea gas assets are highly attractive, economically viable and have the potential to provide a foothold in the European gas storage market. They also have the potential to significantly help safeguard Ireland's gas supply.

The sale of these assets will ensure that the Company has sufficient funds to continue to build value across its portfolio and may allow the Company to return some cash to shareholders. 

Any transaction undertaken by Island in the process of monetising the Company's Celtic Sea gas assets will also require the approval of the Petroleum Affairs Division, the Department of Communications, Energy and Natural Resources (DCENR).

Paul Griffiths, Chief Executive commented:

"The strategic importance of our Celtic Sea assets should not be under-estimated, and the sale of these assets provides a unique opportunity. We are confident as we embark on this process, after other recent sales in Ireland, that potential buyers will see the significant value of these assets from both a commercial and financial viewpoint. The Directors believe that this sales strategy provides Island with the best opportunity to realise considerable value for shareholders."