Magnolia Petroleum Regulatory News (MAGP)

Magnolia Petroleum Plc - Capital Management Agreement and Issue of Equity

PR Newswire

London, July 4

Magnolia Petroleum Plc / Index: AIM / Epic: MAGP / Sector: Oil & Gas

4 July 2017

Magnolia Petroleum Plc (‘Magnolia’ or ‘the Company’)

Capital Management Agreement and Issue of Equity

Magnolia Petroleum Plc, the AIM quoted US-focused oil and gas exploration and production company, is pleased to announce it has entered into an exclusive agreement (‘the Agreement’) with Western Energy Development LLC (‘WED’) to invest, on behalf of WED, up to US$18,500,000 into the Oklahoma oil and gas market. In exchange for this exclusivity, WED is to be issued with 763,730,000 new ordinary shares (‘Consideration Shares’), at a price of 0.1p per share in the Company, representing 29.0 per cent of the enlarged issued share capital.

WED is an affiliate of Western Energy Regional Center LLC, a United States Citizenship and Immigration Services (‘USCIS’)-designated Regional Center. A Regional Center can accept investment in job-creating projects from foreign nationals through the Immigrant Investor Program. In return for their investment, foreign nationals can receive an EB-5 visa. The US Congress created this Immigrant Investor Program in 1993 to stimulate economic growth and job creation in the US. WED has been approved by the USCIS to raise US$19,000,000.

Agreement provides Magnolia with additional revenue stream and rapid low risk, low cost expansion of its asset base

Directors believe the Agreement with WED will generate significant value for all its shareholders in the near and long-term

Consideration Shares subject to two-year lock-in

Magnolia CEO, Rita Whittington said, “For Western Energy to entrust us with the management of up to US$18.5 million of their clients’ funds, together with their agreement to receive shares in lieu of a cash fee for the deal, represents a major endorsement of the current Board and management team. It is a real triumph for the Company in the face of significant competition and cements the relationship that started in late 2016. In an extremely challenging oil and gas market, the Board believes this deal will deliver significant near-term growth in Magnolia’s revenues, profits and shareholder value and at the same time raises our profile in key US States and with potential operating partners. 

“We expect that this Agreement will be a win-win for both parties. WED benefits from our proven expertise in the specialist field of US onshore oil and gas lease acquisition, development and management; while Magnolia stands to gain an additional revenue stream based on the provision of third party asset management services, as well as de-risked, nil cost entry into attractive leases and wells. For comparison using the pilot project as a benchmark, to equal the new well inventory that Magnolia could secure under the minimum capital contribution in the Agreement, we calculate Magnolia would have had to raise approximately US$2,500,000 in new equity. On top of this we will receive cash fees along the way. 

“Importantly, the capital management service is already proven following the successful pilot programme. The opportunity to scale up our activities with WED should fast track the execution of our strategy and the delivery of our primary objectives. Our strategy remains to create significant value for our shareholders through the acquisition and development of leases in proven US onshore formations alongside established operators. Our lenders are supportive of the deal, and the Board believes the increased revenues will provide the Company with real financial stability moving forward. We are delighted to secure WED as a new shareholder of the Company and look forward to working with them over the next five years to deliver value and returns to their investors and our shareholders.”

Western Energy Development LLC CEO, Greg Neher said, “We have been looking for an industry partner for some time and are delighted we have now signed the Capital Management Agreement with Magnolia. The pilot programme with Magnolia has been successful thus far – meaning our alliance has already shown it will work. Rita and her team have the industry expertise to deliver results for our EB-5 investors. As Magnolia’s largest shareholder, we share the Board’s view that the partnership between WED and Magnolia can deliver real Magnolia shareholder value in the near term.”

Further Information on WED

WED is incorporated in the USA and is an affiliate of Western Energy Regional Center LLC, a United States Citizenship and Immigration Service designated Regional Center. The EB-5 programme, which is authorised by the United States congress, encourages investment in US-based companies in exchange for permanent residence. Under its designation, WED is permitted to pool and invest US$19,000,000 of foreign investor capital solely for the purpose of developing oil and gas properties in Oklahoma. Each EB-5 applicant is currently required to invest a minimum of US$500,000 and, at the date of this announcement, WED has been approved by the USCIS to raise US$19,000,000. WED expects that the first investment will be made by 28 September 2017.

Capital Management Agreement

Under the terms of the exclusive Capital Management Agreement (‘CMA’), the Company will negotiate, acquire and manage oil and gas leases on behalf of WED in exchange for certain cash fees and carried interests comprised as follows:-

i) an acquisition fee of US$500 per acre acquired;

ii) annual maintenance fees comprising a one-time fee of US$5,000 and, for a period of 5 years, the greater of 5 per cent. of WED’s net revenue or a minimum payment based on the number of EB-5 investors; and

iii) fully paid up “carried” equity interest 25 per cent. of WED’s interest in the first well each new spacing unit in which Magnolia invests.

The CMA provides for a minimum capital commitment to be provided by WED of US$10,000,000 by 1 January 2020 and includes customary warranties and protections (including a cash indemnity based on the Magnolia share price in the event that WED fails to meet the minimum capital commitment by this date). The term of the CMA is for five years and contains standard termination clauses including mutual consent, change of control, insolvency or material breach. In the event of a change of control of the Company, WED has the right to terminate the Agreement without deployment of further funds for management by the Company.

In addition to the CMA, WED has entered into a relationship agreement and a lock-in and orderly market agreement with the Company covering a restricted period to 1 January 2020 and a further 12-month orderly market arrangement thereafter. These agreements also contain standard warranties and termination clauses, including termination of lock-in obligations in the event of early termination of the CMA for any reason. In addition, the lock-in and orderly market agreement ceases to apply in the event that WED has advanced greater than US$10,000,000 within the restricted period. 

Successful Initial Pilot Programme

In November 2016, the Company and WED completed an initial pilot project whereby the Company provided management and acquisition advisory services to WED, which invested US$500,000 in the Oklahoma oil and gas market, in exchange for cash fees and a carried interest of 25 per cent of WED’s interest in the first well drilled in each spacing unit. 

From the pilot project, Magnolia successfully purchased interests in five spacing units within the designated counties in Oklahoma. Out of these five units Magnolia acquired 31 net mineral acres. At the time, the Company believed up to 26 new wells could be drilled on the five units. To date out of the 26 possible well locations, two wells are now producing, one well is currently drilling, 14 wells are proposed and staked and the remaining nine wells are classified as proven undeveloped (‘PUDs’). This test case has to date generated approximately US$75,500 in value (lease bonus plus a carried interest for 25% in the first well, within each spacing unit). In addition, based on the Company’s reserve based calculations, Magnolia’s interests in the 26 new wells have been assigned a current PV0 Value of US$281,508 and a PV9 Value of US$127,982. As a result, the pilot programme generated a rate of return of 100%, and a return on investment of 3.26 times.

Issue of Equity

Application has been made for the Consideration Shares to be admitted to trading on AIM, which is anticipated to occur on or around 7 July 2017 ("Admission"). The Consideration Shares will rank pari passu with existing ordinary shares of the Company.

Following Admission, the Company will have 2,633,556,370 ordinary shares in issue with voting rights. The Company does not hold any ordinary shares in treasury and accordingly there are no voting rights in respect of any treasury shares. The aforementioned figure of 2,633,556,370 ordinary shares may be used by shareholders as the denominator for the calculations by which they will determine if they are required to notify their interest in, or a change to their interest in, the Company, under the disclosure requirements applicable to the Company.

The information contained within this announcement constitutes inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014.

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For further information on Magnolia Petroleum Plc visit www.magnoliapetroleum.com or contact the following: