Bahamas Petroleum Co (BPC.L) Perseverance #1: Cost Estimate and Funding Update

BPC, the Caribbean and Atlantic margin focused oil and gas company, with exploration, production, appraisal and development assets across the region, is pleased to provide an update on cost estimates and funding arrangements for well operations in The Bahamas.


· Sustained impact of Covid-19 means that BPC and Stena Drilling have decided to implement enhanced Covid-19 mitigation measures; this includes heightened isolation and testing measures for all crew and personnel, extended mandatory quarantine in secure hotel facilities, and private charter flights

· Enhanced Covid-19 mitigation measures and associated operational impacts means the cost estimate for Perseverance #1 is revised upward by approximately 15%, to between $24 million to $28 million (from $21 million to $25 million); contingency element expanded to $7 million (from $5 million)

· To provide appropriate financial headroom, the Conditional Convertible Note facility (as previously announced) has been increased by £4.75 million (c. $6.3 million) to £15 million (c. $20 million) in total, with an initial subscription notice issued for £3 million (c. $4 million, with funds anticipated before year end) and the balance of the facility to be provided in a timeframe consistent with the demands of operations (subject to satisfaction of certain conditions precedent)

Commenting, Simon Potter, CEO of BPC, said:

” Given the ever-evolving and escalating Covid-19 situation around the world, the sobering reality is that preventing the Covid-19 virus spreading onto the Perseverance #1 drilling installation in the first place is dramatically more cost effective than having to deal with it once it has arrived offshore. Hence the considerable efforts put in by BPC, Stena and participating contractors and service companies to develop even more stringent measures to detect and diminish the risk of infection, which are now being implemented, but which will come at a cost.

Fortunately, given the flexible range of funding options the Company has developed over the course of the last two years, we have successfully agreed an increase to the size of our Conditional Convertible Note facility by £4.75 million to offset this increased cost . Moreover, we are pleased that the providers of this facility have demonstrated their commitment to the project by agreeing to provide a portion of this facility unconditionally once the well is spud, and the balance expected to be available as required. In aggregate, these arrangements provide enhanced financial capacity, notwithstanding a worsening Covid-19 environment.

We are aiming to assess what hydrocarbon resource potential lies within the territorial waters of The Bahamas, for the mutual benefit of the nation and people of The Bahamas, the shareholders of BPC, and all other stakeholders. Safe, responsible, and uninterrupted operation is our key objective in the ever changing global Covid-19 environment, and these additional costs and increased funding arrangements reflect a prudent approach to achieving this objective.”

Perseverance #1 Well – Cost Update

Over recent months BPC has undertaken an extensive body of work, in conjunction with Stena Drilling and a number of BPC’s key contractors, to develop a Covid-19 mitigation plan. This plan is designed to minimise the chance of importing the virus on to the Stena IceMAX drill ship, and thus to ensure continuous operations whilst also providing a series of plans for outbreak containment and business continuity.

Accordingly, the Company’s Covid-19 mitigation plan has defined a series of Covid-19 protocols (isolation, testing and quarantine) to be applied ahead of and throughout the drilling campaign. Moreover, given the highly fluid nature of the global Covid-19 situation, the Covid-19 plan as developed contemplates a wide range of potential Covid-19 scenarios, with a tiered range of specific mitigation measures applicable.

In recent days and weeks international measures taken to mitigate the ever-evolving Covid-19 situation have had an emerging impact on BPC’s intended operations. For example, in the United Kingdom, where approximately half of the rig crew are based and where almost all of the rig crew will assemble pre-mobilisation, a national lockdown had been reimposed along with heightened tier responses. Equally, the United States, being the location from which much of the technical support and supplies for the rig will emanate, is experiencing record levels of Covid-19, and the likelihood of tighter restrictions and new lock-downs appear to be increasing. In The Bahamas a State of Emergency remains in place and there is considerable and growing uncertainty as to the uninterrupted availability of required services, for example regular scheduled flights and accommodation.

In view of this evolving situation, BPC and Stena Drilling have decided to move to implement an even more rigorous Covid-19 mitigation plan, so as to ensure creation of a series of effective Covid-19-free “bubbles” that completely isolate and test all crew, staff and vendor personnel on an enhanced basis, and thus “shields” the vessel to the maximum extent possible from the risk of Covid-19 importation / disruption. These measures include:

· enhanced quarantine and testing measures, where all crew and personnel will be required to undertake mandatory isolation in secure chartered hotel facilities for seven days or more (as opposed to domestic requirements in various relevant locations of up to three days),

· multiple and different Covid-19 tests before, during and after isolation and during transit (as compared, for example, to the USA which requires no Covid-19 testing for transit passengers),

· all transits being via private charter flights for all crew to and from the UK / USA and The Bahamas and then ultimately to the vessel (as compared to previous plans that involved commercial air flights, which may no longer be available and in any case pose considerably higher systemic risk),

· increased demobilisation procedures / costs, including BPC likely being required to bear a larger share of demobilisation costs than previously anticipated, as a result of Stena having notified BPC it has not found suitable follow-on work for the vessel after the completion of Perseverance #1, and

· maintaining flexibility on loading/offloading locations, greater inherent ‘friction’ in transit and loading procedures, and ultimately resultant increases in fuel costs.

In aggregate, these measures are considerably more stringent than current domestic requirements in each of The Bahamas, USA and UK in specific relation to Covid-19. However, BPC’s core objective remains safe, responsible and uninterrupted operations for the entire duration of the Perseverance #1 well program. The continually unpredictable risk profile arising from the deteriorating global circumstances means that these enhanced Covid-19 measures are now considered prudent and necessary to achieving that objective.

Collectively, all of these measures are expected to add approximately $3 million of additional cost to the overall program. The Company has previously advised a cost estimate for of between $21 million to $25 million, with a possible contingency of up to $5 million.

The cost estimate of Perseverance #1 is now revised upward, to between $24 million to $28 million. The Company also considers that it would be appropriate to expand the contingency allowance to $7 million, such that if all contingencies were to materialise, the total cost of Perseverance #1 could be up to $35m, or approximately 15% more than previously contemplated.

Within this revised total cost estimate, BPC has already prepaid a number of items, including the rig mobilisation fee, purchase of wellheads and equipment, and advance payments to a number of suppliers, such that remaining cash outflows required to complete Perseverance #1 is estimated to be in the range of $19m – $23m (and the aforementioned $7 million contingency, which may be required all, in part, or not at all).

Conditional Convertible Note Funding Update

On 10 October 2019, BPC entered into a Conditional Convertible Note Subscription Agreement to provide financing through convertible notes (“Conditional Convertible Notes”). Under this agreement, BPC expected to raise gross proceeds of £10.25 million through the issue of convertible notes (“Notes”) to a syndicate of Australian-based investors (the “Subscriber”). On 20 October 2020, BPC and the Subscriber agreed to extend the date for satisfaction of all of the conditions precedent such that the last date for satisfaction (or waiver by the Subscriber) of those conditions precedent was agreed to be 15 December 2020. However, it was also agreed that to the extent that the Subscriber elected to subscribe on an unconditional basis for at least £1.5 million of Notes prior to 30 November 2020, the date for the satisfaction (or waiver by the Subscriber) of the conditions precedent would be further extended to 15 January 2021.

The Subscriber and BPC have today agreed a further amendment to the terms of the Conditional Convertible Notes Subscription Agreement whereby (i) the total amount of Notes available for subscription under that agreement is increased to £15 million, (ii) a new condition precedent under that agreement has been added, to the effect that subscription of Notes is conditional on the spud of Perseverance #1, and (iii) a new schedule for availability of funding, such that if the Subscriber elected to subscribe on an unconditional basis for at least £1.5 million of Notes prior to 30 November 2020, the date for satisfaction of conditions precedent in respect of the balance of the facility is extended to 15 January 2021, and if by that date the Subscriber has subscribed for a further amount of Notes in excess of £5 million, the last date in respect of subscription of the remaining £7 million will be three days after the date that operations are concluded. BPC retains the right to scale back the Notes by up to 50%, should it elect to do so, at no cost or penalty.

At the same time, the Subscriber has provided an initial subscription notice in the amount of £3 million, and has waived all conditions in respect of that subscription other than that the well has spudded by 28 December 2020. In parallel, BPC and the Subscriber have agreed the appointment of a trustee to hold the Notes, once issued. This initial subscription notice satisfies the requirement noted above to subscribe on an unconditional basis for at least £1.5 million of Notes prior to 30 November 2020.

The net effect of these variations to the Conditional Convertible Note Subscription Agreement is that, subject to the spud of Perseverance #1, BPC will receive £3 million of additional funding shortly after spud, and (subject to satisfaction or waiver of conditions precedent) expects that it will receive at least a further £5 million in mid-January 2021 (that is, during the course of drilling), and will have access to the balance of funding (£ 7 million) at the conclusion of drilling operations (that is, at the point in time at which final actual costs of Perseverance #1, including contingency requirements, will be known), with BPC retaining the right, at its election, to scale back up to 50% of the Notes prior to drawdown.

This funding schedule is consistent with BPC’s anticipated funding needs through the course of drilling, and minimises cost to BPC (specifically, interest at 12% per annum does not accrue on Notes until funding is actually advanced).

In terms of potential dilution, assuming the full value of the Notes were to be drawn without any scale back (and assuming further that all interest on the Notes was settled in cash, which is BPC’s current expectation) a total of approximately 600 million new ordinary shares would be issued to the Subscriber. This potential issuance was approved by shareholders at the 2019 Annual General Meeting, and is consistent with BPC’s communicated funding strategy.

In aggregate terms, this means that BPC’s funding arrangements stand at $37 million, consisting of current cash holdings, the proceeds of the initial note subscription to be received on 28 December 2020, and the further note drawdowns expected in mid – January 2021 and on conclusion of well operations (the note drawdowns being subject to satisfaction or waiver of the relevant conditions precedent). As previously noted, remaining cash outflows required to complete operations are, inclusive of the increased cost estimate, expected to be in the range of $19m – $23m (plus the aforementioned $7 million contingency, which may be required in full, in part, or not at all).

Update on Other Funding Sources

The Company continues to work actively on a range of other financing alternatives as part of its overall funding and risk mitigation strategy, and will continue to seek access to incremental capital, most relevantly for activities across the Company’s broader portfolio of assets in Trinidad and Tobago, Suriname, and Uruguay. These alternatives include:

· Surplus cash-flows from operations: As a full-cycle exploration and production company, BPC expects to see cashflows available from production such that it can be in a position, by end of 2021, to be generating sufficient cash flows to cover all overhead and operating expenses, and with surplus free cash flow potentially making a considerable contribution to ongoing capital and exploration expenditures.

· Farm-out options or similar transactions: For several years, the Company has been engaged in a process to secure financing whereby another entity will acquire an interest in the project in The Bahamas, and in exchange will pay for all or a substantial part of the cost of drilling and cash payments in respect of back costs, thus freeing up capital for redeployment elsewhere in the Company’s operations. Discussions remain ongoing.

· Reserve-based lending facilities: The Company has commissioned a Competent Persons’ Review (CPR) of certain of its production and development assets in Trinidad and Tobago and Suriname, which is expected to be completed shortly. On completion of this work, the Company expects that it will have a readily monetisable asset in the form of certified 2P reserves, and the Company has commenced discussion with several providers of financing facilities that advance funding against the assessed value of these reserves.

· “Drill for equity” type arrangements: Another common financing structure in the oil and gas industry is a “drill for equity” type arrangement. Several such options may be available to the Company, including the previously announced option granted to Stena Drilling to “swap” part of the fee for use of the Stena IceMAX into equity in BPC .

· Zero coupon Facility : In addition, the Company has a facility for Zero-coupon variable conversion price convertible notes, entered into on 19 February 2020, under which approximately £11.3 million remains available for draw-down in instalments through the course of drilling. Given the Company’s current finance sources there is no evident requirement for this facility to be drawn, and given the unknown level of potential dilution were this facility to be drawn the Company has no present intention to do so.

· Bahamian domiciled mutual fund : The Company has a sponsored fund with the primary objective of creating a vehicle through which qualified Bahamian investors could invest in the Company. Should this fund grow, additional capital may become available to the Company.

To the extent that any one or a combination of the above funding alternatives are successfully concluded on terms acceptable to the Company, the amount of capital available to the Company would likely materially increase, and would be additive to existing funding sources.

However, even based upon the revised anticipated total well cost, and therefore a future capital requirement of $19m – $23m with an allowance for up to a further $7 million in contingencies, the combined amount of the Company’s existing cash balance and proceeds of part of the Conditional Convertible Notes represent sufficient resources required for the completion of Perseverance #1.

In circumstances where neither the Conditional Convertible Notes nor the Zero-coupon Facility are available (for example, where the conditions precedent set out in the Conditional Convertible Note Subscription Agreement are not satisfied (or waived by the Subscriber)), the Company would need to rely on seeking alternative funding, and there can be no assurance that the Company would be successful in securing any such alternative funding.

Excluding any costs relating to the Perseverance #1 well, the Company currently has sufficient cash available to meet general working capital needs for at least the next 12 months .

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