Challenger Energy Group plc (LON:CEG) Chief Executive Officer Eytan Uliel caught up with DirectorsTalk for an exclusive interview to discuss Charlestown Energy, the structure of the deal with them, the appointment of Robert Bose, the progress of the farm out process for Area OFF-1 and provides investors with an update on the Area OFF-3 license.
Q1: First off, congratulations on the recently announced investment by Charlestown Energy. Could you just talk us through who Charlestown Energy are and why they’ve invested in Challenger Energy Group?
A1: Charlestown are a New York-based fund that are associated with several high net worth individuals and the Charlestown Energy Fund exists specifically for the purposes of investing in high impact E&P projects around the world, which is far and few between.
The universe of investors, particularly those interested in big frontier exploration prospects like we have, has shrunk dramatically over the years so finding these investors and then getting them interested in you and then having them take large shareholdings is quite an achievement.
In relation to Charlestown specifically, they were one of the early investors in Namibia and they have a fairly large shareholding in a company called Sintana Energy, which has been a massive success story both operationally and in terms of the return to shareholders in that company.
As we’ve been saying for a long time now, Uruguay is the conjugate margin of Namibia, is a geological sense, we think a direct mirror, and that’s what’s led to all the interest in Uruguay, not just from our company, from the majors. As I’ve said in many other forums, Uruguay went from being completely unheard of in international oil and gas terms, to being fully licensed in less than two years and all the other licenses apart from ours have been taken out by international majors.
So the people who understand this best are the people who’ve been in Namibia for a while, and who’ve made lots of money in Namibia, Charlestown being one of them. So when they saw what we had been doing in Uruguay, and then most importantly, when they saw we’d managed to attract Chevron as a farm out partner for one of our blocks there, that was a match made in heaven.
They said, look, this is our business, this is what we like to invest in, we see a real parallel trajectory for Uruguay to what happened in Namibia. We were in Namibia early, we want to be in Uruguay early, and that’s why they’ve invested in us.
Q2: What can you tell us about the deal? How was the deal with Charlestown structured?
A2: In the first phase, the deal is a loan and that was really for no other reason than just pure practicalities. The first line is Charlestown said, look, we want to become a shareholder but you need to first reach financial close with your transaction with Chevron.
The second thing, which is just something I struggle to explain, because I don’t understand why it’s so but most people nowadays, when you hold shares electronically, you hold them via a share custodian and for reasons I don’t quite understand, many of the global share custodians will not hold shares where the value of those shares is less than a penny. Our share price is considerably less so in order to enable Charlestown’s share custodian to hold our shares, we needed to first undertake a share consolidation and so we’re doing that. That’s going to happen sometime in July.
Once those two preconditions are satisfied, Charlestown’s loan will automatically become shares in CEG, we pre-agreed the basis of that with Charlestown. So it’ll be at a price that represents a hefty premium to our current share price. I don’t know too many other companies around that have been able to get equity investors in at a premium price so we’re very pleased with that.
Charlestown will become an 8.7-ish percent shareholder, which will make them one of our largest shareholders, obviously committed to the future of the company over the long term. So all in all, we’re very pleased with it.
Really, if you’ve asked about the structure, as I said, there’s some structural elements which are really to deal with some practicalities but for all intents and purposes, Charlestown are becoming a shareholder in the company. They’ve paid a premium price to do it and they’re putting one of their people on the Board to show just how committed they are to the future of Challenger Energy.
Q3: You just mentioned that the deal includes the appointment of Robert Bose to the Board. What experience and skill will Mr. Bose bring to the Board?
A3: Robert is a terrific guy. We’ve got to know each other quite well over the period while we’ve been working on this transaction together.
He has a lifetime of experience in energy and commodities, he was an investment banker for a long time but he was one of the founders of the Charlestown Energy Fund. He’s their managing member so he’s responsible for their investments and in particular, he was the one who led their investments in Namibia. He is currently acting not just as a director, but the Chief Executive Officer of Sintana, the other company I mentioned.
So, he has a wealth of experience both in terms of finance and capital and access to networks we don’t have in North America, but also, he is a great window into what’s going on in Namibia and to opportunities that may arise there and in other places.
We’re pretty excited, it’s a great addition to our Board.
Q4: Is the farm out process for Area OFF-1, the license, progressing as planned?
A4: Absolutely. Tickety-boo. Unfortunately, many casual observers think that you sign a farm-out agreement and you wave a magic wand and the next day it’s all done, and that’s just not how it works in the international oil and gas industry.
You sign a farm-out agreement, and then you go to the regulators involved, in our case, the Uruguayan regulators, and you say, this is what we want to do, and they go through a process of checking that the new partner has the financial and technical capabilities to do the job and to join the project. Then there’s a process of paperwork and so on.
Now, you have to go through that, notwithstanding that it’s Chevron, who obviously has no problem establishing their technical and financial capabilities or credibility, but you still have a process to go through. You’re dealing with bureaucracies and government authorities, and these are processes that take some time, usually measured in the three to six month timeframe.
So we’ve said right from the day we signed this farm-out, which was in early March, that it’s going to take several months, and we’re working through the process, paperwork’s been submitted, cooperative and very amicable procedural stuff going on between us, Chevron, and the government. It will sort itself out in the course of the next couple of months, precisely when, I can’t tell you but it will.
Ultimately, the key thing here, though, is that Chevron wants to get on with work, the first phase of that work being shooting 3D seismic and the first window by which 3D seismic can be done, a sort of a weather window in Uruguay, commences in about November/December of this year. So, we have a little bit of time left to just sort out all the paperwork and that really leads to the more substantive stuff, which is getting on with contracting seismic vendors and preparing for the seismic campaign, all of which is in full swing at the moment, in anticipation of the procedural closing of the farm out.
Q5: Do you have any update for investors on Challenger Energy Group’s Area OFF-3 license?
A5: Well, that license, the formal agreement, we were awarded that license sometime last year and the formal signature of that license happened in March in Montevideo. As a consequence, the first expiration period of that license kicks off imminently, in fact, on the 7th of June.
So the first update is the license is done and dusted, it belongs to us, we have a work program that we’ve planned that we will commence almost immediately on the first expiration period commencing.
That work program is almost similar to the program we adopted for Area OFF-1. It involves 2D, and in this case, also 3D seismic reprocessing, a bunch of other technical work that proved hugely valuable in terms of ultimately getting a farm out for OFF-1. We’ve lined up exactly the same sort of work for OFF-3 so all of that work will start soon.
It’s, again, a process. These things take time to be done properly and to the quality that you need to be able to show to potential partners so it’s work that will run for the rest of this year and into the beginning of next year.
On the back of that work, we’ll kick off a formal farm out process, so ideally early next year and the whole aim with OFF-3 is to replicate what we did with OFF-1, do good technical work, run a formal farm out process, bring in a partner with a view to accelerating the next phase of work on OFF-3. In the case of OFF-3, though, there’s no need to shoot 3D seismic because there is already 3D seismic data so the objective with area OFF-3 is going to be to get a farm out partner who will take us forward to drilling of an initial exploration well as soon as possible.
