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Regional News

February 28, 2013
Cash strapped CGX may soon change hands
Stabroek News

Strapped for cash and facing a demand from its partners for US$15M, CGX is entering into a private placement to raise CDN$35-40M which could see its fellow Canadian oil explorer Pacific Rubiales Energy Corp gaining as much as 70% of the shares  in the company.

In the face of several costly failed wells, Canada-based CGX yesterday frankly admitted in  a press release that it was in a dire financial situation and its ability to continue as a going concern is dependent on raising further financing and there “can be no assurances that the company will successfully raise additional funds”.

Executive Director of CGX Energy Inc.  Professor Suresh Narine (extreme right) responding to questions at CGX’s press conference yesterday. Also at the table from left to right are President of the Georgetown Chamber of Commerce and Industry Clinton Urling; Serafino Iacono, Chairman of Pacific Rubiales and Ronald Pantin, CEO of Pacific Rubiales.

Executive Director of CGX Energy Inc. Professor Suresh Narine (extreme right) responding to questions at CGX’s press conference yesterday. Also at the table from left to right are President of the Georgetown Chamber of Commerce and Industry Clinton Urling; Serafino Iacono, Chairman of Pacific Rubiales and Ronald Pantin, CEO of Pacific Rubiales.

Searching for oil here since 2000, CGX saw two of its wells failing to hit commercial oil last year – one wholly-owned and the other as part of a consortium. It was the demand for around US$15M from the other partners in the consortium which appears to have triggered the private placement arrangement with Pacific Rubiales.

Pacific Rubiales is likely to provide an immediate shot in the arm of between US$35 million and US$40 million in the private placement agreement with GMP Securities made on February 27th. Other subscribers will be sought but analysts suggest that given CGX’s state the placement is essentially for Pacific Rubiales.

The private placement will allow CGX to meet pressing expenses following the two recent failed drilling attempts offshore. The 100 percent CGX owned Eagle well was abandoned in May 2012 after it was found to be dry. This well cost the company over US$71 million. The company together with the other partners at the Jaguar 1 well abandoned this site for safety concerns. It was expected that the drilling at this site would have cost CGX some US$180 million.

The press release issued by CGX yesterday said that Pacific Rubiales could own up to 70 percent of CGX if the private placement deal for the purchase of shares  goes through. This would have immediate implications for the management structure with Pacific Rubiales’ personnel being in the majority on the Board of Directors.

The press release said that CGX Energy Inc is faced with a demand for US$15 million from Repsol, Tullow and YPF S.A. for its share of oil drilling costs.

The press release added that the pact between CGX and Pacific Rubiales will see renegotiation of certain agreements and the fixing of a CDN$4 million limit on payments to officers, directors and consultants as a consequence of the likely change of control.

In the detailed press release, CGX said “In its Management’s Discussion and Analysis for the nine months ended September 30, 2012, the Company disclosed that as of November 26, 2012, the Company had received a default notice in respect of its Participating Share of joint account expenses for the Georgetown PA in the amount of US$11,500,000.  On January 24, 2013, the Company was advised by Repsol as operator of the Georgetown PA that the total default amount had increased to US$14,939,626. The Company has negotiated a stay of any enforcement proceedings until March 22, 2013. The Company reports that the current default amount is significantly in excess of its cash on hand and, accordingly, the Company currently has insufficient funds to satisfy this obligation and other near term obligations.”

CGX also said that there would be need for more financing and there was no guarantee that it would be able to continue as a going concern.

“The net proceeds from the private placement will enable the Company to discharge its immediate obligations under the Georgetown PA Joint Operating Agreement and to continue to fund its other near term obligations.  The Company expects that further financings will be necessary to ensure that it can meet its ongoing obligations.

The ability of the Company to continue as a going concern is dependent on securing the additional required financing, either through issuing additional equity, debt instruments and/or payments associated with a joint venture farm-out.  There can be no assurances that the Company will successfully raise additional funds”, the statement said.

The statement said that the private placement proceeds would be used as follows approximately US$15,000,000, to meet the Company’s current default payment obligations owing to Repsol Exploración S.A. (“Repsol”), Tullow Guyana B.V. and YPF S.A. (collectively the “Partners”) pursuant to the Joint Operating Agreement among the Partners to the Georgetown Petroleum Agreement (“Georgetown PA”),  a maximum of Cdn$4,000,000, for change of control payments to officers, directors, employees and consultants of the Company who will no longer be with the Company following closing, in satisfaction of a transaction fee payable to the Company’s financial advisor, and as to the balance of the net proceeds of the private placement, to fund expenditures related to the Company’s oil and gas exploration activities and for general corporate purposes.

However, new partners in the venture yesterday remained confident that with their support and expertise and CGX’s knowledge of the area, there will be success.

“CGX at this moment has three concessions and some obligations that we will have to meet. We will start drilling as soon as possible. We have to look into the details of the different blocks…we have excellent prospects.

What we have seen in the seismic is very interesting but we have to look at some more details. I am sure that this new association of CGX and Pacific Rubiales will bring oil soon to Guyana,” said Ronald Pantin CEO of Pacific Rubiales, at a press conference held at the Guyana Pegasus yesterday.

Speaking at the press conference, Executive Director of CGX Energy Inc Suresh Narine said that the partnership was not as a result of the company going out and soliciting multiple partners. “This was a deliberate, directed, and carefully thought out partnership that we engaged. Pacific [Rubiales] not only has the financial wherewithal…as a matter of fact Pacific’s financial engagement with CGX is an open door in which the partnership can begin. The financial capacity of CGX now with this partnership on its own is significant. It is not as if CGX was a poor partner and partnered with Pacific in order to be bailed out,” he said.

Asked about Pacific Rubiales’ stake in CGX, Narine said that as of yesterday it was about 48 percent. “But it depends on how you do the math. You must be able to apply the mathematics within the context,” he said.

“I am not going to skirt around what you all know…CGX upon drilling of the last dry well experienced a plummet of its stock. It experienced a significant deterioration of its prospects and we set about quite deliberately to rebuild the promise of those prospects. Now today I am happy to announce that CGX has announced over the past weeks and months the renewal of three of its most important licences: its Corentyne, Demerara and Berbice licence.

“CGX proposed a work plan which spans between an estimated US$600 million to US$1 billion in expenditure over the next five years. We set out to secure a partner who could be there with us for the distance of that. I am pleased to announce today that after an exhaustive look at our options, we decided to invite Pacific Rubiales, which already owned 30 percent of CGX, to join us,” he said.

He said that Pacific Rubiales has been able to deliver the most results by a single company in this basin.

Narine said that CGX has spent more than US$290 million since it commenced operations in Guyana during the 1990s. He said too that the company has about 85 employees when it is not drilling and when it is drilling that increases significantly to more than 300 persons.

“We don’t believe that those numbers are enough. We believe that we need to engage in additional training and this is why we need to engage in partnership. We as a company are committed to see local [employment]. Long before we pump a single drop of oil there is a tremendous opportunity in this sector for Guyanese companies and Guyanese people but we have got to partner with Government and more importantly with the private sector because risk is an important part of being able to access [petroleum resources]. So over the next months or years will see us partnering with the Ministry of Labour and Ministry of Natural Resources and Environment in articulating what we believe are the opportunities for Guyanese out there so that the private sector could position itself to partner with us,” he said.

Asked about the capacity of the company to manage and contain a mishap offshore, he said that CGX has a 100 percent safety record in its drilling of six wells in 15 years. “One must not pander to the ability to attract headlines,” he said, in clear displeasure at the question posed. “What I want to assure your readers is that this will continue. I am in charge of the committee that oversees health, safety and the environment and this is paramount,” he said.

He said that when the issue of a potential problem with the Jaguar 1 well came up, CGX was the first party in that consortium to register a vote to say that safety for the environment must be paramount.

Narine said that CGX’s collaboration with partner entities to look at spill cleanup and management was not because of the company’s inability to handle the matter on its own but rather because it is a shared responsibility. On the new well, Narine said that the company is bound by certain rules of disclosure and because of this he could not reveal the location of the well.

On the conclusion of the private placement, CGX’s board will be reconstituted as follows to ensure that a majority of the directors are nominees of Pacific Rubiales - Ronald Pantin, José Francisco Arata, Marino Ostos, Dennis Mills, Jairo Lugo, Suresh Narine, John Cullen and Dennis Pieters.

The release said that Pantin is the Chief Executive Officer and Executive Director of Pacific Rubiales. He worked in the Venezuelan oil industry for 24 years prior to founding Pacific Rubiales. Pantin has held a number of senior positions within Petroleos de Venezuela, S.A. (“PDVSA”), most recently being President of PDVSA Services. Immediately after PDVSA, Pantin was also President of Enron Venezuela.

Noticeably absent and not mentioned at yesterday’s press briefing was CGX’s CEO and President Kerry Sully who has been the company’s point man for meetings with the government.

CGX had an inauspicious beginning here in 2000 when Surinamese gunboats ejected it from Guyana’s waters as it was about commence drilling off the Corentyne.

This led to a protracted dispute between Paramaribo and Georgetown with Guyana eventually moving to the International Law of the Sea Tribunal in Hamburg and winning its case in 2007. CGX started drilling several years later but a series of costly wells turned up dry.



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