Given the steep decline in oil prices over the past months, Canadian oil explorer CGX Energy Inc has shelved plans for drilling on its Corentyne block for now and says its ability to continue as a going concern is dependent on additional financing being found.
“Given the steep decline in oil prices that has persisted over the last ten months, CGX Energy and its Board of Directors have determined that exploration drilling on the Corentyne Block offshore Guyana would not be prudent,” Dewi Jones, Chief Executive Officer of CGX said in a recent statement. The Government of Guyana in June had granted approved for CGX to extend its spud date deadlines on the Corentyne Block from October 31, 2015 to July 31, 2016 for the first commitment well and from November 27, 2016 to November 27, 2017 on the second commitment well. The company in a statement on August 28 thanked the government for affording it an extension of drilling commitments on the Corentyne Block until July 31, 2016.
The company, which has been engaged here since 2000 in the search for oil, also terminated its rig sharing agreement with Japan Drilling Co. Ltd (JDC) and Teikoku Oil (Suriname) Co., Ltd. (INPEX) and said that this will allow it to continue to seek a joint venture partner. Jones added that CGX is pleased that JDC has agreed to become a significant equity holder in CGX.
In June, following hydrocarbon finds of a significant quantity offshore Guyana by ExxonMobil, CGX said that it was seeking support to intensify its exploration efforts on the Corentyne block in the Guyana-Suriname Basin. The company, which has been involved in exploration in the area since 2000, said that it was “very encouraged” by the recent discoveries by ExxonMobil on the Stabroek Block located immediately adjacent to the Corentyne block and intended to spend in excess of US$320 million over the next few years in its attempt to locate commercially viable deposits in what it refers to as a “proven hydrocarbon system.”
In its statement on August 28, CGX said that the termination of the rig sharing agreements and deferral of the associated costs will allow it to continue to search for a joint venture partner and continue to evaluate industry and market conditions over the next six months.
“It is also important to note that despite the costs associated with terminating these agreements, we believe that given the current availability of rigs and current rig rates the aggregate cost of drilling our next exploration well offshore Guyana will nonetheless be similar to what was originally budgeted. As a result of INPEX utilization exceeding the original timeline, the company obtained a reduction in the aggregate cost of the rig of approximately US$1 million,” Jones said.
The statement also reported that for the second quarter of this year, CGX recorded a net loss of US$2.3 million compared with US$1.5 million for the same period in 2014. It said that CGX continues to work towards securing a joint venture partner for all of its petroleum prospecting licences in Guyana and is actively pursuing this initiative.
In terms of its drilling agreement termination, CGX recalled that in June last year, its wholly-owned subsidiary CGX Resources Inc. entered into a drilling rig agreement with JDC and a rig sharing agreement with JDC, INPEX for the use of JDC’s HAKURYU-12 drilling rig. The statement reported that upon termination of the drilling agreement, the total amount payable to JDC by CGX Resources is US$20.5 million.
However, based on the terms of a settlement term sheet entered into between CGX Energy, CGX Resources and JDC on August 28, 2015, the Japanese company will be paid US$5.5 million in common shares in the capital of CGX, US$500,000 on or before December 1, 2015, US$7.25 million on or before March 25, 2016, and US$7.25 million on or before June 15, 2016.
The statement said that the total amount of the JDC Payable is subject to adjustment based upon the demobilization fees under the drilling agreement. It noted that JDC will be issued 16,522,500 common shares which would result in JDC owning approximately 15% of the CGX on a non-diluted basis, which represents a 10% premium to the 30 day volume weighted average trading price of the Common Shares on the TSXV.
It also pointed out that as a result of the termination of the rig sharing agreement, CGX Resources owes US$2.8 million to INPEX for shared costs incurred in the utilization of the rig. INPEX has agreed to defer payment until December 1, 2015.
Meantime, the statement said that as a result of the much lower prices for rigs currently available, CGX is of the view that notwithstanding the sum owed to JDC, drilling the next exploration well offshore Guyana on the Corentyne Block will ultimately cost approximately the same as under the drilling agreement.
The company also highlighted its cost cutting initiatives and revealed that it was in a precarious financial position. The statement said that general and administration costs decreased by US$12,745 to US$786,363 in the six month period ended June 30, 2015 from US$799,108 for the same period in 2014.
“These costs are consistent with the prior year and are a continued result of an overall cost cutting initiative undertaken by the company in the latter half of 2013 driven by the reduction in non-essential staff and purchases. The company expects these costs to decrease further in the third quarter,” it said.
The company disclosed that its ability to continue as a going concern is dependent on securing additional financing through issuing additional equity, debt instruments or the sale of its assets and/or to obtain a joint venture partner. “Given the company’s capital commitment requirements associated with its petroleum prospecting licenses and the aforementioned penalties, the company does not have sufficient cash flow to meet its operating requirements for the next twelve months,” the statement said.
