Rose Petroleum plc

Update on Operations and Assets

27-April-2016

Update on Operations and Assets
De-risking of portfolio and reduction of cost base

Rose Petroleum plc, the AIM-quoted (AIM: ROSE) natural resources company, is pleased to provide an operational update on the current activities taking place within both its Oil and Gas and Mining divisions.
 
In overview, given the very challenging market conditions, the board of directors of the Company (the “Board”) has taken major steps to reduce costs and liabilities across the Group to enable the Company to weather the current market conditions and to position the Company for the recovery. Whilst doing this the Board has been seeking and reviewing additional opportunities which it believes could offer substantial value to shareholders.
 
Highlights:
  • Strategic review of Group assets with a view to conserving existing cash and de-risking the asset portfolio
  • Disposal of Cisco Dome field and, with it, the associated plug and abandonment liability on over 50 wells and termination of Mancos earn-in
  • Focus on larger, more prospective Paradox acreage and reduction of Paradox earn-in threshold by US$2m to US$5.5m
  • Partner secured on the Ardmore Copper Project and drilling underway
  • Significant reduction of Group and Head Office operational costs and a reduction of  Group liabilities
 
US Oil and Gas Operations
 
Background
 
During the strong oil price environment of 2014 and early 2015, the Group entered into agreements under which it was able to earn into a 75% working interest in approximately 263,000 gross acres in Utah. The area of focus of the acreage is on two unconventional oil and gas basins: the Uinta Basin, which targets the Mancos Shale at a maximum depth of approximately 3,200ft, and the Paradox Basin that targets the Paradox Clastics at a maximum depth of approximately 10,500ft.
 
Under the terms of the purchase agreements, Rose carries the seller, Rockies Standard Oil Company LLC (“RSOC”), which retains a 25% working interest in the leasehold, for the first US$17m expenditure on the projects: US$9.5m in the Uinta Basin and US$7.5m in the Paradox Basin.
 
Part of the Group’s land position was secured through the acquisition in October 2014 of the Cisco Dome Field, adjacent to the Mancos acreage, which included 76 miles of a mid-stream gathering system, a gas processing plant, a compressor station and main pipeline tap and meter into Williams’ 26” natural gas pipeline. The Cisco Dome field also contained over fifty historical conventional wells, all of which are currently shut in.
 
During 2014 and subsequent to the acquisition of the Cisco Dome field, Ryder Scott Company LP (“Ryder Scott”) completed a reserve report on the Utah leasehold. Based on that reserve report, the Group’s Mean Un-Risked Recoverable Prospective Resources across its total acreage were estimated to be 1.8 billion barrels of oil (“BO”) and 6.45 trillion cubic feet of gas (“TCFG”). Of these total resources, it was estimated by Ryder Scott that the Paradox acreage contained over 1.1 billion BO (61% of the total BO resources estimated) and circa 2.2 TCFG (34% of the total gas resources estimated), whilst the Mancos acreage contained circa 710 million BO  (39% of the total BO resources estimated) and circa 4,260 TCFG (66% of the total gas resources estimated).
 
In the report, Ryder Scott also gave an opinion on the chance of success (“COS”) in the Paradox and Mancos acreage and concluded that the COS within the Paradox leases was up to 56%, compared with 30% in the Mancos leases.
 
To date, Rose has concentrated its efforts in the main towards the Mancos due to the relative ease of drilling with its shallow depth, low drilling costs, and good infrastructure. Given its depth the Paradox is more costly to drill and requires a 3D seismic shoot prior to drilling. The Board was hopeful that a demonstration of the prospectivity of the Mancos could be achieved in quick time and that a successful drilling campaign would provide the funding to commence the Paradox activity.
 
Although the initial analytical results from the core taken at the State 1-34 well within the Mancos acreage were encouraging, Rose’s follow up work has led the Board to conclude that in the current market the Mancos, due to its depth in the location of Rose’s acreage, may have insufficient pressure/energy to be commercial and therefore represents too high a risk profile to merit further work at this time. The Board believes that the existing operations in the Paradox basin present a lower risk opportunity, with greater potential and a higher chance of success.
 
The Paradox Basin has been actively exploited by Fidelity Exploration and Production (“Fidelity”), mainly in the Cane Creek formation, 18 to 27 miles south-south east of the main Rose Paradox lease blocks. In addition, multiple wells in the area of Rose’s leases have produced oil and gas to surface from various formations. Fidelity has been the most active operator in the Paradox basin over the past two years with average Q1 2015 production of 2100 barrels of oil per day (“boepd”).
 
It is hoped that the Rose acreage in the Paradox can be unlocked using the same process as Fidelity has used, namely a 3D seismic shoot for target identification followed by drilling. 
 
Rose is currently in the process of obtaining permits for a 61 square mile 3D seismic shoot in the Paradox which are hoped to be available in Q4 2016.
 
Revised Agreement with RSOC
 
Having considered all of the above, the Board has entered into an agreement with RSOC to terminate its earn-in rights to the Mancos acreage and dispose of the Cisco Dome field, wells, pipelines, gas tap, gas plant, and all the associated equipment and liabilities. The Company will now focus its efforts on the Paradox which it feels is more prospective and carries a greater chance of success.
 
As part of the revised agreement with RSOC, Rose has agreed to cover the cost of the existing plug and abandonment (“P&A”) liability of the four wells already scheduled for P&A with the authorities, which is calculated to be US$320,000, and is agreed to be the total cost of P&A for these wells.  Rose has also agreed to leave the existing operator bonds in place with the State of Utah and Bureau of Land Management (“BLM”).  In the unlikely event that the bond requirements increase during the transfer, Rose has the right to top up the bonds, and if Rose chooses not to, then RSOC has the right to terminate the agreement.
 
RSOC has, in turn, agreed to reduce Rose’s carry obligation to earn the 75% working interest in the Paradox acreage by US$2m to US$5.5m. Rose has also gained the exclusive option to acquire 100% of RSOC’s interest (as opposed to the earn-in to 75% of RSOC’s interest) in the Paradox acreage for a one-time payment of US$1m at any time prior to 30 June 2016.
 
The reassignment of the Mancos assets will significantly reduce the future expenses Rose would have had to pay on this acreage including lease rental/minimum royalty payments associated to the Mancos leasehold. Further, and potentially more importantly, Rose will no longer be liable for the P&A liability of the fifty plus wells in the Cisco Dome field. This reduction of acreage has also led to a reduction of headcount in the O&G Denver office and there is now only one full-time employee managing the Paradox acreage.
 
The Company will keep the market updated in respect of future developments on the Paradox Basin acreage.
 
Mining Operations
 
Gold mining and milling in Mexico
 
In the period between January and March 2016, 5,515 tonnes of third-party ore were processed through the mill, however, toll milling operations from the client have now been suspended due to insufficient grade in the ore provided.  The Company is presently negotiating terms on an alternative potential long term tolling agreement and reviewing a number of different options in respect of the mill including looking at other joint venture opportunities and a potential sale. 
 
Agreement on Ardmore Copper Project, U.S.A.
 
The Group has entered into an agreement with privately held Burdett Gold LLC (“Burdett”) to conduct exploration drilling on the Ardmore copper project which consists of 18 unpatented mining claims located north of Tucson, Arizona.  The terms included a US$5,350 cash payment to the Group and a retained 15% net profits interest on the claims as well as on any other claims that Burdett acquires which is located within a 3-mile area.  The net profits interest is subject to proportional reduction to offset any obligations owed to third parties associated with such acquisitions. Burdett will responsible for operations and the Group is released from all liabilities.  Burdett has now commenced drilling at the project and we will update the market on progress in due course.
 
Wate Uranium Project, U.S.A.
 
Following the disposal of the Group’s 50% interest in the Wate project in early 2015, Energy Fuels Resources (“EFR”) has to-date paid the Group US$300,000 in consideration.  A further US$250,000 tranche of consideration was due to be paid to the Group in the first quarter of this year. The Group was informed by EFR that it is having delays with the State of Arizona over obtaining the Mineral Lease on the project due to the State requiring EFR to obtain access rights to the project over private land that surrounds the State parcel, which is presently being denied by the Navajo.  Consequently, EFR proposed an addendum to the agreement terms whereby they would pay US$50,000 of the US$250,000 due in quarter one 2016 and defer the rest of the payment until the commencement of commercial production.  Rose felt that it was in the best interests of the Company’s shareholders to accept the US$50,000 and to agree to the addendum to the original contract.  EFR is actively engaged in securing access to, as well as the environmental permitting, on the project.
 
Tango Project
 
Rose has continued the necessary land payments to ensure the continuity of the agreement and drilling permits in respect of the Tango project. The Board is now considering a number of different options for progressing the project.
 
Additional Projects
 
As announced to the market on 13th April 2016, the Company continues to investigate various opportunities across different sectors and geographies to provide additional projects alongside its existing hydrocarbon and metals activities.
 
Matthew Idiens, CEO of Rose, commented:  “The amendment to the earn-in agreement has given us the opportunity to substantially de-risk the Oil and Gas portfolio and we can now focus on the Paradox acreage, with in excess of 1 billion barrels of oil, and which we believe has a greater chance of success than the Mancos. The amendment also means we have eliminated the Group’s P&A liability which became an increasing issue as market conditions declined and gives us the opportunity to further reduce the underlying operational cost base.
 
In the current market conditions and taking into account the general outlook, the Board believes this is the best course to follow. We have combined this with implementing dramatic cost cuttings throughout the Group and feel we are now well positioned for both the present and for a future upturn. 

Rose has always retained a diverse portfolio of assets to enable it to adapt rapidly to changing market conditions and we continue to believe that even in these challenging markets there are opportunities to create value for our shareholders.”