Challenger Energy has entered into a binding heads of terms with Predator Oil & Gas and relevant subsidiary entities, providing for (i)  the conditional sale of the Company's interest in the non-producing Cory Moruga licence in Trinidad, (ii) a framework for future CO2 collaboration between the Company and Predator, and (iii) a mutually agreed settlement in relation to all matters relating to the Inniss-Trinity CO2 enhanced oil recovery ('EOR') pilot project previously carried out by Predator at the Company's Inniss-Trinity block.

Highlights

• Binding heads of terms signed for the conditional sale of CEG's 83.8% interest in the non-producing Cory Moruga licence in Trinidad, including the Snowcap oil field, to Predator, by way of sale of 100% of the issued share capital of T-Rex Resources (Trinidad) Limited, with retention of 25% future back-in right based on future drilling / EOR activity and associated future production
• Up to US$9m aggregate value proposition for Challenger Energy, comprising US$2m in staged cash consideration, US$1m in contingent cash consideration, removal of all liabilities and potential exposures associated with the Cory Moruga licence, retention of residual back-in rights, and a full settlement with Predator in respect of all matters relating to the Inniss-Trinity CO2 EOR pilot project

 About Cory Moruga and Transaction Background

• The Cory Moruga licence is a direct licence from the Trinidadian Ministry of Energy and Energy Industries ("MEEI") in which the Company's wholly-owned subsidiary T-Rex Resources (Trinidad) Limited ("T-Rex") holds an 83.8% operating interest, alongside its partner Touchstone Exploration Inc. which has a non-operating 16.2% interest.
• The Cory Moruga licence includes the Snowcap oil discovery, with oil previously having been produced on test from the Snowcap-1 and Snowcap-2ST wells. On the basis of the production tests, a development plan was submitted in 2018, prior to the Company taking control of the asset, however, the block has not been further developed since that time.
• Subsequent to the acquisition of Columbus Energy Resources PLC in 2020, the Company undertook a detailed technical review of its Trinidad portfolio and assessed that Cory Moruga field required further appraisal before a commercial development decision could be made. There is currently no production from the Cory Moruga licence.
• As a consequence of the lack of current production and the need for further appraisal, the Company considers the Cory Moruga licence to be non-core to its cash flow generative production-focused business in Trinidad, and therefore no further work has been planned for the Cory Moruga field in the near-term. In contrast, Predator considers the Cory Moruga field to represent an ideal candidate for a CO2 EOR project.
• The Company's wholly owned Trinidadian subsidiary, CEG Inniss-Trinity Trinidad Limited, was a party to a Well Participation Agreement (and subsequent amendments) ("WPA") with Predator and its subsidiaries, pursuant to which Predator agreed to carry out a CO2 EOR pilot project in a restricted part of the Company's Inniss-Trinity field in Trinidad. The pilot project was carried out in 2020 and 2021, with the WPA terminated by the Company in August 2021.
• Following mutual discussions, the Company and Predator consider that a broader collaboration in relation to CO2 EOR projects in the Company's existing portfolio of mature oil fields across Trinidad could provide a mutually beneficial outcome for both parties, leveraging shared past experiences utilising CO2 EOR techniques and methodologies.
• The Company and Predator have therefore entered into the binding Term Sheet, summary details of which are set out in this announcement, to reflect the parties' strategic intent and the agreed commercial terms between the parties in respect of the Transaction.

Key terms of the Transaction

• Predator will acquire 100% of the issued share capital of T-Rex, an indirectly wholly-owned subsidiary of the Company that holds the Company's 83.8% interest in, and is the operator of, the Cory Moruga licence.
• The Company will retain a "back-in right" which will afford the Company the option in the future to repurchase 25% of Predator's share in T-Rex (and thus representing a 20.95% interest in the underlying Cory Moruga asset).
• CEG and Predator have also agreed to establish a collaboration in relation to CO2 EOR activities and projects in other areas in Trinidad, including but not limited to potential application of CO2 EOR techniques across the Company's other fields.
• As part of the overall Transaction, the Company (and its relevant subsidiaries) and Predator (and its relevant subsidiaries), without admission of fault and liability on either party's part, have agreed to a mutual settlement and discharge of all disputes and claims in relation to the Inniss-Trinity CO2 EOR pilot project previously undertaken by Predator, including the repayment of all loans and debts owed or claimed to be owed by either party to the other in respect of the Inniss-Trinity CO2 EOR pilot project.
• The Transaction represents a gross potential value proposition to Challenger Energy of up to US$9 million (as estimated by the parties to the Transaction), comprising:
  • US$2.0 million payable to the Company by Predator in cash, in instalments as follows: (i) US$1 million upon completion of the transaction (the "Completion Date"), and (ii) a further US$1 million on the date that is six months after the Completion Date;
  • a further US$1 million conditional cash payment, payable once the Cory Moruga field production first reaches 100 barrels of oil per day;
  • the option-value embedded in the retained back-in right;
  • the removal of all ongoing T-Rex financial obligations, and the elimination of all T-Rex associated liabilities from the Challenger Energy balance sheet, as well as the elimination of all contingent and potential liabilities associated with the Cory Moruga licence, whether crystalised or not;
  • the settlement of any outstanding loan amounts in respect of the Inniss-Trinity CO2 EOR pilot project (recognising that absent a settlement between the parties, such amounts would be recoverable only from incremental production from the Inniss-Trinity CO2 EOR pilot project area); and
  • a full and final mutual settlement in respect of all disputes and claims between the parties in relation to the Inniss-Trinity CO2 EOR pilot.
• In relation to the back-in right, it may be exercised at the Company's sole election at any time in the period commencing three years after the Completion Date or first commercial production from Cory Moruga field (whichever is earlier) and ending six years after the Completion Date. Consideration payable if the Company elects to exercise the back-in right is a fixed cash amount of US$2.25 million, plus a variable percentage of the costs incurred by Predator on the Cory Moruga field subsequent to the Completion Date, the percentage dependent on the P50 Resource attributable to the Cory Moruga field at that time, as follows: (i) 50% of costs incurred if the P50 Resource is less than 5 million barrels of oil (MMbbls), (ii) 75% of costs incurred if the P50 Resource is more than 5 MMbbls but less than 10 MMbbls, and (iii) 100% of costs incurred if the P50 resource exceeds 10 MMbbls.
• Predator will have until 31 January 2023 to complete confirmatory due diligence, prior to which time the parties will also work in good faith to enter into long-form transaction documentation in respect of the Transaction. However, the Term Sheet is expressed to be legally binding, and will remain as the operative legal document in respect of the Transaction until long-form transaction documentation is entered into.
• Thereafter, completion of the Transaction will be conditional on consent of the Trinidadian Ministry of Energy and Energy Industries ("MEEI") to a revised work programme for the Cory Moruga licence proposed by Predator (to include technical work, CO2 EOR activity, and new well drilling), as well as agreement of MEEI to a revision of future fees for the Cory Moruga licence and a settlement / cancellation of past claimed dues and other amounts pertaining to the Cory Moruga licence. Completion of the Transaction will occur 7 days after satisfaction of this condition and any other relevant conditions precedent that may be stipulated in the long-form transaction documentation. The parties have agreed to work together to secure the required consents and agreements with MEEI and thus achieve completion of the Transaction as soon as reasonably practicable on or before 30 May 2023, with a long stop date of 31 August 2023.
• For the year to 31 December 2021 T-Rex made a loss of approximately TT$4.5 million (or approximately US$674,000), largely reflective of the annual licence fees and dues in respect of the Cory Moruga licence. As at 31 December 2021, T-Rex had net liabilities of approximately TT$48.0 million (or approximately US$7.1 million) of which approximately TT$31.7 million (or approximately US$4.7 million) is intra-group and will be written-off as at the Completion Date. Cash received in relation to the Transaction will be used for general working capital in the Company's operations.

Eytan Uliel, Chief Executive Officer of Challenger Energy, said:
"I am pleased to advise of today's commercial agreement, to sell our interest in the Cory Moruga block to Predator. Subject to Ministry consent and agreement, Predator intend to aggressively take the block forward to production, through a combination of new technical studies, CO2 enhanced oil recovery activities, and new well drilling. In the event Predator are successful, we retain a future ability to come back in to a 25% interest, and we have put in place a new framework to work with Predator on considering the application of CO2 EOR techniques on our other Trinidadian assets.

In financial terms, subject to completion, the transaction will result in cash receipts of US$2 million through 2023, and a further US$1 million in the event of commercial production being achieved at the Cory Moruga field. In addition, we will see tangible realisation of value in the form of the embedded option value of the back-in right retained, all liabilities and potential liabilities associated with the Cory Moruga entity being removed, and a resolution of all outstanding matters between us and Predator being achieved in an amicable manner.

It is worth noting though that whilst Cory Moruga may currently be non-producing and thus non-core to our existing business in Trinidad, the block does have future production potential, albeit new wells and the application of innovative, environmentally-friendly EOR techniques will be required to unlock that potential. We will thus be working with Predator in the coming months to seek the consents and agreements necessary from the Ministry to enable the future work program intended by Predator to proceed. This will not only be to the benefit of our Company and Predator, but will meet the Trinidadian Government's objective of seeing EOR deployment in Trinidadian onshore fields, with a view to establishing the basis for new oil production in the future. Further updates will be provided as appropriate."

 KeyFacts Energy: Challenger Energy Trinidad and Tobago country profile   l   Predator Oil & Gas Trinidad and Tobago country profile