METGASCO has terminated a proposed merger with US-focused Elk Petroleum after announcing its chances of securing finance for the deal was “now very low.”
The all-scrip merger, announced in December 2014, was conditional on oil prices remaining above a certain level and on Metgasco being able to arrange acceptable funding for Elk’s Grieve enhanced oil recovery project, in Wyoming.
The deal also incorporated a convertible loan facility (CLF) that would have provided Elk with $2.5 million in financing to fund its operations until the merger was concluded.
Metgasco said the oil price condition to the deal had been triggered, with “numerous financial organisations” telling the group it would find it difficult to secure finance on acceptable terms.
“This was due to a number of factors, including current oil prices, which are significantly lower than anticipated when the original merger terms were negotiated,” Metgasco said.
“Metgasco is disappointed that the opportunity had not been successful and will continue seeking means to realise value from its Clarence Moreton basin exploration acreage and identifying opportunities outside of New South Wales.”
Under the terms of the CLF, Elk Petroleum must now repay about $1.75 million within 30 days of the termination of the deal – that being the amount borrowed under the $2.5 million loan facility so far, plus interest.
In its half-year announcement, Elk said its directors had been in discussions with major shareholders seeking new ways to secure funds since the merger was officially terminated.
Elk had been sent a letter of intended support from one of its shareholders, saying it was looking into new ways to organise forward funding over the next 12 months.
In addition to the money to be repaid to Metgasco was the fact that the Grieve project had reached the stage where Elk was now responsible for the remaining joint costs.
With project partner Denbury Resources having carried and financed Elk’s 35% working interest in the project through to the end of 2014 under a US$10 million in a free-carry and a US$12 million loan, Elk estimates it must spend another US$10 million over the next two years to reach free cash flow.
Elk received its first Grieve Joint Interest Billing from Denbury in February 2015, but the companies have agreed to suspend Elk’s requirement to pay so they can discuss a number of financial and commercial matters.
“The Company expects to be able to obtain the required funding to meet the group’s commitments,” Elk said.