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Independent Oil & Gas IOG has announced the farm-out of 50% of the company’s SNS assets to CalEnergy Resources (CER) for £40m in cash, up to £125m of development carry of 80% of IOG’s 50% core project costs and an option to farm-into Harvey post the upcoming appraisal well. There are some curious features which primarily include the fact that IOG will pay CER a royalty of 20.2% of its net revenue from the phase 1 fields only, up to a cap of £91m over field life which strikes me as pretty high. In order to fund its own share of phase 1 costs and without the ability to raise such money via equity, IOG are going to tap the Euro-denominated debt market by the issuing of a senior secured bond of £70m, it already has a detailed term sheet with ABG for this process. It appears from the statement, and I havent heard from the company this morning yet, that the LOG debt has to be repaid or restructured before this further debt can be taken on. TBC So, on completion, IOG will repay the non-convertible debt of £16.6m, as for the £22m of convertible debt this will either be repaid, converted into a maximum of 29.9% (it would be much more) of equity or converted into L/T unsecured debt at the same price…If they paid it all off it would use up £38.6m of the £40m being paid by CalEnergy so it will probably be a mixture of the rest but a minimum of £16.6m plus dilution and of course a lump of unsecured into the bargain. This is a real curates egg of a farm-out, at first glance it looks good and puts IOG into the position it wants to be in, ie developing its core project with cash and a substantial carry to deliver the project. But the payout from net revenue of 20.2% and the formidable task of repaying and restructuring the LOG debt along with the equity dilution that it brings takes some of the gloss of it. After a big rise first thing IOG shares have settled at 19.5p, just shy of what I seem to remember was the indicated bid some time ago….
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