Three-Year Arrangement with Petroperu

 

 

 

PetroTal Announces Three-Year Arrangement with Petroperu

Oil Sales Contract terms enhanced and extended to three years

 

Calgary and Houston - June 12, 2020 - PetroTal Corp.  ("PetroTal" or the "Company") (TSX‐V: TAL and AIM: PTAL) is pleased to announce that it has entered into an arrangement with PETROPERU S.A. ("Petroperu"). 

 

The arrangement will result in the Company's liability to Petroperu in relation to the recent oil price movements being payable over a three year period, rather than at the point of sale of the oil.  The arrangement has been structured to minimize the impact of the recent oil price decline on the Company's cash flows and forward plans, whilst allowing the Company to benefit from any future increase in oil prices when physical oil sales occur.  As announced on May 7, 2020, the liability relates to the oil price differential between the date that oil enters the Northern Oil Pipeline ("ONP") and the current oil price (and, ultimately, the physical oil sales price).

 

Additionally, PetroTal announces an extension of the oil sales contract with Petroperu dated December 23, 2019 ("Oil Sales Contract") from one year to three years on enhanced terms.  All monetary amounts in this release are in United States dollars.

 

 

 

Highlights

 

·    The contingent liability announced on May 7, 2020 has been structured into a three-year payment arrangement ("Arrangement") with Petroperu at an interest rate of 6.5%[1];

·    The contingent liability at the end of May is estimated to be approximately $43 million;

·    The Arrangement allows PetroTal to settle the obligations to Petroperu now while still allowing the Company to benefit from higher oil prices forecasted by the Brent forward strip pricing curve when the physical oil sales occur;

·    PetroTal and Petroperu (the "Parties") have agreed to extend the one-year Oil Sales Contract to three years upon expiry of the current term on December 23, 2020;

·    The Parties will establish a framework to ensure that future oil sales under the Oil Sales Contract have adequate hedge protection to avoid future downside losses;

·    The Parties have agreed to further amendments to the Oil Sales Contract for lower pipeline tariffs and fees during the period of low oil prices; and,

·    PetroTal is coordinating with Petroperu to reopen the Bretana oil field in early July.

 

 

 

Arrangement

 

Pursuant to the terms of the Oil Sales Contract and the oil swap contract referenced in PetroTal's May 7, 2020 announcement, a contingent liability arose due to the significant reduction in oil prices in early 2020.  The purchaser of the oil, Petroperu, has agreed to resolve this entire contingent liability on a one-time basis that would see the obligation paid evenly over a three year period, at an annual interest rate of 6.5%.  At May 31, 2020, 2.1 million barrels of oil are either in the pipeline or storage tanks, and based on the average oil price for May 2020, the contingent liability is approximately $43 million. At March 31, 2020, there were 1.8 million barrels of oil in the pipeline or storage tanks.  The actual liability will be determined based on the future Brent oil price when the oil is sold.  For reference, based on the average Brent oil price of approximately $40/bbl for June to date, the contingent liability is approximately $26 million.  The Arrangement will allow PetroTal to continue to benefit from the higher oil prices forecasted by the Brent forward strip pricing curve when the physical oil sales occur while allowing PetroTal to invest in the Bretana oil field development. 

 

As security for the Arrangement, the production facilities of PetroTal at Bretana will be pledged under a trust agreement pursuant to which such facilities will be held as security for the benefit of Petroperu. Along with the contractual monthly repayments, PetroTal may make additional pre-payments to facilitate an earlier payout.  Once Petroperu has been repaid in full, the trust agreement will terminate and any security in respect of the facilities shall be released.

 

PetroTal will continue to benefit from higher projected oil prices when the oil volumes that have been sold to Petroperu under the Oil Sales Contract and the oil swap contract are sold by Petroperu in Q3 and Q4 2020. 

 

 

Amendments to the Oil Sales Contract

 

In order to solidify the long-term operating relationship between PetroTal and Petroperu, the parties have agreed to amend certain terms of the Oil Sales Contract in recognition of the current weak oil price conditions.  The key changes are:

 

·    Extension of the term to three years from the current one-year term;

·    Given the extended time for Petroperu to realize the export sales, future invoices submitted by PetroTal will be due 240 days from when PetroTal delivers the oil at Saramuro;

·    PetroTal will continue to have the ability to immediately factor future invoices, at a nominal rate, and therefore cash flow is expected to remain largely unaffected by this longer invoice period;

·    Reductions in the pipeline tariff and commercialization fee graduated to correspond to varying levels of Brent oil prices;

·    At current Brent oil price levels with minimum production of 9,000 barrels of oil per day monthly average, the combined fees are expected to drop from $11.00 per barrel to $8.67 per barrel;

·    The initial differential at the time Bretana oil is sold to Petroperu  has been adjusted to $6 per barrel (previously $4 per barrel).  If the actual differential is less than the initial $6 per barrel at the time the oil is physically exported 8 to 12 months later, then PetroTal will recapture the difference as revenue, however if the actual differential is higher than $6 per barrel then PetroTal will pay the difference.  By increasing the initial differential, PetroTal is reducing its future exposure to realized price differential risk;

·    Future value fluctuation settlements will occur at the date the physical oil is sold by Petroperu;

·    To minimize the future price differential, Petroperu will use their best efforts to sell the Bretana oil at the best market conditions; and,

·    Both parties have mutually agreed to hedge future sales of the Bretana oil sold into the ONP to limit price exposure, at the Company's expense.

 

 

Pipeline and Bretana Oil Field Shut Down

 

While the Bretana oil field remains shut down awaiting opening of the ONP by Petroperu, PetroTal is coordinating with Petroperu to reopen the Bretana oil field in early July, with the expectation that the ONP restarts pumping oil very shortly thereafter.  Both PetroTal and Petroperu will fully abide by the health directives issued by the Peruvian government in order to safely restart operations during the ongoing COVID-19 pandemic.

 

 

Financial Update

 

 

PetroTal currently has no bank debt and continues its efforts to establish a credit facility that will further enhance liquidity and flexibility for the Company.  Upon collection of oil sales invoices in the next few weeks, PetroTal will have cash of approximately $11 million.  The Company has obligations to its suppliers of approximately $49 million, excluding the contingent liability to Petroperu.  Deferred payment plans are either in place or being discussed with a number of suppliers that will result in the payments being deferred to fit within PetroTal's cash resources and future cash flow generated.  

 

 

Carlos Barrientos Gonzales, General Manager of Petroperu, commented:

 

"Petroperu appreciates the dedication and investment that PetroTal has made in the development of the Bretana oil field.  Petroperu expects to complete the significant upgrade of the Talara refinery in mid-2021 and the ability to utilize domestic oil production will be an important element.  PetroTal is an important player in Peru's oil industry and is now an important oil producer in the Country.  The Oil Sales Contract between Petroperu and PetroTal is an important link between our two companies, and I'm pleased that we've reached agreement to extend it to three years along with the additional contract enhancements.  In recognition of the significant investment PetroTal has made in the Bretana oil field and production facilities, Petroperu is very comfortable with allowing the contingent liability to be settled over the next three years.  The Bretana oil production coming through the Northern Pipeline also represents an important benefit for the Loreto Region and for the Country"

 

 

Manolo Zuniga, President and Chief Executive Officer, commented:

 

"PetroTal is pleased to embrace the strong working relationship it has with Petroperu.  Oil production from the Bretana oil field is an important component of Petroperu's pipeline and refinery network.  Solidifying a three-year arrangement for both settlement of the contingent liability and ensuring future oil sales, significantly enhances PetroTal's operations.  It also sets the stage for PetroTal to continue the development of the Bretana oil field, as and when oil prices recover. 

 

Our focus on balance sheet strength and enhancing liquidity will ensure PetroTal has the financial strength for working capital management and the ongoing development of Bretana.  PetroTal appreciates the support of its suppliers and the continued dedication of our employees and contractors.  Together, PetroTal will emerge from the pandemic stronger, in order to rebuild value for shareholders."

 

 

Eight Capital acted as strategic advisor to PetroTal on the Arrangement with Petroperu.

 

 

 

ABOUT PETROTAL

 

PetroTal is a publicly‐traded, dual‐quoted (TSXV: TAL and AIM: PTAL) oil and gas development and production company domiciled in Calgary, Alberta, focused on the development of oil assets in Peru.  PetroTal's flagship asset is its 100% working interest in Bretaña oil field in Peru's Block 95 where oil production was initiated in June 2018, and in early 2020 became the second largest oil producer in Peru.  Additionally, the Company has large exploration prospects and is engaged in finding a partner to drill the Osheki prospect in Block 107.  The Company's management team has significant experience in developing and exploring for oil in Northern Peru and is led by a Board of Directors that is focused on safely and cost effectively developing the Bretaña oil field. 

 

 

For further information, please see the Company's website at www.petrotal-corp.com, the Company's filed documents at www.sedar.com, or contact:

 

 

Douglas Urch

Executive Vice President and Chief Financial Officer

[email protected]

T: (713) 609-9101

 

Manolo Zuniga

President and Chief Executive Officer

[email protected]

T: (713) 609-9101

 

Celicourt Communications

Mark Antelme / Jimmy Lea

[email protected]

T : 44 (0) 208 434 2643

 

Strand Hanson Limited (Nominated & Financial Adviser)

James Spinney / Ritchie Balmer

T: 44 (0) 207 409 3494

 

Stifel Nicolaus Europe Limited (Joint Broker)

Callum Stewart / Simon Mensley / Ashton Clanfield

Tel: +44 (0) 20 7710 7600

 

Numis Securities Limited (Joint Broker)

John Prior / Emily Morris

T: +44 (0) 207 260 1000

 

 

READER ADVISORIES

FORWARD‐LOOKING STATEMENTS: This press release contains certain statements that may be deemed to be forward‐looking statements.  Such statements relate to possible future events, including, but not limited to: PetroTal's business strategy, objectives, strength and focus; the Company's ability to resume operations in accordance with developing public health efforts to contain COVID-19; additional cost reductions; and liability under the Swap Contract and Sales Contract and the settlement of such liability.  All statements other than statements of historical fact may be forward‐looking statements.  Forward‐ looking statements are often, but not always, identified by the use of words such as "anticipate", "believe", "expect", "plan", "estimate", "potential", "will", "should", "continue", "may", "objective" and similar expressions.  The forward‐looking statements are based on certain key expectations and assumptions made by the Company.  Although the Company believes that the expectations and assumptions on which the forward‐looking statements are based are reasonable, undue reliance should not be placed on the forward‐looking statements because the Company can give no assurance that they will prove to be correct.  Since forward‐looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties.  Actual results could differ materially from those currently anticipated due to a number of factors and risks.  These include, but are not limited to, risks associated with the oil and gas industry in general (e.g., operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to production, costs and expenses; and health, safety and environmental risks), commodity price volatility, price differentials and the actual prices received for products, exchange rate fluctuations, legal, political and economic instability in Peru, access to transportation routes and markets for the Company's production, changes in legislation affecting the oil and gas industry and uncertainties resulting from potential delays or changes in plans with respect to exploration or development projects or capital expenditures.  In addition, the Company cautions that current global uncertainty with respect to the spread of the COVID-19 virus and its effect on the broader global economy may have a significant negative effect on the Company.  While the precise impact of the COVID-19 virus on the Company remains unknown, rapid spread of the COVID-19 virus may continue to have a material adverse effect on global economic activity, and may continue to result in volatility and disruption to global supply chains, operations, mobility of people and the financial markets, which could affect interest rates, credit ratings, credit risk, inflation, business, financial conditions, results of operations and other factors relevant to the Company.  Please refer to the risk factors identified in the Company's annual information form for the year ended December 31, 2018 and management's discussion and analysis for the three and nine months ended September 30, 2019 which are available on SEDAR at www.sedar.com.  The forward‐looking statements contained in this press release are made as of the date hereof and the Company undertakes no obligation to update publicly or revise any forward‐looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.

 

  FOFI DISCLOSURE: This press release contains future‐oriented financial information and financial outlook information (collectively, "FOFI") about PetroTal's temporary shut down of operations, the anticipated resumption of operations, storage capacity, cost reductions, pipeline transportation arrangements, liability under the Swap Contract and Sales Contract and components thereof, all of which are subject to the same assumptions, risk factors, limitations and qualifications as set forth in the above paragraphs.  FOFI contained in this press release was approved by management as of the date of this press release and was included for the purpose of providing further information about PetroTal's anticipated future business operations.  PetroTal disclaims any intention or obligation to update or revise any FOFI contained in this press release, whether as a result of new information, future events or otherwise, unless required pursuant to applicable law.  Readers are cautioned that the FOFI contained in this press release should not be used for purposes other than for which it is disclosed herein.

 

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this press release.