Information and some thoughts on Contract Migration On the first stage of approval ROE had to present its business plan for the development of the Amittilan block, plus all of the work to date was reviewed. This was presented to the Board of Directors of Pemex at a meeting on June 22, 2018, and the Board of Pemex approved the migration of the contract at this meeting. Then it was submitted by Pemex and ROE to the government for review and approval. Apparently this and four other neighbouring blocks have been approved of by Pemex for migration. I did not ask if any have received the final government approval. Management had no idea of how long the Government process will take. A condition of the migration is that ROE has to the complete the current work program which is the Chincontepec remaining wells plus the Upper Jurassic proof of concept well.
With respect to financing I asked if they have sufficient financing to complete the Chincontepec Program, the Upper Jurassic Proof of Concept Well and the Chiapas program. Management indicated he believed they would have sufficient funding and would not have to go back to a share issuance for financing until after these programs were complete. He indicated they would prefer not to do another financing until stock was in the $1.00 range.
When I asked what it will cost to exercise its’ option to increase its’ percentage after migration to move the Amititlan block partnership share from 25% to 65%. I was told there would possible be two stages to it and the first stage will be about $14.5 million and the second stage about $5.5 million and these numbers are in the contracts.
So the following is my understanding of what I think is the likely outcome based on what I was told.
There are possibly two stages. The first stage will have ROE going to 62.5% of the partnership if Pemex retains 40% and this cost will be about $14.5 million. This would mean that Pemex would have 40% and ROE would buy up to 62.5 % of the remaining 60% so ROE would end up with 37.5% of the whole block an increase from its’ current 15%. This move will cost ROE about $14.5 Million.
The second stage occurs if Pemex has to be carried through the first year of the drill program which means Pemex does not pay its share of the costs of drilling and exploration which is a possibility as Pemex may have better places to spend its’ money. Iftshis happens then Pemex share will drop from 40% to 20% and then ROE will have to buy up that second part which will be about another $5.5 Million which would move ROE to a 50% position of the whole block or 62.5 % of the partnership interest. (62.5% of 80% is 50%).
Management gave no indication of how this would get financed. Management has said that ROE may incentivize warrants, but that is only one of many methods that are being looked at. They did indicate that further financing will be a lot easier once the contract migrates.