3Legs Resources Corporate Update : News from McNeill.org.uk

3Legs Resources Corporate Update

20 March 2012
3Legs Resources Corporate Update

3Legs Resources plc corporate update

3Legs Resources plc (the "Company"), an independent oil and gas group focusing on the exploration and development of unconventional oil and gas, announces the following operational update.

Key points

Baltic Basin concessions

  • ConocoPhillips, with whom the Company has conducted joint evaluation activities on its Baltic Basin concessions, has given notice of exercise of its call option over the Company's three western Baltic Basin concessions, thereby acquiring a 70% equity interest in and operatorship of these concessions
  • The 2011 exploration programme has enabled the Company to refine its modelling of likely variations in quality and thickness of the shales
  • The 2012 exploration programme includes a vertical well on one of the three western concessions in the second half of 2012, with the option to drill a horizontal section later; further testing on one or both of the two existing horizontal wells, Lebien LE-2H and Warblino LE-1H, is still under consideration
  • Plans for the Company's three eastern Baltic Basin concessions are still under consideration
  • The three eastern Baltic Basin concessions are to be divested into a new legal entity to be retained by the Company under the same terms as the existing Joint Evaluation Agreement; ConocoPhillips will retain the option to acquire a 70% interest in the three eastern concessions, exercisable at any time up until 30 September 2012

Southern Poland concessions

  • Seismic acquisition on the Company's southern Poland concessions is now complete; data has been processed and is currently undergoing interpretation

Forward strategy

  • The Company continues to consider other unconventional resource opportunities; its preferred area of activity remains Europe but other regions of the world will also be considered

Cash position

  • As at 29 February 2012, the Company had unaudited cash and cash equivalents of £48.1 million

Peter Clutterbuck, Chief Executive of 3Legs Resources, said:

"We are very pleased that ConocoPhillips has exercised its call option in respect of our three western concessions in the Baltic Basin. Our objective all along has been to see ConocoPhillips exercise this option and this decision represents a very satisfactory conclusion to almost three years of cooperation in the exploration and appraisal of the Baltic Basin shales. During that period 3Legs Resources as operator has drilled a total of four wells in the Baltic Basin shale play and has safely and successfully drilled, fracced and tested the first two horizontal shale gas wells in Poland. We enjoy an excellent working relationship with ConocoPhillips, which will now move into a new phase as operatorship of the three western concessions passes to ConocoPhillips.

We have developed with ConocoPhillips a basis for the separate treatment of the western and eastern Baltic Basin concessions. This will enable us, together with ConocoPhillips, to continue to progress the exploration and appraisal of our three western concessions. We have already demonstrated that these concessions are more dry gas-prone and hence offer a more attractive risk profile, confirming our original assessment of the basin. Nevertheless, we continue to believe our three eastern concessions also have potential and we will be finalising our plans for these concessions over the coming months, following which a further announcement will be made.

Our Baltic Basin work programme for 2012 is focused on further defining the 'sweet spots' within our western concessions, building on the conclusions learned from our 2011 drilling campaign. We will be taking a measured approach to data gathering and will ensure that we have assembled as full a data set as possible before committing to drilling further horizontal sections. In this context, data-sharing between operators will be of great importance to the future progress of the Baltic Basin shale play, and we will continue to promote this. We are committed to taking the Baltic Basin programme forward from its current exploration phase and the focus from now on will be to drill wells in areas most likely to have the best potential to flow at commercial rates, while further refining frac design."

Baltic Basin concessions

ConocoPhillips, with whom the Company has conducted joint evaluation activities on its Baltic Basin concessions, has given formal notice of exercise of its option to acquire a 70% interest in the Company's three western Baltic Basin concessions, pursuant to the Joint Evaluation Agreement and ancillary documents entered into between the Company and ConocoPhillips in August 2009. Completion of the option exercise must take place by no later than September 2012, whereupon operatorship of the three western concessions will pass to ConocoPhillips. ConocoPhillips has been actively involved in operations to date and accordingly the Company anticipates a smooth transfer of operatorship.

The Company will retain a net 30% interest in the three western concessions, as a non-operator. The three western concessions cover an area of approximately 2,049 sq km (506,000 acres) gross, or approximately 615 sq km (152,000 acres) net to the Company.

The Company and ConocoPhillips are continuing to consider options for the three eastern Baltic Basin concessions. Results to date from the Company's wells and those of other operators in the basin confirm that the eastern concessions are situated in a more liquids-prone part of the basin, whereas the Company has always prioritised the exploration of the more dry gas-prone parts of its concessions, situated further to the west. As the potential for production of liquids in the Baltic Basin becomes better understood, the Company may increase its focus on the eastern concessions, depending on the well results that are obtained.

In order to facilitate the development of a separate strategy for the three eastern concessions, these concessions will be divested into a separate Polish legal entity, which will be a wholly-owned subsidiary of the Company and be subject to equivalent contractual terms as are set out in the Joint Evaluation Agreement. ConocoPhillips will retain an option to acquire a 70% interest in the three eastern concessions, exercisable by giving six months' notice at any time up until 30 September 2012. The three eastern concessions cover an area of approximately 2,338 sq km (578,000 acres) gross.

Following the conclusion of its 2011 exploration programme, the Company has been able to refine further its regional geological model incorporating the results of its two horizontal wells Lebien LE-2H and Warblino LE-1H, as well as data from wells drilled by other operators in the basin which has been acquired through data trades. While its target lower Palaeozoic shales are understood to show considerable lateral continuity across the entire basin, the additional data nevertheless reveals degrees of variability in quality and thickness of the shales which enables a more detailed understanding of the basin. The Company's updated interpretation broadly validates its existing acreage selection and also enables it to project with greater certainty areas within its concessions where it may prioritise activity.

Based on its updated geological interpretation, the Company has agreed with ConocoPhillips a plan for one vertical well to be drilled on its Lebork concession, in the second half of 2012. This well will be extensively evaluated and the parties will retain the flexibility, if considered appropriate, to drill a horizontal section to the well at a later date, which may be then be fracture stimulated and tested. The Company and ConocoPhillips are giving further consideration to options for additional testing of one or both of its two existing horizontal wells Lebien LE-2H and Warblino LE-1H, following the end of winter conditions.

The Company has concluded a number of data exchanges with other operators in the basin, with a view to improving its understanding of the basin geology in the most efficient manner possible. Further exchanges are planned. Data being exchanged includes well logs and core data and in the future is likely to include well completion and frac design, together with test results. The Company firmly believes that data sharing and other similar forms of cooperation amongst operators will be of great benefit in enabling all parties to advance their understanding of the Baltic Basin shales.

Southern Poland concessions

The campaign of 2D and 3D seismic acquisition has now been completed by Acoustic Geophysical Services and this data has been processed. Interpretation results are expected in early second quarter 2012.

Forward strategy

The Company continues to consider adding other unconventional resource opportunities to its portfolio, building on its proven unconventional capabilities and leveraging its existing knowledge of unconventional oil and gas exploration. Looking ahead, its focus will include tight oil and gas exploration opportunities as well as shale oil and shale gas, and while its preferred area of activity remains Europe, the Company considers it also appropriate to include other regions of the world where a company of its size and profile is, in its view, able to operate safely and effectively. The objective will be to build a portfolio optimised for entry cost, risk, timing and upside.

Cash position

As at 29 February 2012, the Company had unaudited cash and cash equivalents of £48.1 million.