MALKA OIL'S BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS
APPROVE THE TRANSACTION WITH GAZPROM NEFT
THE DEVELOPMENT OF MALKA OIL'S BUSINESS AND INITIATIVE TO CHANGES
The Board of Directors (the "Board") has since it took office
investigated different strategic options for the company's future
growth. The options have included organic growth, acquired growth,
joint ventures and divestures. The investigation has principally
looked at expected revenues and costs and has in connection therewith
taken into account the prevailing conditions for growth and
profitability for the business. Great emphasis has been put on
evaluation of the geological conditions, but material efforts have
also been made to clarify legal status. For the purposes hereof
external expertise has been commissioned.
The company's block 87 has geological potential but also contains
difficult technical challenges. The investment costs for extractions
of the reserves will most likely be material, creating substantial
risks for a small sized company like Malka Oil. Furthermore, the
subsidiary STS-Service is as previously reported involved in a number
of legal disputes which are time consuming and costly for the
company.
In consequence hereof, the board of directors and the management wish
to divest STS-Service and block 87.
If the general meeting approves the transfer it is the intention of
the Board that the company shall continue to conduct its business in
accordance with the object stated in the articles of association
based on a revised business plan. The shareholders of the company
will be summoned to attend a new shareholders meeting in connection
with the completion of the sale at which time the revised business
plan will be presented to the shareholders for approval by the
shareholders.
ESTIMATED VALUE FOR THE SHAREHOLDERS
The value of the transaction on a debt-free basis amounts to SEK
820,000,000. Following deductions for sale- and other transaction
costs the sale is expected to result in a price of approx. SEK
780,000,000 corresponding to approx. SEK 0.19/share.
As is evident by this information material a sale at this level will
result in a loss in comparison to previously reported evaluations of
the company's oil assets. The Board has in its previous reports
maintained a valuation which in connection with assumptions made on
future investments, looked at a long-term extraction of the oil
reserves of the Russian subsidiary.
During the review of the strategic alternatives, the Board has,
however, identified the abovementioned problems which have lead to
the proposal to divest STS-Service together with its block license.
During the structured sales process, in which a number of potential
buyers have placed bids for STS-Service, it has been evident that the
valuation that the market players have been willing to pay, is
essentially lower than the valuation which has been maintained so
far.
SHAREHOLDERS SUPPORTING THE TRANSACTION
A majority of the shareholders registered to attend the general
meeting have expressed their support for the transaction and have
committed to vote in favour of it at the extraordinary general
meeting 17 December 2009.
RECOMMENDATION
The Board is unanimously recommending that Malka Oil's shareholders
approve the transaction at the extraordinary general meeting, 17
December 2009.
Stockholm
The Board of Directors
EXECUTIVE SUMMARY OF THE TRANSACTION
Through the transaction, Gazprom Neft will acquire all shares in
Malka Oil's subsidiary LLC STS-Service, including a group debt Malka
Oil has against the subsidiary. The transaction is expected to be
completed during February 2010.
THE PRICE for the shares and the group debt amounts to SEK
820,000,000.
THE TRANSACTION is subject to approval by the General Meeting of
Malka Oil and the Federal Antimonopoly Service of Russia ("FAS").
Furthermore Gazprom Neft is under certain circumstances entitled to
withdraw from the transaction.
TIMETABLE
- Extraordinary General Meeting in Malka Oil AB (publ) 17 December
2009, to approve the transaction.
- Approval from FAS which is expected to be received during February
2010.
The completion of the transaction following approval from the FAS is
expected to occur no later than at the end of February 2010.
Share Transfer agreement
An overview
On 1 December Malka Oil signed a binding Term Sheet with Gazprom Neft
regarding the sale of the subsidiary LLC STS-Service, including a
group debt. Following additional negotiations the Term Sheet has now
been elaborated in a Share Transfer Agreement signed by both parties
on 14 December 2009. The purchase price for the shares in the
subsidiary and the group debt amounts to SEK 820,000,000. The
transaction is estimated to be completed in February 2010. The Share
Transfer Agreement is governed by English law. Any disputes shall be
settled by arbitration in accordance with the Arbitration Rules of
the Arbitration Institute of the Stockholm Chamber of Commerce.
How has the purchase price been determined?
For the purpose of investigating the divesture option, the company
has carried out a structured sale process together with Renaissance
Capital, where a number of potential buyers expressing their interest
have been evaluated. The purchase price has been determined following
bidding between these potential buyers. The bid from Gazprom Neft was
the highest price offered and was thus accepted.
What are the actual and potential costs of the transaction?
The transaction will be charged with costs for financial and legal
advisory services, and certain liquidation costs.
The transaction costs following a realized sale in accordance with
the proposal of the Board is estimated to amount to approx. SEK
40,000,000, of which the greater part relates to the financial
advisory services provided.
Is the transaction done, or are there any risks that it might fail?
In addition to approval from the General Meeting the transaction is
conditional upon approval from FAS and approval from the board of
directors in Gazprom Neft. A decision from FAS is estimated to take
approx. two (2) months to receive. Approval from the board of
directors in Gazprom Neft was obtained on 11 December 2009.
In addition thereto, Gazprom Neft is entitled to withdraw from the
transaction if a material adverse event has occurred before
completion of the deal, which has a significant negative impact on
the subsidiary and its possibility to continue to conduct its
business operations. Gazprom Neft may until 6 months after completion
of the transaction reverse the sale if such an event has been
discovered (provided it occurred prior to completion). The Board
assesses the risk of the occurrence of any such event to be low. It
should be noted that events that have an overall effect on the market
as such, for example a decrease in the oil price, will not entitle
Gazprom to reverse the sale.
What would the consequences be if the transaction is not approved by
the shareholders?
If the transaction is not approved, the liquidity situation of the
company will be very strained and the company will in such a
situation shortly have to solve its financing need until a new issue
can be carried out.
Malka Oil after the transaction
Malka Oil will, after the transaction, consist of the Swedish parent
and cash corresponding the purchase price less the transaction costs.
In addition thereto, the subsidiary STS Management in Tomsk will
remain, but will be under liquidation. The company further considers
taking over STS-Service's office in Moscow and maintain a staff or
approx. 5 persons.
The company will elaborate on a complete and detailed business plan
for new investments. This plan will be presented to the shareholders
at an extraordinary general meeting to be held following completion
of the current transaction.
Pro forma Balance Sheet
The Pro forma Balance Sheet illustrating the company after a
transaction in line with the proposal of the Board has been developed
using the following assumptions:
* The balance sheet of the parent company as of September 30, 2009
presented in the financial report for the 3rd quarter has been
used as a base;
* The parent company perspective has been used since practically
all other parts of the group are part of the transaction;
* The expenses for liquidation of the remaining STS Management are
expected to amount to a maximum of approximately 2 million SEK
covering redundancy payments to a limited number of remaining
staff. These expenses have been accounted for in the pro forma
balance sheet as an increase in short-term liabilities and an
increase in the reported loss as part of retained earnings;
* Fees and expenses linked to the transaction have been estimated
at 40 million SEK and therefore the company's cash position has
increased by 780 million SEK (=820 million SEK - 40 million SEK)
as a result of the transaction;
* The price of the deal covers payment for the parent company's
shares in the subsidiary and the parent company's loans to the
subsidiary;
* Previously, the accounting values of the shares in and loans to
the subsidiary have been reported in total as TSEK 1,471,071 in
the company balance sheet. As a result of the transaction, a loss
of TSEK 691,071 (=TSEK 1,471,071 - TSEK 780,000) is booked into
retained earnings;
* The total reported loss including the loss of TSEK 2,000 due to
the liquidation of STS Management amounts to TSEK 693,071.
Estimated value for the shareholders
Following deductions for sale- and other transaction costs the sale
is expected to render a price of approx. SEK 780,000,000
corresponding to approx. SEK 0.19/ share.
Risks
The Board has specifically identified the following risks in respect
of the transaction.
Liquidity risk: The company is currently in a very difficult
liquidity situation. This means that a delay of the sales process may
result in material liquidity problems for the company.
Cost risk: In the event of a delayed sales process the transaction
costs may increase as a result of an extended engagement of the
company's external advisors.
Liability risk: Malka Oil has provided a number of warranties to
Gazprom Neft in the Share Transfer Agreement and a breach against
these warranties may lead to damage claims. Malka Oil has also
granted a number of indemnities in respect of certain key issues for
the transaction, such as ownership to the shares in LLC STS-Service.
The liability in respect of these key issues has been limited to 100
percent of the purchase price. In respect of any other warranties the
liability is limited to 30 percent of the purchase price. To the best
of the knowledge of the Board there is no, and will not be, any
breach of warranties and the risk of damages being incurred is
therefore assessed to be low. Except for the key issues the warranty
period is limited to twelve (12) months from completion of the
transaction.
MALKA
Malka Oil AB is an independent Swedish oil company within exploration
and production active in Tomsk region in western Siberia in Russia.
The subsidiary OOO STS-Service owns an oil licence valid for 25 years
as from April 2005, which gives the company the right to extract all
hydrocarbons found within the Tomsk licence block during the licence
period. The licence block measures just over 1,803 square kilometres,
corresponding to an area of approximately 30 times 60 kilometres and
is located in the very active oil and gas producing north western
part of the Tomsk region. The licence block is surrounded by a large
number of established producing oil and gas fields.
Drilling on the licence block commenced during the Soviet era. The
Soviet authorities drilled four wells, three of which discovered
hydrocarbons, i.e. oil, gas and gas condensate. A vast amount of 2D
seismic data was collected which indicated a volume of approximately
one million tons (which is about eight million barrels) of
recoverable oil reserves classified in accordance with Russian
categories "Proven" (C1) and "Probable" (C2).
Besides the four oilfields that are currently establish in the
licence block, Malka Oil has, based on existing seismic data,
identified another seven structures, i.e. potential oil fields. A
further important dimension that indicates additional potential in
Malka Oil´s licence block is that there was no seismic data for
approximately a third of the licence block and the data acquisition
for this area was completed during spring 2008. After two seasons of
seismic data gathering and interpretation, Sibneftegeofizika, a
reputable Siberian oil service company has presented a seismic report
covering Malka Oil's license block nr 87 in the Tomsk region. This
new report identifies four new potential oil bearing structures in
addition to the seven communicated earlier. These will be subject to
exploration drilling over the next few years.
Tomsk region
Malka Oils licence block 87 is surrounded by a large number of
productive oil and gas fields.
