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Caspian Sunrise - Acquisition of the Caspian Explorer

1          Introduction


The Board of Caspian Sunrise is pleased to announce the proposed acquisition of the Caspian Explorer, a drilling vessel capable drilling exploration wells to depths of up to 6,000 meters in extremely shallow water, for a consideration of $25 million to be satisfied by the issue of 160,256,410 new Ordinary shares at a price of 12p per share, a premium of 27.7 per cent to the closing mid-market price on 20 January 2020.


As the majority owner of the Caspian Explorer is a member of the Oraziman family the Acquisition is a related party transaction.


As a result of the Acquisition the Oraziman's family's interest in the Company would increase from 42.9% to 44.2%. The Panel has given its consent that the issue of shares to the Oraziman Family in connection with the acquisition of the Caspian Explorer does not require the Oraziman Family to make a mandatory Rule 9 offer under the Takeover Code (pursuant to Note 4 on Rule 9.1 of the Code) and accordingly does not require Independent Shareholders to vote on a waiver of the obligations of the Oraziman Family under the same rule.


Later today a Circular will be sent to shareholders to convene a General Meeting to be held at 11.00am Thursday 13 February 2020 at the offices of Fladgate 16, Great Queen Street, London WC2B 5DG to consider the resolutions necessary to approve the acquisition of the Caspian Explorer (the "Acquisition"). A copy of the Circular will be made available on the Company's website www.caspiansunrise.com


2          Background to the Acquisition


The Directors believe that the Company's flagship asset BNG has the potential to become extremely valuable, in particular on the assumption that the deep wells will flow at commercial rates.  The Directors also have high hopes with regard to the 3A Best Contract Area. However, these are not the only oil and gas assets of value in Kazakhstan.


To date Caspian Sunrise has focused exclusively on on-shore exploration and production.


In parts of the Northern Caspian Sea, where the Company's management believe there are attractive oil producing prospects, the water levels are extremely shallow and cannot be explored with traditional deep water rigs.


The principal ways of exploring these properties are either from a land base or by the use of a specialist shallow drilling vessel.  Land based options typically involve either the creation of man-made islands from which to drill as if onshore or less commonly drilling out from an onshore location.  Both are expensive compared to the use of a specialist drilling platform.


The Independent Directors believe the Caspian Explorer to be the only currently operational drilling vessel of its type capable of operating in water as shallow as 2.5 meters in the Caspian Sea. Further, given the lead times and construction costs, the Independent Directors do not expect a new competing drilling vessel to enter the market in the next few years.


Offshore exploration is generally more expensive and complicated than on-shore exploration, with typically higher costs.  Accordingly, it would unusual for a company the size of Caspian Sunrise to seek to develop offshore assets without a partner.


The Independent Directors believe the opportunities for participation in the exploration of these offshore blocks in the Northern Caspian Sea would be significantly enhanced should the Company own a suitable shallow water drilling vessel.


In the event ownership did not allow the Company to participate directly in the exploration of these shallow water blocks the Caspian Explorer could be used by other exploration group at rates estimated at up to $25 million per annum.


3          The Caspian Explorer


Introduction


The Caspian Explorer is a drilling vessel designed to operate in the extreme shallow waters of the Northern Caspian Sea.


The Caspian Explorer was conceived of by a consortium of leading Korean companies including KNOC, Samsung and Daewoo Shipbuilding.  The vessel was assembled in the Ersay shipyard in Kazakhstan between 2010 and 2011 for a construction cost believed to be approximately $170 million. The total costs after fit-out are believed to have been approximately $200 million.


The Caspian Explorer became operational in 2012 at a time of relatively low oil prices and reduced exploration activity in the Northern Caspian Sea.


In 2017, the Korean consortium decided to sell the Caspian Explorer by way of a competitive tender with the buyer being KC Caspian Explorer LLP.


Operational characteristics


The Caspian Explorer:


·    operates principally between May and November as the Northern Caspian Sea is subject to ice in the winter months


·    operates in depths between 2.5 meters and 7.5 meters

·    can drill to depths of 6,000 meters


·    typically has a crew to operate the drilling vessel of 20


·    has accommodation for approximately 100


·    costs approximately $100,000 per month while moored in port


·    is generally able to pass on other costs incurred while operational to the clients hiring the vessel


Commercial activity


In 2017, the Caspian Explorer was hired out to a KazMunaiGas / Indian state oil company joint venture for $28 million after costs and drilled one exploration well to a depth of 3.5 km.


In 2018, the Caspian Explorer was hired out KazMunaiGas for up to $24 million drilling one exploration well to a depth of 1.8 km.


The Caspian Explorer did not operate in 2019.


Financial information.


The unaudited consolidated profit for Prosperity Petroleum for the year ended 31 December 2018, was $7 million on revenues of $18 million.  The net assets at 31 December 2018 were $53 million.


4          Summary of the terms and conditions of the Acquisition


Terms


Under the terms of the Share Purchase Agreement  the Company will acquire the entire issued share capital of Prosperity Petroleum for a consideration of $25 million.


Prosperity Petroleum is registered in the United Arab Emirates and is the sole shareholder of KC Caspian Explorer LLP the Kazakh registered entity which owns a 100 per cent interest in the Caspian Explorer.


The Prosperity Petroleum shares to be acquired will be fully paid and free from any pre-emption right, conversion right, option, mortgage, charge, pledge, lien, hypothecation, assignment, security interest, retention of title or other encumbrance of any kind and together with all the rights attaching to those shares.


The Share Purchase Agreement and any dispute or claim arising out of, or in connection with it (including non-contractual dispute or claim) are governed by and construed in accordance with English law.  The court of England and Wales are to have exclusive jurisdiction to settle any dispute or claim (including non-contractual disputes or claims) arising out of the Share Purchase Agreement.


Aibek Oraziman owns 60 per cent of the shares of Prosperity Petroleum.


The purchase consideration will be satisfied by the issue of 160,256,410 new Ordinary Shares.


On completion of the Acquisition Prosperity Petroleum will become a wholly owned subsidiary of the Company.


Conditions


Completion of the Acquisition is dependent on amongst other things:


1          The consent of the Kazakh Committee for Regulation of Natural Monopolies and Competition Protection (or its legal assignee) for economic concentration pursuant to Articles 200.1 and 201.1.2 of the RK Entrepreneurial Code having been obtained;


2          The consent of the Republic of Kazakhstan ministry of Energy (or its legal assignee) to the issuance of new shares of the Buyer as objects connected with the subsoil use pursuant to Articles 42.1.6 and 44.1 of the RK Code Concerning Subsoil and Subsoil Use having been obtained;


3          The passing at the General Meeting of Resolutions 1 & 2;


4          The approval of the companies registrar of the Jebel Ali Free Zone Authority to the transfer of the shares in Prosperity Petroleum from the Sellers to the Company ("JAFZA Registration"); and


5          Admission of the Consideration Shares occurring by the long stop date of 30 June 2020 (unless extended by agreement of the parties)


But all or any of the conditions (other than the passing at the General Meeting of Resolution 1) may, if capable of waiver, be waived (either in whole or in part) at any time by the Company.


Conduct of business


Pending completion of the Acquisition the Sellers will procure that Prosperity Petroleum and its subsidiaries will:


1          continue to carry on the business in the normal course in compliance with all laws and regulations applicable to them and in the same manner as the business has been carried on before the date of this Circular so as to maintain the business as a going concern with a view to profit; and


2          do not conduct their affairs in a manner which could reasonably be considered as damaging or otherwise prejudicial to goodwill or relationships with customers, suppliers or employees.


Certain customary specific restrictions on the conduct and operations of Prosperity Petroleum and its subsidiaries (including restrictions on material changes of business, the granting of security over assets, and the issuance of further shares) are set out in the Share Purchase Agreement.


Termination of rights


The Company is entitled (but not obliged) to terminate the Share Purchase Agreement prior to completion of the Acquisition in the event:


1          of a material breach of warranty or other provision of the Share Purchase Agreement, or


2          of a material breach of the conduct of business restrictions referred to above, or


3          that a material adverse change occurs to the business, operations, assets or liabilities of Prosperity Petroleum.


Warranties and claim limitations


The Share Purchase Agreement contains customary warranties from the Sellers to the Company.  The maximum aggregate liability of the Sellers shall not exceed the pound Sterling equivalent of US$25 million at an exchange rate of £1 = $1.30 in relation to warranty claims. The liability of the Sellers in respect of warranty claims shall terminate 24 months from the date of completion of the Acquisition, except in respect of any warranty claims of which notice was given to the Sellers prior to the end of the 24 month period. The liability of the Sellers in respect of any warranty claims notified prior to the end of the 24 month period.


The liability of the Sellers in respect of any warranty claims notified prior to the end of the 24 month period shall terminate unless legal proceedings in respect of the relevant warranty claim has not commenced by being issued and served within nine months after giving notice of such claim. The Company will have recourse to Consideration Shares held by the Sellers in securing satisfaction for any warranty claims.


Completion timing


Shareholders should note that the timing of the Caspian Explorer Acquisition is conditional on the satisfaction of all of the Acquisition Conditions, including in particular receipt of the approval from the appropriate Kazakh authorities, the likely timing of which are not know as at the date of the publication of this announcement. The Company will announce the satisfaction of all Acquisition Conditions and the definitive timetable in due course. The long stop date for the satisfaction of all Acquisition Conditions is 30 June 2020.


If the Acquisition Conditions are not satisfied by this date, and the date is not extended by agreement between the parties, the Company will not issue the Consideration Shares and the Acquisition will not complete.


5          Reasons to vote in favour of the Acquisition


The Company's management believe it is in the Company's interest to participate in the exploration of potential oil producing blocks in the Northern Caspian Sea.


Ownership of the only drilling vessel of its type believed to be currently operational to explore the shallow parts of the region is expected to permit the Company to be invited into consortia formed to explore these assets.


In the event direct participation in the relevant blocks is not possible the Independent directors believe an attractive financial return could be generated by hiring out the Caspian Explorer to third parties.


The consideration shares are being issued at a premium of 27.7 per cent to the closing mid-market price on 20 January 2020.


6          Concentration of Ownership


Following the completion of the Acquisition the Oraziman family's shareholding in the Company will increase from 42.9% to 44.2%. The Independent Directors do not believe this is materially detrimental to the Company.


The Panel has given its consent that the issue of shares to the Oraziman Family in connection with the Acquisition does not require the Oraziman Family to make a mandatory Rule 9 offer under the Takeover Code (pursuant to Note 4 on Rule 9.1 of the Code) and accordingly does not require the obligations Independent Shareholders to vote on a waiver of the Oraziman Family under the same rule.


7          Lock-in arrangements


Pursuant to the Share Purchase Agreement, each of the Sellers have undertaken to the Company, subject to certain exemptions, not to dispose of any of the Consideration Shares for a period of three months from the completion of the Acquisition.


Such restriction will not apply, inter alia, in the event of the death of the relevant individual or an intervening court order, or to the acceptance of an offer for the Company (for which the relevant Seller may give an irrevocable undertaking to accept), or where the Company agrees to waive the restriction.


8          Relationship Agreement


The Company and each member of the Oraziman Family will enter into a relationship agreement pursuant to which each member of the Oraziman Family will undertake to the Company and to WH Ireland, in or acting in their capacity as Shareholders and not in any other capacity, that he/she will use the voting powers attaching to the Ordinary Shares held by him / her to, amongst other things, ensure no directors are appointed or removed without the consent of the board, ensure the board comprises at least two independent directors and to ensure that any committee of the board of the Company is comprised of a majority of independent directors.


Each member of the Oraziman Family will also agree not to do anything that would have the effect of preventing the Company complying with the AIM Rules or other applicable laws or seek to cancel the admission of the Ordinary Shares to trading on AIM. Further, transactions between the Company and any member of the Oraziman Family, in or acting in their capacity as Shareholders and not in any other capacity must be approved by a majority of the independent directors.


The relationship agreement will be effective from the earlier of  Admission of the Consideration Shares until such time as the Oraziman Family ceases to hold, in aggregate 20 per cent or more of the aggregate voting rights in the Company. The relationship agreement is covered by English law and the courts of England have exclusive jurisdiction to settle any dispute arising in connection with the relationship agreement.


9          Irrevocable Undertakings


Edmund Limerick has provided an irrevocable undertaking to vote in favour of the Company and WH Ireland to vote in favour of all the Resolutions in respect of 4,095,000 shares representing approximately 0.22 per cent of the issued share capital.


10        Related Party transaction


Sixty percent of the shares in the company owning the Caspian Explorer are held by Aibek Oraziman, the adult son of Kuat Oraziman, CEO and an 18.8 per cent shareholder in the Company. As a result of the Oraziman's family interest in the Caspian Explorer the Acquisition is under Rule 13 of the AIM Rules for Companies.


The Independent Directors consider, having consulted with WH Ireland, that the terms of the Acquisition on the terms of the Share Purchase Agreement are fair and reasonable insofar as shareholders of Caspian Sunrise are concerned.


Comment


Clive Carver, Executive Chairman commented


"Acquiring the Caspian Explorer will allow the Company to participate in the further development of the Northern Caspian Sea, either directly via participation in an exploration consortium, or indirectly by hiring the vessel to others active in the region."

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