Two months ago shares of CGX Energy Inc. (TSX-V: OYL.V) were trading as high as 1.49 but the world came crashing down for shareholders on May 8, 2012 as the Canadian-based oil and gas exploration company focused on the exploration of oil in the Guyana-Suriname Basin saw shares plummet from a 1.05 close the previous day to a low of 0.29. It would get worse before it got better as OYL.V eventually fell to a low of 0.285 later in the month but they have been slowly building the share price back up and on Wednesday they hit a high of 0.66. Of course Thursday has been a step backwards for OYL.V as shares have dipped down to a low of 0.50; the lowest they’ve been all week and their trading volume has slumped as well. Obviously it’s going to be difficult for OYL.V to recover from the disappointment regarding the results of the drilling of the Eagle-1 well on their 100% owned and operated Corentyne Petroleum Prospecting License (“PPL”), offshore Guyana.
These were the results, delivered on May 7, 2012, that sent shares crashing as OYL.V detailed “Although wire-line logs provided encouraging results with high resistivities correlating with sandstones that had encountered oil shows, additional open hole logs were necessary to determine the nature of the fluids in those zones. Hence, CMR (combinable magnetic resonance) and MDT (modular formation dynamics) were run and both logs identified the presence of good quality sandstone reservoirs that unfortunately proved to be water bearing.”
Not only did the Eagle-1 well produce poor results but weather delays and mechanical issues related to drilling extended the project from 60 days to 90 days, an extension that added an additional $16 million to the operation that had originally budgeted $55 million. So not only did they get bad news but that bad news cost them $71 million.
Kerry Sully, President and CEO of CGX Energy, did his best to spin the news saying, “Although the results of the Eagle-1 well are disappointing for all stakeholders, this test has gathered valuable information that will assist CGX with determining the drilling location for its next well to be drilled on the Corentyne PPL and for other future targets. The Company’s geosciences team has been interpreting the recently acquired 3D and additional prospects have been identified. In addition, the team has established that the up-dip termination of our Eagle Deep Turonian prospect is at a shallower depth than originally anticipated. Now that the Eagle-1 well has finished drilling and in response to expressions of interest, CGX is re-opening the data room to re-start the joint venture process.” Unfortunately for the company shareholders weren’t buying it and the sell off began.
With the negative news OYL.V announced they would need to raise $20 million in the near future and on May 28, 2012 they announced that Pacific Rubiales Energy Corp (TSX: PRE.TO), which already owns about 18% of CGX shares, would increase its stake in the company to 35% by paying C$30 million as they continue their efforts to enter the offshore oil plays in Guyana.
That C$30 million comes by the way of a private placement in which Pacific Rubiales has subscribed for 85,714,285 units of CGX with each unit consisting of one common share and one-half of one common share purchase warrant of the CGX. Of course this isn’t a done deal just yet as CGX explained “the private placement is subject to approval by the Company’s shareholders as well as acceptance by the Exchange. Shareholder approval will be sought at the Annual and Special Meeting of Shareholders of the Company to be held on June 28, 2012 (or at any adjournment or postponement thereof) (the “Meeting”) by ordinary resolution of shareholders, provided that the votes attached to the Company’s common shares held by Pacific Rubiales and its associates and affiliates will be excluded from the calculation of such approval. Certain of the directors of the Company have entered into voting agreements with Pacific Rubiales pursuant to which they will vote their CGX shares in favour of the private placement at the Meeting. The closing of the private placement is expected to occur five business days following the date that the Company obtains all necessary shareholder and Exchange approvals.”
In need of immediate financing OYL.V has secured the C$30 million from Pacific Rubiales in the form of a promissory note which will be cancelled upon approval of the private placement by the Exchange and shareholders. This puts substantial pressure on CGX to gain the approvals because the alternative is not pretty: “If the approvals have not been obtained on or before July 31, 2012, the promissory note will become payable upon 30 business days notice by Pacific Rubiales to the Company. Prior to July 31, 2012, no interest is payable on the promissory note. However, if the Units are not issued by July 31, 2012 , interest will become payable on the principal amount of the promissory note at a rate of 13.5%, compounded quarterly, until the promissory note is repaid in full. In such a scenario, the Company expects to repay the amounts owing under the promissory note through the issuance of additional equity or the sale of a farm-in interest in one or more of its petroleum agreements.”