Company Update

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN OR INTO THE UNITED STATES, AUSTRALIA, CANADA OR JAPAN

18 February 2016

MADAGASCAR OIL LIMITED

("Madagascar Oil" or the "Company")

Company Update

Madagascar Oil provides the following update on the status of its operations, the Partner Process, its financial position and its funding situation, including the potential requirement for the Company to propose a delisting of Madagascar Oil from AIM.

The Company is also pleased to announce the granting of the Environmental Permit for the Tsimiroro Block 3104 Phase 1a Exploitation by the Office Nationale de l'Environnement ("O.N.E.") of Madagascar and the signing of the Environmental Management Programme ("PGE"). This is the first Environmental Permit issued for an oil exploitation project in Madagascar.

Terms used in this announcement have the same meaning as in the Company's announcement of 29 September 2015.

OPERATIONAL UPDATE

The Group continues to operate the Steam Flood Pilot Facility in Madagascar and currently has over 150,000 barrels of Tsimiroro Crude in its storage tanks at the Tsimiroro Block 3104. Under the Tsimiroro Development Plan, the Group is permitted to undertake domestic sales of its Tsimiroro Crude and the Group is in the process of negotiating offtake agreements with local power suppliers. Whilst it is in advanced negotiations with Symbion Power regarding a Fuel Supply Agreement for the Mandroseza power station, no sales agreement has been concluded and there have been no sales to date. Pursuant to the terms of the Bridge Facility, any revenues from oil sales (less associated transportation costs) are to be applied to repaying amounts outstanding under the Bridge Facility.

On 29 September 2015, the Company announced that, due to storage capacity constraints at the Tsimiroro Facility and in response to the challenging oil price environment that continues to persist today, the Group had decided to scale down operations and production from the Steam Flood Pilot, until such time as an offtake agreement has been signed for the domestic sale of Tsimiroro Crude and the Partner Process has come to a successful conclusion. The scale down is being implemented according to plan, including shut down of steam injection and managed reduction of production to an average daily-rate of 100-150 barrels of oil per day ("bopd").

As announced by the Company on 15 December 2014, Madagascar Oil S.A. has formally requested a two year extension of the exploration periods for blocks 3105, 3106 and 3107 from the Malagasy Government. This formal request was made ahead of the scheduled end date of the current exploration periods and the Group remains hopeful of receiving these extensions in the near future.

ENVIRONMENTAL PERMIT APPROVAL

The process for obtaining the Environmental Permit was launched on 23 June 2015, upon submission of the Environmental and Social Impact Assessment ("ESIA") for Exploitation Phase 1a of the Tsimiroro Block 3104, in accordance with Decree No. 2004-167 (setting compatibility between Investment and Environment) and other legal texts including the Madagascar Petroleum Code and the Production Sharing Contract signed between the Malagasy Government, represented by OMNIS, and Madagascar Oil S.A.

The evaluation of the ESIA lasted over seven months and was conducted by:

- A Technical Assessment Committee ("CTE"), coordinated by O.N.E. for reviewing the technical aspects of the ESIA;

- A Commission of Inquiry and Public Hearing ("CEAP") assessing the social aspects relating to project execution: 11 public consultation sessions were held, including 7 sessions in the municipalities surrounding the Tsimiroro site (Ankondromena, Andramy, Beravina, Betsipolitra, Soaloka, and Ankavandra, Morafenobe), 3 sessions in the local regions (Menabe, Melaky and Bongolava) and a national level Public Consultation (Antananarivo).

During the evaluation process, key issues submitted in the ESIA were studied by the CTE and raised during the public consultation sessions. These included aspects relating to biodiversity, water management, waste management and emissions, management of grazing areas, recruitment, rehabilitation of the national road RN1 / RN1bis and the local content component.

The evaluation process included adjusting the measures suggested by the Group to address, minimise or correct the impacts of its activities on the environment and on the local population. This assessment and the consultations which have followed have resulted in the signing of the Environmental Management Programme ("PGE"), which includes all mitigation measures agreed during the ESIA evaluation.

The granting by O.N.E. of the Environmental Permit and the signing of the PGE for Exploitation Phase 1a is a significant milestone in the enforcement of the Production Sharing Contract signed between Madagascar Oil S.A. and OMNIS, as it is the starting point of the implementation of the Tsimiroro Block 3104 Development Plan, approved by the Malagasy Government in April 2015. This is the first Environmental Permit issued for an oil exploitation project in Madagascar.

Chief Executive Officer, Robert Estill, commented:

"The granting of this Environmental Permit is a significant milestone for the country and for the Company, as it is the first ever permit for the petroleum exploitation industry in Madagascar. We engaged in open and close dialogue with the National Environment Office and public institutions during the process of ESIA assessment and we are looking forward to continuing in this manner. With this permit, Madagascar Oil's goal is to be an exemplary company in the petroleum industry as we proceed with the Tsimiroro field development."

PARTNER PROCESS UPDATE

Since the summer of 2015, the Company has been conducting, with the assistance of Jefferies and other advisers, a "Partner Process", to identify and secure a strategic partner(s), to work with Madagascar Oil on the development and funding of the Tsimiroro Block. The Company can confirm that this Partner Process is continuing, but that it has yet to yield any actionable proposals.

There remain a number of discussions ongoing, but it will take time to confirm whether any of these discussions can be converted into an executable deal and there is no guarantee that any of them will be consummated within any predictable timeframe, if at all.

Under the terms of the Bridge Facility, the Company provided a Lender Report to the lenders on 6 January 2016. In this, the Company reported that it had presented the opportunity to over 140 organisations ranging from E&P companies, oil services companies, private equity firms and private investors. The Lender Report explained that a number of leads were being pursued and were undertaking due diligence including:

· An Asian consortium, including upstream and infrastructure expertise, which was undertaking formal technical due diligence which it hoped to complete within 2-3 months.

· A southern African Investment firm, which had undertaken initial internal due diligence and wished to continue with more in depth due diligence which it estimated would take around 2 months.

· An Asian E&P company, which was potentially interested in an asset farm-in deal and had amassed a significant due diligence team but expected that the due diligence process would take between 2-4 months to complete.

· Various large multinational oil and gas services companies, who were at various stages of due diligence and were potentially interested in arrangements to provide services to the Tsimiroro Block 3104.

As at the date of this announcement, the Company understands that these companies are still interested in the project and can confirm that due diligence is continuing. However, there have been no formal or informal offers received by the Company from any of these parties at this stage and no certainty that any offers will be forthcoming.

FUNDING SITUATION

In parallel with the Partner Process, the Company has also sought to identify alternative sources of short-term funding for the Company, either by way of equity, debt, contractor and offtake partner funding.

With respect to short term funding, as announced on 29 September 2015, the Company entered into a US$21.89 million Bridge Facility, provided by Outrider Management LLC ("Outrider"), BMK Resources Ltd ("BMK"), SEP African Ventures Ltd ("SEP") and the John Paul Dejoria Family Trust ("JEP"), together "the Lenders"). The First Tranche under the Bridge Facility, comprising US$8.9 million of new funds, was received by the Company by 13 October 2015. Under the terms of the Bridge Facility, a further second tranche of up to US$8 million of new funds ("Second Tranche") would be potentially available from 1 February 2016, at the sole discretion of each of the Lenders, if they were satisfied with the progress being made by the Company towards achieving its objectives (including pursuant to the Partner Process).

As at the date of this announcement, approximately US$14.4 million, including rolled up interest, is outstanding under the Bridge Facility, but no Second Tranche funds have been drawn down.

Following discussions during January and early February 2016, the Lenders advised the Company that they were not prepared to provide the full amount available under the Second Tranche of the Bridge Facility, but some of them indicated that they may provide some further funding, subject to additional conditions.

As at 31 December 2015, the Company had approximately US$2.8 million in available cash and US$1.5 million trade and other payables due during the first quarter of 2016. Accordingly, the Company urgently needed to secure additional financing in early 2016 to continue the Group's operations and to allow the Company to operate as a going concern.

The Company has not been successful in identifying any alternative form of short term financing and so has continued negotiations with certain of its Major Shareholders (the "Relevant Lenders"), who also constitute Lenders representing at least 66% by loan value of the outstanding Loan, with regard to their conditions for the provision of further funding, which is required for the Company to continue to operate as a going concern. 

The terms of any further financing, which may be in the form of equity or further debt, are still being discussed with the Relevant Lenders, but one major condition being imposed by them in the discussions is that the Company agrees to call a Special General Meeting to propose the delisting of the Company from AIM, which is discussed further below.

An update with regard to these negotiations and any further funding will be provided in due course.

Shareholders should note that, should agreement not be reached with the Relevant Lenders and Relevant Lenders do not agree to provide further funding to the Company, or they call an event of default pursuant to the terms of the Bridge Facility, the Company would urgently need to secure additional financing.

In the absence of alternative funding being made available, the Board believes that it is probable that the Company would become insolvent and would need to seek a winding-up order in the Bermudan Courts in the very near term.

As set out above, one of the major conditions the Relevant Lenders are seeking to impose on the Company in return for them providing any further financing, is that the Company agrees to call a special general meeting of the Company (the "Special General Meeting") to propose a special resolution to approve the cancellation of admission of the common shares to trading on AIM becoming effective in accordance with the AIM Rules ("Delisting").

Therefore, should financing be secured from the Relevant Lenders, shareholders in the Company should expect that the Company would call such a Special General Meeting to approve the Delisting. The Delisting would require the approval of at least 75% of the votes cast in the Special General Meeting.

Relevant Lenders who have insisted on the calling of this Special General Meeting, as a condition to any financing, currently represent approximately 60.5% of the existing common shares in the Company.

Further announcements on all matters set out in this announcement will be made as and when appropriate.

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