19th Jul 2007 07:01
Venture Production PLC19 July 2007 19 July 2007 VENTURE PRODUCTION plc Announcement of Strategic Investment in Venture Venture Production plc, the Aberdeen based, UK independent oil and gasproduction company, today announces that 3i Group plc and its affiliates ("3i")and ArcLight Capital Partners, LLC and its co-investors through an affiliate ("ArcLight") (3i and ArcLight together being "the Investors") have agreed to make a significant strategic investment in Venture. In aggregate, 3i and ArcLight will, subject to Venture shareholder approval,make a total investment of over £200 million in Venture. Combined with theirexisting interests this new investment is intended to give each an approximate9.9% stake in Venture on a fully diluted basis. The 3i and ArcLight investments will consist of several elements as follows: - £151 million in newly issued 3.25% unsecured convertible bonds ("CBs") due 2010. The CBs are convertible into newly issued Venture ordinary shares at a conversion price of 915p per share. After an initial holding period of six months the CBs will be convertible into 16.5 million new shares equivalent to 11.6% of Venture's fully diluted share capital. The issue of the CBs will be subject to Venture shareholder approval. The conversion price represents a premium of 20.6% to the closing price on 18th July, 2007 the last trading day prior to this announcement and a 27.3% premium to the volumetrically weighted average share price over the one month prior to this announcement; - Conversion of ArcLight's existing North Sea Gas Partners ("NSGP") interest into new Venture ordinary shares. ArcLight will convert its interest in NSGP into 6.03 million newly issued Venture ordinary shares at a price of 772p per share; - 3i's existing investment in Venture. This consists of 3.59 million shares, which were acquired in 2006 as a result of the sale of CH4 Energy Limited ("CH4") to Venture. CH4 was a Southern North Sea gas production company in which 3i had a significant investment; and - Additional market purchases. 3i and ArcLight intend to acquire additional Venture shares through market purchases to take each of the Investors' stakes in Venture up to approximately 9.9% on a fully diluted basis. The Investors have indicated that in principle (subject to terms and theirrespective internal approvals) they have an interest in providing additionalfuture funding through further equity capital subscription, alongside othersources of equity and debt capital, to support Venture in its North Sea growthstrategy. As part of this strategic investment, provided that 3i and ArcLight each achievea fully diluted interest of at least 9.0%, they will each be entitled tomaintain a non-executive director on Venture's Board. The transactions described above will, taken together, bring in two strategiclong term investors into Venture, both of whom have extensive experience ofinvesting in the upstream energy sector. This investment will both strengthenthe Company's immediate capital base and provide additional financing capacityto support its medium to long term North Sea growth strategy, particularly forpotential acquisitions. Commenting on the news, Mike Wagstaff, Chief Executive of Venture said: "We are delighted to be able to announce these substantial investments by two ofVenture's long term financial partners. Today's investment commitment totalsover £200 million and represents a huge vote of support for Venture's businessmodel and strategy, its team and our competitive position within the North Seaas we enter what we expect to be a period of consolidation within the basin thisis an exciting. In addition, the investment in the Company represents avalidation of the going concern value of Venture and the future growth potentialof our business. I look forward to developing and growing Venture's businessalongside both 3i and ArcLight over the coming months and years." Graeme Sword, Partner and Head of 3i's Oil, Gas and Power team explained: "3i is delighted to be making this further growth capital investment in Venture.We have been a strong supporter of the business and the management team sinceVenture was founded in 1997. We believe that there is considerable opportunityfor both new investment and consolidation in the North Sea and with 3i andArcLight's investment in the company, Venture is the right platform to take fulladvantage of this trend." Commenting on the sale of NSGP for shares and the additional new investment inVenture, Robb Turner, Senior Partner at ArcLight, stated: "Our significant involvement with Venture and its management team over the lasttwo years has demonstrated to us that the company is uniquely positioned to besuccessful as an operator, developer and asset acquiror in the North Sea.Through this series of transactions we will gain greater exposure to Venture'soverall corporate strategy and value creation potential, and be better able tosupport the Company's growth. We view Venture as a core relationship forArcLight, and we will welcome the opportunity to consider future investment inVenture should the company's growth require additional strategic investment." ENDS Contact: Venture Production plcMike Wagstaff, Chief ExecutiveMarie-Louise Clayton, Finance DirectorRod Begbie, Corporate Development Director +44 1224 619 000 Patrick Handley, Brunswick +44 207 404 5959 John MacDonald, Weber Shandwick +44 1224 806 600 3i plcGraeme Sword, Partner and Head of Oil, Gas and Power +44 1224 638 666Rachel Richards, Senior Press Officer +44 20 7975 3573 ArcLightHeidi Milne, Director of Investor Relations +1 617 531 6304 Letter from the Chairman of the Company Venture Production plc (Incorporated and registered in Scotland under number SC169182) Directors: Registered Office:John Charles Morgan (Chairman) 34 Albyn PlaceMark Patrick Nicholls (Senior Non-executive Director) AberdeenMichael John Wagstaff (Chief Executive) AB10 1FWMarie-Louise Clayton (Finance Director)Jonathan David Murphy (Chief Operating Officer)Roderick McIntosh Begbie (Corporate Development Director)Thomas Blades (Non-executive Director)Thomas Ehret (Non-executive Director)Alan Morrison Jones (Non-executive Director)Laurence William Kinch (Non-executive Director) 19 July 2007 To Shareholders and, for information only, to the holders of options under the Share Option Schemes Dear Shareholder, Proposed investments by ArcLight and the 3i Investors and proposed increase in borrowing powers Introduction Venture Production plc ("the Company" or "Venture Production") announced on 19July 2007, a strategic partnership with, and proposed capital subscriptions by,ArcLight and the 3i Investors to further the strategic objectives of theCompany. The Company is proposing to raise £151 million (before expenses)through the conditional subscription by ArcLight and the 3i Investors for cashfor the Convertible Bonds, and has agreed to acquire the interest held byArcLight in NSGP which the Group does not already own, in exchange for the issueof 6,033,906 Ordinary Shares valued at £46.6 million to ArcLight. As the Convertible Bonds are not being offered to existing Shareholders andcontain terms allowing the holders to convert them into new Ordinary Shares, itis necessary to disapply statutory pre-emption rights which requires theapproval of Shareholders. In addition, Shareholders' approval is required for anamendment to the Articles in order to increase the borrowing powers of theCompany to allow the Company to increase its debt facilities in the future. TheAcquisition is not conditional upon Shareholders' approval and no such approvalis sought. The purpose of this document is to provide you with details of the BondSubscription and the Acquisition and to explain why the Board considers thatthese are in the best interests of Shareholders as a whole and recommends thatyou vote in favour of the Resolutions to be proposed at the ExtraordinaryGeneral Meeting. Background to and reasons for the Bond Subscription and the Acquisition Since it entered the UK sector of the North Sea in April 2000, VentureProduction has built its business through the acquisition and development ofproved but underexploited or 'stranded' reserves. Generally, this involvessignificant additional capital investment in the oil and gas fields afteracquisition to increase production and recoverable reserves. Venture Production has chosen to focus its activities in specific core areaswithin the North Sea to build production hubs consisting of multiple fieldssharing common geological characteristics, hydrocarbon type, productionfacilities, export route and common ultimate market for its production. Buildingthese production hubs offers Venture Production economies of scale andefficiencies of operations which Venture Production believes gives it acompetitive advantage in these areas. Venture Production currently has fourproduction hubs: the more mature 'Trees', 'A' Fields and GKA hubs and therecently acquired GMA hub. Venture Production has boosted the average annual production from these threemore mature hubs from approximately 1.4 Mboepd in 2000 to approximately 43.3Mboepd in 2006 and increased proved and probable ("2P") reserves in these threehubs from 31 MMboe at the end of 2005 to 106 MMboe at the end of 2006. Over thesame period, in these three hubs Venture Production has recovered in excess ofits total investment from operating cashflow. Over the last three years, Venture Production has focused on becoming a low-cost, efficient development and production operator and today ranks as the sixthlargest independent operator in the UK sector of the North Sea by gross operatedproduction. In a mature basin such as the North Sea, Venture Productionbelieves that its operating capability, size, scale and strategic and geographicfocus give it a strong competitive position. In recent months, driven by the fundamentals in the global oil and gas industry,Venture Production has seen a significant increase in levels of asset tradingactivity in the UKCS compared to the last few years. This activity isconsistent with historical patterns seen in other mature basins such as the USGulf of Mexico where, as the basin matures, ownership of substantial proportionsof the basin's oil and gas reserves has migrated from larger international oilcompanies to more regionally focused independents. Venture Production believes that it is competitively positioned to capitalise onthis consolidation trend, which it believes will create significantopportunities for Venture Production to expand its business. Venture Productionis therefore seeking to strengthen its financial position to take advantage ofthis opportunity. In addition to raising capital through the Bond Subscription,Venture Production is currently negotiating an increase in the amount andflexibility of its debt facilities to better enable it to expand its businessthrough acquisitions. Through the Bond Subscription and the Sale and Purchase Agreement, VentureProduction is seeking to bring two longer term strategic investors into VentureProduction to make an investment of over £200 million to support VentureProduction in building its North Sea business. Both ArcLight and 3i areexperienced North Sea investors with substantial capital resources and a historyof supporting Venture Production through sizeable investments in the Company. Inaddition, the Investors have each expressed an interest in consideringsubstantial additional future equity investments if requested (subject toagreement of terms and their respective internal approvals) to help VentureProduction execute its North Sea consolidation strategy. This strategicinvestment is intended to form the basis of a longer term relationship with theInvestors which involves the addition of one representative from each Investorto the Board of Venture Production. It is the intention of the Board that, iffurther equity is required to fund future investments all the then currentShareholders will be given the opportunity to participate in accordance withinvestor protection committee guidelines and the listing rules of the UK ListingAuthority. In Venture Production's experience, acquisition opportunities are competitive. In order to be successful, it is necessary to move rapidly and decisively and tooffer certainty of funding to vendors. The Bond Subscription and the furtherpotential funding by the Investors provides Venture Production with considerableadditional financial firepower and credibility as a potential purchaser ofassets in this context. Furthermore, both Investors have considerable experiencein the oil and gas sector, adding further capabilities to the Board as describedbelow. If over time the Board determines that the Group has accumulated capital inexcess of that required to execute the Company's ongoing acquisition anddevelopment strategy, then it is intended that any such surplus capital will bereturned to Shareholders. The Board has demonstrated its commitment to efficientcapital management and capital returns to Shareholders through the recentlyannounced ordinary and special dividends totalling £66 million. Strategic relationship with ArcLight and 3i Venture Production has had a successful relationship with 3i and ArcLight, whichare both large private equity investors with long and successful track recordsof investing in the upstream energy sector. 3i is a world leader in private equity and venture capital with operations inEurope, the United States and Asia. 3i is active across all stages of funding.From early-stage venture capital to growth capital, buyouts and infrastructure,3i invests approximately £1.4 billion a year in some of the most exciting andambitious companies in the world. 3i is the only FTSE 100 company in its sectorand has total funds under management of some £7.0 billion. 3i's Oil, Gas & Powerteam manages an investment portfolio with a value of approximately £500 millionacross the UK, Norway, the US and Singapore. 3i was a founding investor inVenture Production in 1997 and subsequently made a number of investments in theCompany up to the time of its flotation in 2002. 3i currently has a 2.6 percent. stake in the Company as a result of Venture Production's acquisition of3i's stake in CH4 Energy Limited, a private southern North Sea gas productioncompany, for which 3i received Ordinary Shares as partial consideration. ArcLight Capital Partners, LLC ("ArcLight Capital Partners") is one of theworld's leading energy investing firms with more than $6.8 billion undermanagement. ArcLight Capital Partners invests broadly across the entire energyvalue chain including oil, gas, and coal resources and infrastructure; powergeneration; and electric and gas transmission and distribution. Founded in 2001,it is headquartered in Boston with an office in New York City. In April 2006,Venture Production announced the formation of NSGP with ArcLight CapitalPartners and its co-investors ("the ArcLight Group") to acquire and develop gasfields in the southern North Sea alongside Venture Production with an initialtotal financial commitment of $300 million. In addition, in late 2006, VentureProduction and ArcLight Capital Partners formed North Sea InfrastructurePartners ("NSIP") to build and acquire infrastructure in the North Sea. NSIP iscurrently constructing the GKA export pipeline and owns a 25 per cent. stake inthe ETS pipeline. Although the 3i Investors and ArcLight are independent of one another and, forthe purposes of the City Code on Takeovers and Mergers are understood not to beacting in concert with one another, both Investors have been supporters ofVenture Production for some time and share Venture Production's view of theattractive opportunity created by the likely ownership changes of the North Seaoil and gas fields and believe that Venture Production is well placed tocapitalise on these trends over the next several years. Description of the Convertible Bonds The Convertible Bonds will be constituted pursuant to the Bond Instrument.£151,000,000 in principal amount will be issued, of which £75,500,000 isproposed to be issued to each of ArcLight and the 3i Investors under the termsof the Subscription Agreement. The Convertible Bonds will bear a coupon of 3.25per cent. per annum of the principal amount outstanding, payable in semi annualinstalments in arrears. To the extent not then converted, purchased or redeemed,the Convertible Bonds will be redeemed on the final maturity date being threeyears from the date of constitution of the Bonds, or may become redeemable atany time following an event of default under the Bond Instrument. The Convertible Bonds will be convertible at the option of the holder intoOrdinary Shares at any time from six months after their issue at a conversionprice of 915 pence per Ordinary Share, representing a premium of approximately27.3 per cent. over the volume weighted average price of the Ordinary Sharesduring the four weeks prior to the announcement of the Bond Subscription. TheConvertible Bonds will also be convertible during the first six months followingtheir issue in the event of a change of control of the Company. The conversionprice is subject to adjustments to reflect the impact on the market value of theOrdinary Shares of any future discounted rights issues, capital distributionsand certain other changes to the Company's share capital. The Convertible Bondswill not be listed on any exchange, will be freely transferable and do not carryany rights to vote at general meetings of the Company. The Company has agreed to use reasonable endeavours to ensure that any newOrdinary Shares resulting from the conversion of the Convertible Bonds areadmitted to the Official List and to trading on the Main Market operated by theLondon Stock Exchange within 40 business days of conversion. Any such newOrdinary Shares will, when issued, rank in full for all dividends and otherdistributions declared, made or paid thereafter and otherwise pari passu withthe then existing issued Ordinary Shares. Bond Subscription arrangements The Company has entered into the Subscription Agreement with ArcLight and the 3iInvestors under which ArcLight and the 3i Investors have conditionally agreed tosubscribe for the Convertible Bonds at par. The Bond Subscription is conditionalupon, inter alia, the passing of a special resolution authorising theSubscription Agreement and the allotment of Ordinary Shares pursuant to the BondSubscription. The Subscription Agreement also contains customary warrantiesgiven by the Company in favour of ArcLight and the 3i Investors in relation tothe Company and its business. 3i and ArcLight will each receive an arrangementfee of £500,000 or if Shareholders do not approve the Bond Subscription theywill each receive a break fee of £1,000,000. NSGP Acquisition As part of the overall strategic relationship, the Company has entered into theSale and Purchase Agreement with ArcLight's affiliate under which the Companywill acquire the entire issued share capital of NSGP which it does not alreadyown. The Company already holds a 33 per cent. interest in NSGP. Theconsideration for the Acquisition will be the issue by the Company of the NewOrdinary Shares to ArcLight's affiliate. Using a price of 772 pence per OrdinaryShare (being the volume weighted average price of an Ordinary Share for the 5trading days prior to and including 18 July 2007, being the day before the BondSubscription and the Acquisition were announced), this values NSGP atapproximately £69.8 million. In addition to its interests in the Ensign andAmanda discoveries and Agatha exploration prospect, NSGP currently contains£24.5 million in cash. In accordance with the termination provisions of the NSGPpartnership agreements, the NSGP interest has been valued on the basis of anarm's length market based valuation. The Board believes that the acquisition of the ArcLight Group's interests inNSGP in this way simplifies the structure of the Group and has the benefit ofconsolidating ArcLight's interests at the holding company level in a mannerequivalent with those of 3i and other existing shareholders. The Acquisition isseparate from and not conditional on ArcLight's subscription for the ConvertibleBond. The purchase of NSGP by the Company is not subject to or conditional uponShareholders' approval and no such approval is being sought. It is anticipatedthat the Acquisition, and the issue of Ordinary Shares as consideration, will becompleted on or about 24 July 2007. Application will be made for Admission and it is expected that, conditional uponthe Sale and Purchase Agreement otherwise becoming wholly unconditional and notbeing terminated in accordance with its terms, dealings in the New OrdinaryShares will commence on 24 July 2007. The New Ordinary Shares will, when issued,rank in full for dividends and other distributions declared, made or paid on orafter Admission and otherwise pari passu with the existing issued OrdinaryShares. Immediately upon Admission, the Company's issued share capital isexpected to be 142,088,209 Ordinary Shares (assuming no exercise of optionsunder the Share Option Schemes or the exercise of conversion rights under theexisting £29,000,000 4.25 per cent. convertible unsecured bonds 2010 issued bythe Company). The New Ordinary Shares will be eligible for settlement throughCREST. Appointment of Directors The Company has agreed that each of ArcLight and the 3i Investors shall beentitled to nominate a person to be appointed as a non-executive director to theBoard of the Company. Each of ArcLight and the 3i Investors shall be entitled toexercise this right immediately upon completion of the Bond Subscription. If therespective aggregate interests of the 3i Investors or ArcLight in the issuedshare capital of the Company have not reached at least 9.0 per cent. on orbefore 31 December 2007, they will lose the right to non-executive Boardrepresentation. In calculating these aggregate interests, it is assumed that (a)the Convertible Bond has been fully converted into Ordinary Shares and that thetotal issued share capital has been diluted accordingly, (b) the conversion ofthe existing £29,000,000 4.25 per cent. convertible unsecured bonds 2010,constituted by the Company pursuant to an instrument dated 18 July 2005 hastaken place in full, and (c) employee options and other awards under employeeincentive arrangements will be disregarded. After 31 December 2007, if the respective shareholdings of the 3i Investors orArcLight fall below 7.5 per cent. of the diluted share capital of the Company(as described above), they will lose the right to non-executive Boardrepresentation. However, if their respective shareholdings are reduced tobetween 5 per cent. and 7.49 per cent. as a result of inter alia the Companyissuing equity in consideration for an acquisition, each of ArcLight and the 3iInvestors will be able to nominate an observer who will be entitled to attendbut not vote at Board meetings. The 3i Investors and ArcLight have indicated to Venture Production that it istheir intention to increase their shareholdings in the Company up to 9.9 percent. through market purchases over time. The Company notes that the appointment of the two non-executive directors underthis provision will reduce the proportion of independent non-executive directorson the Board. In order to maintain appropriate independent non-executiverepresentation on the Board, the Company intends to appoint one or two furtherindependent non-executive directors to the Board once appropriate candidateshave been identified. Although after taking account of any such appointments,the Company may not fully comply with the Combined Code on Corporate Governancein terms of independent non-executive representation, the Board neverthelessbelieves that, given the size of the Board, the diversity and independence ofinterests represented thereon and the strength of the independent non-executivedirectors, the interests of Shareholders taken as a whole will be fullyprotected. DEFINITIONS The following definitions apply throughout this document, unless the context requires otherwise: "3i" 3i Group plc "the 3i Investors" together, 3i Group plc, 3i Global Growth 2006-08 LP, 3i Pan European Growth 2006-08 LP, Oil Gas & Power Co-invest 2006-08 LP, and Global Growth Co-invest 2006-08 LP "Acquisition" the proposed acquisition of the shares in NSGP held by ArcLight by the Company under the terms of the Sale and Purchase Agreement "Admission" application to the Financial Services Authority and to the London Stock Exchange for admission of the New Ordinary Shares to listing on the Official List and to trading on the main market of the London Stock Exchange becoming effective "ArcLight" ArcLight Capital Partners, LLC through its affiliate NSGP Holdings Limited "Articles" the articles of association of the Company "Board" or "Directors" the board of directors of the Company, whose names appear on page 5 of this document "Mboepd" millions of barrels of oil equivalent per day "Bond Instrument" the instrument to be executed by the Company constituting the Convertible Bonds "Bond Subscription" the proposed subscription by ArcLight and the 3i Investors for the Convertible Bonds "Company" or "Venture Venture Production plcProduction" "Convertible Bonds" the £151,000,000 3.25 per cent. unsecured convertible bonds due 2010 proposed to be issued by the Company to the 3i Investors and ArcLight pursuant to the Bond Subscription "CREST" a relevant system (as defined in the Regulations) in respect of which CRESTCo is the Operator (as defined in the Regulations) "CRESTCo" Euroclear UK & Ireland Limited "CREST Manual" the CREST manual published by CRESTCo as amended or updated from time to time "Extraordinary General Meeting" the extraordinary general meeting of the or "EGM" Company convened for 2.00 p.m. on Wednesday 15 August 2007 (or any adjournment of it) "Form of Proxy" the proxy form sent to Shareholders with this document for use by Shareholders at the Extraordinary General Meeting "Investors" together, the 3i Investors and Arclight "London Stock Exchange" London Stock Exchange plc "MMboe" millions of barrels of oil equivalent "New Ordinary Shares" the 6,033,906 Ordinary Shares allotted and issued pursuant to the Sale and Purchase Agreement "NSGP" North Sea Gas Partners Limited "Official List" the Official List of the UK Listing Authority "Ordinary Shares" ordinary shares of 0.4 pence each in the capital of the Company "Registrars" Lloyds TSB Registrars, The Causeway, Worthing BN99 6DA "Regulations" the Uncertificated Securities Regulations 2001 No. 3755, as amended from time to time "Resolutions" the resolutions to be proposed at the EGM whereby pre-emption rights are disapplied in respect of the issue of the Convertible Bonds and the borrowing powers in the Articles are increased "Sale and Purchase Agreement" the agreement entered into by the Company and ArcLight relating to the acquisition of NSGP "Shareholders" holders of Ordinary Shares "Share Option Schemes" the unapproved share option scheme established by the Company on 7 May 1998; the employee share option scheme established by the Company in March 2002; the share incentive plan established by the Company in October 2003; the long term incentive plan which ran from 1 January 2003 to 31 December 2006; the long term incentive plan established by the Company in June 2006; the employee annual bonus plan established by the Company in 2006; and the annual deferred share bonus plan established by the Company on 2 June 2005 "Subscription Agreement" the conditional agreement entered into by the Company, the 3i Investors and ArcLight details of which are set out in the paragraph on page 9 of this document entitled "Bond Subscription arrangements" "Subscription Proceeds" the £151,000,000 (before expenses) proposed to be raised by the Company pursuant to the Bond Subscription UKCS United Kingdom Continental Shelf "UK Listing Authority" the Financial Services Authority acting in its capacity as the competent authority for the purposes of Part IV of the Financial Services and Markets Act 2000, as amended from time to time "US" or "United States" or " the United States of America, its possessions United States of America" and territories, all areas subject to its jurisdiction or any political sub-division thereof, any state of the United States of America and the District of Columbia Unless otherwise indicated, all references in this document to "pounds sterling", "£", "pence" or "p" are to the lawful currency of the United Kingdom. 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