Monetisation of Ombrina Mare Arbitration Award
The information contained within this Announcement is deemed by Rockhopper Exploration plc to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014 as it forms part of UK law by virtue of the European Union (Withdrawal) Act 2018 ("MAR").
20 December 2023
Rockhopper Exploration plc
("Rockhopper" or the "Company")
Monetisation of Ombrina Mare Arbitration Award
Rockhopper Exploration plc (AIM: RKH), the oil and gas company with key interests in the North Falkland Basin, announces its entry into a funded participation agreement (the "Agreement") with a regulated specialist fund with over $4bn in investments under management that has experience in investing in legal assets (the "Specialist Fund") to monetise its ICSID Award (the "Award"), in relation to the arbitration against the Republic of Italy relating to the Ombrina Mare oil field (the "Arbitration"). The Award was previously announced on 24 August 2022.
Key terms of the Agreement
· Rockhopper to retain legal and beneficial ownership of the Award
· Under the terms of the Agreement, the Specialist Fund will make cash payments to Rockhopper in up to three tranches:
Ø Tranche 1 - Rockhopper will retain approximately €15 million of an upfront payment of €45million on completion. As previously disclosed, Rockhopper entered into a litigation funding agreement in 2017 under which all costs relating to the Arbitration from commencement to the rendering of the Award were paid on its behalf by a separate specialist arbitration funder (the "Original Arbitration Funder"). That agreement entitles the Original Arbitration Funder to a proportion of any proceeds from the Award or any monetisation of the Award. Rockhopper has entered into an agreement with the Original Arbitration Funder to pay €26 million of the Tranche 1 proceeds to discharge all of its liabilities under the agreement with the Original Arbitration Funder. In addition, Rockhopper is due to pay certain success fees to its legal representatives. After making these payments, Rockhopper will retain approximately €15million of the Tranche 1 payment and 100 per cent of all Tranche 2 and 3 payments.
Ø Tranche 2 - Additional contingent payment of €65 million upon a successful annulment outcome. Should the Award be partially annulled and the quantum reduced as a result, then Tranche 2 will be reduced such that the amounts under Tranche 1 and Tranche 2 shall be adjusted downward on a pro-rata basis. For example, if the quantum of the Award is reduced by 20%, then the amounts under Tranche 1 and Tranche 2 shall be reduced by 20%. For the avoidance of doubt, the amounts under Tranche 1 and Tranche 2 shall not reduce below €45m in any circumstance.
Ø Tranche 3 - Potential payment of 20% on recovery of amounts in excess of 200% of the Specialist Fund's total investment including costs.
· Tax will also be payable on Rockhopper's share of the proceeds from the monetisation of the Award. These calculations are complex and are unlikely to be resolved for some months but Rockhopper currently estimates that the approximate effective tax rate of between 10-15% is likely.
The Specialist Fund will cover all costs related to the Arbitration from the date of this announcement.
Benefits of the agreement
· Materially strengthens Rockhopper's balance sheet with no dilution to shareholders
· De-risks the Award process while maintaining potentially significant upside
· Removes future costs associated with the Award
· Accelerates monetisation when compared to Rockhopper challenging the annulment itself and seeking to enforce against the Republic of Italy, which could take several years
· Allows Rockhopper to focus on its core opportunity in the Falkland Islands
Proceeds from the monetisation will be used by Rockhopper for both working capital, general corporate purposes and towards Rockhopper's equity funding requirements in relation to developing the Sea Lion oil field
Under the terms of the previously announced arrangements with the Falkland Islands Government, it remains the case that Rockhopper is prevented from making distributions, including any form of dividend or share buyback.
Precedent Conditions
Approval will be required from the Falkland Islands Government to the transaction. A further announcement will be made on completion. Should completion not occur by 30.6.24. either side has the right to termination. In the case of non-completion Rockhopper will use proceeds of the Award to provide compensation to the Specialist Funder based on their legal fees incurred.
Samuel Moody, Chief Executive of Rockhopper, commented:
"We are delighted to be able to announce this transaction which provides near-term certainty for Rockhopper and de-risks our exposure to the annulment process, while maintaining potentially significant upside exposure both to a successful annulment outcome and eventual recovery.
In the meantime, work continues refining the phasing of the Sea Lion development in the Falklands and we will make further updates to the market as appropriate. We are hopeful that this new funding will largely or entirely fulfil our equity requirements for Sea Lion which will only become clear once the project and financing have been finalised."
Simon Thomson, Non-Executive Chairman, commented:
"We are aware of a number of international arbitration awards against the Government of Italy where payment remains outstanding. Given this background, and the circumstances of our own dispute, we are therefore pleased to have entered into this agreement, allowing us to secure material value now and remain exposed to future upside in the hands of experienced professional litigators. We look forward to redeploying this capital in Sea Lion which continues to offer significant value for shareholders."
Background
As announced on 23 March 2017, Rockhopper commenced international arbitration proceedings against the Republic of Italy in relation to the Ombrina Mare project.
Following the decision in February 2016 by the Ministry of Economic Development not to award the Company a Production Concession covering the Ombrina Mare field, the Company, with its legal advisers, has considered its options with regard to obtaining damages and compensation from the Republic of Italy for breaching the Energy Charter Treaty ("ECT").
By way of background, the ECT entered into legal force in April 1998 and is designed to provide a stable platform for energy sector investments. The Republic of Italy, as a member of the European Union, was a founding signatory to the ECT.
In addition, the Company announced it had secured non-recourse funding for the Arbitration from the Specialist Arbitration Funder that specialises in financing commercial litigation and arbitration claims.
As announced on 24 August 2022, the arbitration panel unanimously held that the Republic of Italy had breached its obligations under the Energy Charter Treaty (the "Award") entitling Rockhopper to compensation of €190 million plus interest at EURIBOR + 4%, compounded annually from 29 January 2016 until time of payment (except the four-month period immediately following the date of the Award).
The third-party funding agreement with the Original Arbitration Funder does not cover any costs arising past the date of the Award (23 August 2022). The Company recorded $185,000 of legal expenses attributable to the Arbitration in the audited accounts to 31 December 2022. The Award was considered a contingent asset as at 31 December 2022 and was merely disclosed in those same accounts and had no carrying value.
On 20 October 2022, Italy submitted an application to the International Centre for Settlement of Investment Disputes ("ICSID") seeking to annul the Award under Article 52 of the ICSID Convention. The Republic of Italy also requested a provisional stay of the enforcement of the Award pursuant to Article 52(5) of the ICSID Convention. The provisional stay prevented Rockhopper from taking legal action to enforce the Award in any jurisdiction.
Following a hearing on 6 March 2023, the ad hoc committee (the "Committee") convened by ICSID to rule on the annulment issued the following orders with regard to the provisional stay of enforcement:
1: that Italy and Rockhopper (together the "Parties") shall confer - in good faith and using their best efforts to cooperate and find an effective arrangement - for the mitigation of the risk of non-recoupment using a first-class international bank outside the European Union (or as Italy and Rockhopper otherwise agree) to be put into place in anticipation of the termination of the provisional stay of enforcement of the Award. This is to mitigate the perceived risk that, in the event the Award is annulled, Italy may not be able to recover Italian assets seized or frozen by Rockhopper (before the ad hoc Committee issues its decision on annulment) in court enforcement proceedings.
2: that Rockhopper shall, within 30 days of the date of the decision, apprise the Committee of arrangements agreed with Italy for the mitigation of the risk of non-recoupment or that negotiations have failed and, in the latter event, propose concrete arrangements in accordance with the decision for the mitigation of the risk of non-recoupment. Italy may then briefly comment on Rockhopper's proposal within 10 days, constructively highlighting any areas of disagreement between the Parties.
In line with preceding orders and following failure to agree arrangements with the Republic of Italy, Rockhopper submitted its proposed arrangements (the "Escrow Arrangements") to mitigate the risk of non-recoupment on 24 May 2023. On 5 June 2023 Italy submitted its comments on the Escrow Arrangements.
On 11 July 2023, and having received additional comments from the Parties, the Committee issued the following orders with regard to the provisional stay of enforcement:
1: That the provisional stay of enforcement shall terminate 5 business days following the provision by Rockhopper to Italy of documentation that escrow arrangements in the form proposed have been established, provided that Italy does not within those 5 business days submit a reasoned written objection in these annulment proceedings that the escrow arrangements established are not in accordance with the proposed arrangements.
2: Reserves its right to revisit its decision at any time; and
3: Reserves its decision on costs
The Republic of Italy submitted no further comments on the Escrow Arrangements and so the stay of enforcement is now lifted.
The Republic of Italy has not responded to Rockhopper's September 2022 request for payment of €247 million, or to multiple subsequent attempts to engage in negotiating a settlement.
The annulment hearing is currently scheduled to commence in April 2024.
Enquiries:
Rockhopper Exploration plc
Sam Moody - Chief Executive Officer
Tel. +44 (0) 20 7390 0234 (via Vigo Consulting)
Canaccord Genuity Limited (NOMAD and Joint Broker)
Henry Fitzgerald-O'Connor/Ana Ercegovic
Tel. +44 (0) 20 7523 8000
Peel Hunt LLP (Joint Broker)
Richard Crichton/Georgia Langoulant
Tel. +44 (0) 20 7418 8900
Vigo Consulting
Patrick d'Ancona/Ben Simons/Fiona Hetherington
Tel. +44 (0) 20 7390 0234
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