1. an agreement for the sale of shares in Silurian Hallwood Limited (“JVC”) (“Agreement 1”);
2. an agreement for the sale of shares in Silurian Sp. z o.o (“Silurian”) (“Agreement 2”).
Under Agreement 1, Petrolinvest will acquire 8,680,000 shares, representing a total of 20% shares in JVC, representing a total of 20% of the share capital of JVC and entitling their holder to up to 20% of votes at meetings of the shareholders of JVC (“Shares 1”). The purchase of Shares 1 has been approved by the shareholders and will be effective upon the entry of the Company as the owner of Shares 1 in the register of members of JVC.
Upon the performance of Agreement 1, JVC will have the following shareholding structure:
(i) Petrolinvest – a 49% interest;
(ii) Hallwood Energy Group Incorporated (“Hallwood Energy”) – a 44% interest;
(iii) Mr Wiesław Skrobowski – a 5% interest; and
(iv) Tabacchi – a 2% interest.
The purchase price for Shares 1 is PLN 46,400,000 (i.e. approximately USD 16,000,000), provided that JVC is valued at PLN 232,000,000 (i.e. approximately USD 80,000,000). The Company is furthermore required to make additional payments to Tabacchi for Shares 1, i.e.:
a) two additional Bonus Payments:
(i) constituting 80% of the difference between the valuation of JVC immediately after the planned private placement based on the offer price to be paid by the investors in the planned private placement and the value of Shares 1 taking into consideration the valuation of JVC on the date of Agreement 1; and
(ii) constituting 80% of the difference between the valuation of JVC immediately after the planned initial public offering based on the offer price to be paid by the investors in the planned initial public offering and the value of Shares 1 taking into consideration the valuation of JVC immediately after the planned private placement based on the offer price to be paid by the investors in the planned private placement, and
b) three Adjustment Payments in the amount calculated based in the formulas included in Agreement 1:
(i) determined as at the date of Agreement 1 and constituting 100% of the difference between the nominal value of shares in Petrolinvest to be issued to Tabacchi on the date of Agreement 1 and the average closing price of the Petrolinvest shares at the Warsaw Stock Exchange during ten trading days before the date of Agreement 1;
(ii) determined one day following the private placement of JVC and constituting 100% of the difference between the nominal value of shares in Petrolinvest to be issued to Tabacchi immediately after the planned private placement of JVC and the average closing price of the Petrolinvest shares at the Warsaw Stock Exchange during ten trading days before the planned private placement of JVC;
(iii) determined one day following the planned initial public offering of JVC and constituting 100% of the difference between the nominal value of shares in Petrolinvest to be issued to Tabacchi immediately after the planned initial public offering of JVC and the average closing price of the Petrolinvest shares at the Warsaw Stock Exchange during ten trading days before the planned initial public offering of JVC.
(hereinafter jointly referred to as “Additional Payments 1”).

The purchase price for Shares 1 and Additional Payments 1 will be contractually set-off between the parties to the  agreement against the price for the newly issued shares in the Company, which will be issued to Tabacchi, as the holder of Subscription Warrants of the Company. For the purpose of the contractual set-off Petrolinvest shall issue to Tabacchi Subscription Warrants (“Subscription Warrants 1”) on a free of charge basis, entitling Tabacchi to subscribe for such number of shares in the Company, the nominal value of each will correspond to the purchase price for  Shares 1 and Additional Payments 1, whereas the number of Subscription Warrants 1, which will be issued before the conditional increase in the share capital of the Company cannot exceed 7,100,000. The Petrolinvest shares issued to Tabacchi, will be issued within the conditionally increased shares capital of the Company. The Company undertook to procure that these shares are admitted to trading on the Warsaw Stock Exchange (Giełda Papierów Wartościowych w Warszawie S.A.).

The parties to Agreement 1 agreed that in the case where Petrolinvest fails to comply with its obligation to issue Subscription Warrants 1 to Tabacchi, Tabacchi will be entitled to repurchase the corresponding number of Shares 1 for their nominal value as of the date of Agreement 1.

Moreover, under Agreement 1 Tabacchi is required to provide funding to the Company, at its request, of up to PLN 10,000,000, in the form of cash payments to the share capital of the Company. The aforementioned payments will entitle Tabacchi to subscribe for the relevant number of shares in the Company with a nominal value of PLN 10 each.

The intention of the shareholders of JVC is to transform JVC into a public limited company (Plc.) and to cooperate to proceed to a private placement of JVC and have the shares in JVC admitted to trading on the AIM (London). JVC (directly or through Silurian Energy Services Sp. z o.o. (“SES”), in which it holds a 100% interest) specialises in the exploration of crude oil and gas, the offering of drilling, hydraulic fracturing consultancy and other shale gas services in Europe. SES holds four licences for the exploration of crude oil and natural gas. Further, SES expects that in the 1st and 2nd quarter of 2012 it will receive two drilling rigs specially designed for exploration of shale gas. Additionally, SES is a party to an agreement with Hallwood Energy (the conclusion of which was announced by the Company in current report No. 71/2011 dated 20 July 2011), whereby Hallwood Energy granted to SES (or its group companies, at SES’s discretion) an irrevocable licence to use, benefit from and offer to third-parties any know-how, technology and intellectual property rights in the area of exploring and production of unconventional gas deposits from sedimentary rock, and specifically the hydra-fracturing technology in the procedure of shale gas production as well as the exclusive right to use specific services of Hallwood Energy for the period of 18 months. In result of the executed agreement SES obtained the exclusive rights to the above throughout Europe. The investment in JVC will allow Petrolinvest to strengthen its position in the sector of rendering services to entities in the business of exploration and production of shale gas.

Furthermore on 23 August 2011 the Company and Tabacchi entered into Agreement 2. Pursuant to Agreement 2, the Company purchased six 6 shares, representing a total of 30% shares in Silurian, representing a total of 30% of the share capital of Silurian and entitling their holder to 30% votes at meetings of the shareholders of Silurian (“Shares 2”).
Under Agreement 2, Silurian has the following shareholding structure:
(i) Petrolinvest – a 90% interest;
(ii) Mr Wiesław Skrobowski – a 10% interest.
Petrolinvest purchased Shares 2 for the price of PLN 60,900,000 (i.e. approximately USD 21,000,000), provided that Silurian is valued at PLN 203,000,000 (i.e. approximately USD 70,000,000). The Company is furthermore required to make additional payments to Tabacchi for Shares 2, i.e.:
(a) two additional Bonus Payments:
(i) constituting 70% of the difference between the valuation of Silurian immediately after the planned private placement based on the offer price to be paid by the investors in the planned private placement and the value of Shares 2 taking into consideration the valuation of Silurian on the date of Agreement 2; and
(ii) constituting 70% of the difference between the valuation of Silurian immediately after the planned initial public offering based on the offer price to be paid by the investors in the planned initial public offering and the value of Shares 2 taking into consideration the valuation of Silurian immediately after the planned private placement based on the offer price to be paid by the investors in the planned private placement; and
(b) three Adjustment Payments in the amount calculated based in the formulas included in Agreement 2:
(i) determined as at the date of Agreement 2 and constituting 100% of the difference between the nominal value of shares in Petrolinvest to be issued to Tabacchi on the date of Agreement 2 and the average closing price of the Petrolinvest shares at the Warsaw Stock Exchange during ten trading days before the date of Agreement 2;
(ii) determined one day following the private placement of Silurian and constituting 100% of the difference between the nominal value of shares in Petrolinvest to be issued to Tabacchi immediately after the planned private placement of Silurian and the average closing price of the Petrolinvest shares at the Warsaw Stock Exchange during ten trading days before the planned private placement of Silurian; and
(iii) determined one day following the planned initial public offering of Silurian and constituting 100% of the difference between the nominal value of shares in Petrolinvest to be issued to Tabacchi immediately after the planned initial public offering of Silurian and the average closing price of the Petrolinvest shares at the Warsaw Stock Exchange during ten trading days before the planned initial public offering of Silurian;
(hereinafter jointly referred to as “Additional Payments 2”).
The purchase price for Shares 2 and Additional Payments 2 will be contractually set-off between the parties to the  agreement against the price for the newly issued shares in the Company, which will be issued to Tabacchi, as the holder of Subscription Warrants of the Company. For the purpose of the contractual set-off Petrolinvest shall issue to Tabacchi Subscription Warrants (“Subscription Warrants 2”), on a free of charge basis, entitling Tabacchi to subscribe for such number of shares in the Company, the nominal value of each will correspond to the purchase price for Shares 2 and Additional Payments 2, whereas the number of Subscription Warrants 2, which will be issued before the conditional increase in the share capital of the Company cannot exceed 9,400,000. The Petrolinvest shares issued to Tabacchi, will be issued within the conditionally increased shares capital of the Company. The Company undertook to procure that these shares are admitted to trading on the Warsaw Stock Exchange (Giełda Papierów Wartościowych w Warszawie S.A.).

The parties to Agreement 2 agreed that in the case where Petrolinvest fails to comply with its obligation to issue Subscription Warrants 2 to Tabacchi, Tabacchi will be entitled to repurchase the corresponding number of Shares 2 for their nominal value as of the date of Agreement 2.
Moreover, under Agreement 2 Tabacchi is required to provide funding to the Company, at its request, of up to PLN 20,000,000 in the form of cash payments to the share capital of the Company. The aforementioned payments will entitle Tabacchi to subscribe for the relevant number of shares in the Company with a nominal value of PLN 10 each.

The intention of the shareholders of Silurian is to transform Silurian into a joint-stock company (spółka akcyjna) and to cooperate to proceed to a private placement of Silurian and have the shares in Silurian admitted to trading on the stock exchange within an initial public offering. Silurian currently holds five licences for the exploration of crude oil and natural gas on the total area of 4,082.10 km?. The investment in Silurian will allow Petrolinvest to strengthen its position in the sector of rendering services to entities in the business of exploration and production of shale gas in Poland.

An increase in the Company’s capital engagement in JVC and Silurian results from the development strategies  currently being implemented by these companies, and specifically their planned stock exchange debut. The assets invested may be used by the Company for collateral for debt financing currently held by the Company as well as new financing required for the complete performance of the investment programme on the Shyrak structure and based on the Emba licence aimed to commercially extract hydrocarbons from those structures.

Download current report no. 83/2011