The subject of the Agreement is to define the terms of subscription for shares in the newly established joint-venture company styled Silurian Hallwood Limited (“JVC”) and the terms of implementation of the joint venture by JVC and SES all the shares in which were acquired by JVC.
JVC will (either directly or indirectly through SES which holds four licences for the exploration for crude oil and natural gas deposits) conduct business involving prospecting for crude oil and gas, rendering advisory services related to drilling for and hydro-fracturing as well as other services related with shale gas within the territory of Europe.

Petrolinvest subscribed for 125,860 shares in JVC for the price of PLN 580,000. The said shares constitute 29% of JVC’s share capital and authorise Petrolinvest to exercise 29% of votes at the meeting of shareholders of that company. In result of the Agreement, the JVC shall have the following shareholding structure:
(i) Hallwood Energy subscribed for 44% of shares in JVC;
(ii) Petrolinvest subscribes for 29% of shares in JVC;
(iii) Tabacchi subscribed for 22% of shares in JVC;
(iv) Mr Wiesław Skrobowski subscribed for 5% of shares in JVC.
Additionally, Petrolinvest and Hallwood Energy entered into an understanding whereby they confirmed that 4% of shares in JVC’s share capital (out of the 29% of shares subscribed for by Petrolinvest) have been issued in favour of Petrolinvest in light of Petrolinvest’s past involvement in the operations of Silurian and SES (assuming company valuation at USD 150 million) which is the equivalent of a premium of USD 6 million as referred to in the current report No. 65/2011 dated 7 July 2011.

Moreover, in accordance with the terms of the Agreement, a share purchase agreement was executed on 20 July 2011 whereunder JVC acquired 100% of shares in SES from the SES shareholders, i.e. Silurian (90% of shares in SES) and Mr Wiesław Skrobowski (10% of the shares in SES) for the total price of PLN 1 million. In the past, Petrolinvest has used SES for the development of its business of rendering services to entities who hold licences for exploration and production of shale gas in Poland, and specifically drilling services. SES holds four licences for exploration of crude oil and natural gas deposits and through JVC it has an option for two additional licences. Furthermore, 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, on 20 July 2011, SES and Hallwood Energy executed an agreement whereunder Hallwood Energy granted SES (or companies in its group, at SES discretion), for the price of PLN 1 million, 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 parties intend to transform JVC into a public limited company (Plc.) and, subsequently, to cooperate to conduct a private placement of JVC and to introduce the JVC shares to stock exchange trading on the AIM market (London).

Hallwood Energy specialises in exploration and production of unconventional deposits of gas and one of the leaders in the sector as far as the hydro-fracturing technology used throughout the world in the production of shale gas. Hallwood has extensive long-term experience in the exploration and production of shale gas using the horizontal drills technology and the hydro-fracturing technology. One of the investments that have been recently completed by the Hallwood Group was an investment in the range of USD 120 million in a company producing shale gas in the United States which was sold to a US corporation Chesapeake Energy Corporation for the total sum of approximately USD 535 million.

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. In result of the transaction the Petrolinvest Group will be able to extend the scope of its exploration and production of shale gas services and to develop, thanks to the Hallwood Energy’s know-how and additional financing obtained through private and public placement of shares, its operations in the area of exploration based on its own licences in Poland.

Download current report no. 71/2011