Cluff Natural Resources : Preliminary Results (411.25kB)

Cluff Natural Resources Plc / Index: AIM / Epic: CLNR / Sector: Natural Resources 25 April 2019

Cluff Natural Resources Plc ('CLNR' or 'the Company')

Preliminary Results

Cluff Natural Resources Plc, the AIM-quoted natural resources investing company with a high impact exploration and appraisal portfolio focused on the Southern and Central North Sea, is pleased to announce its audited preliminary results for the year ended 31 December 2018 ('FY 2018').

Highlights

•Farm-outof Licence P2252 (which contains the Pensacola Prospect) to Shell UK. Farm-out agreed in February 2019, which includes shooting of new seismic and a contingent well commitment

•Option granted to Shell UK to farm into Licence P2437 (which contains the Selene Prospect), agreed in February 2019. Cash consideration is US$600,000 which includes an initial payment already received, and a balance on completion

•Awarded six additional licences by the UK Oil and Gas Authority with effect from October 2018 covering 10 full and part blocks in the Central and Southern North Sea, in the UK's 30th Offshore

Licencing Round

•Company now has diverse portfolio of seven licences which includes oil as well as gas prospects

•Estimated resource on Dewar oil prospect on Licence P2352 significantly enhanced - now estimated by the Company to contain up to 270 million barrels of oil in place with P50 Prospective Resources of 39.5 million barrels. Farm-out process planned to commence towards end of H1 2019

•£2.75 million (gross) raised by way of equity in 2018

•Cash position of £1.43 million as at 31 December 2018 (2017: £1.02 million)

•Loss for the year £1.66 million (2017: £1.59 million)

•Cash used in operations for the year £1.52 million (2017: £1.43 million)

Chairman's Statement

In my last Chairman's statement, I made some commitments and predictions. These included the Company obtaining a significant number of additional licences in the 30th Round of North Sea awards and securing a farm-out of our 28th Round licences. As we reflect on 2018, not only were we awarded six additional licences in the 30th Round, but on one of them (P2437) we have already signed an option agreement with Shell which provides for them to acquire a 50% interest in the licence and to pay up to 75% of the costs of an exploration well on the Selene prospect. Shell has until 30 April 2019 to exercise this option.

Shell has also farmed into our 28th Round licence (P2252) which contains the Pensacola Prospect, and have committed to conduct a comprehensive seismic acquisition programme at their cost. The commitment also includes a contingent well. It is gratifying to have received the endorsement from Shell of our technical interpretation of both these licences.

On Licence P2248, although we were unable to achieve a further extension, it is our intention to reapply for the licence in the UK's 32nd Licensing Round, which is expected to commence in mid- 2019.

In summary, we have therefore substantially fulfilled the commitments which I made last year, which is testament to the diligence of our executive team in negotiating the two agreements with Shell, together with the expertise of our technical staff in identifying and communicating the merits of the licences. I would also like to note how stimulating and rewarding the whole process of negotiation with Shell proved to be.

There is no question that the North Sea is experiencing a revival of fortune, especially in the context of natural gas. There is the market, an infrastructure and a need which will conspire to keep the North Sea up the agenda of the UK oil & gas industry for another generation.

Earlier this month, I announced my intention to retire following this year's AGM and that Mark Lappin, who has been a Director of the Company since 2016, will succeed me as Chairman.

Since stepping down as CEO last year, the Company's executive management team, with significant input from Mark, has produced a tremendous platform for the next stage of activity and growth via the successful award of six additional licences in the UK's 30th Licensing Round and delivering a transformational farm-out with Shell on one, and possibly two of the Company's licences. As a result of the farm-out with Shell, there is now a clear transition into a period of intensive oil and gas operations which will see, inter alia, the acquisition of 3D seismic in the summer of this year to support an investment decision for the drilling of at least one and potentially two wells. This is therefore the ideal time to pass the Chair to Mark whose wealth of operational experience, particularly in the North Sea, is perfectly suited to guide the business through this next exciting phase of its development.

I look forward to seeing our company continue to grow and prosper through this next stage of development.

J G Cluff

Chairman

24 April 2019

Chief Executive's Statement

The last year has undoubtedly been transformational for our company. This time last year, the Company's portfolio was limited to two licences and the Company did not yet have any partners. The Company now has a significantly enhanced and diversified portfolio of investment assets totalling seven licences, and is partnered with one of the world's largest oil and gas companies as a result of securing a farm-out over one and possibly two of its licences.

The Company has also strengthened its balance sheet in the course of the year, ending the year in a stronger financial position, while continuing to drive forward investment in our portfolio.

From an operational perspective, throughout the year our technical team continued to carry out extensive technical work on our existing and new licences. This work further enhanced our understanding of the various prospects on our portfolio of licences and has ultimately led to the farm- out success recently achieved.

In May 2018, we announced that the Company had been provisionally awarded licences covering 10 full and part blocks, by the UK Oil and Gas Authority (OGA). The formal award of these licences was announced in August 2018 and the licences took effect from 1 October 2018. These blocks are viewed by the Board as being highly prospective with many containing undeveloped discoveries and exploration upside which significantly enhances both the pipeline of potential drilling opportunities and the overall prospective resources associated with the Company's investment portfolio. This has been demonstrated by the fact that despite only holding these licences for a matter of months, the terms of a farm-out of one of these licences (P2437) has already been agreed, subject to the exercise of an option by 30 April 2019.

We were delighted to have been awarded these additional licences which represented a substantial award over multiple blocks which builds on the Company's core competencies focussed primarily on the Southern North Sea. While the Company's primary focus remains on Southern North Sea gas, two of the six licences awarded were made over blocks in the Central North Sea, which meant that oil prospectivity was added to the portfolio for the first time. The new licences contain a number of drilled discoveries, undrilled prospects and leads and create the potential to build scale, further diversifying the investment portfolio which we anticipate will lead to a significant pipeline of future drilling opportunities.

The Company now has an estimated P50 prospective resource in excess of 2.4 TCF of gas, equivalent to c.400 million barrels of oil. With the exception of one licence in which we are partnering with The Parkmead Group and the licences on which we are co-venturing with Shell, all our licences are held 100%, which provides maximum flexibility from which to farm down. The licences also contain multiple prospects and are located close to existing infrastructure in a proven gas basin which has enjoyed significant exploration success in recent years.

We look forward to further expanding our portfolio of licences when we apply for additional blocks in the UK's next licensing round which the Oil & Gas Authority has indicated will open in mid-2019.

Throughout 2018, exploration budgets amongst major operators remained limited as they continued to focus investment on maintaining existing production after a prolonged period of depressed oil and gas prices. However, as majors and other operators finally started to turn their attention to reserves replacement and ultimately exploration, we experienced a marked increase in the level of interest in our assets, ultimately resulting in the announcement of our agreements with Shell.

In February 2019, we were delighted to announce the farm-out of Licence P2252 (which contains the Pensacola Prospect) and the terms of an option to farm out Licence P2437 (which contains the Selene Prospect) with Shell UK. This partnership is a clear endorsement of the quality of the licences in our portfolio and demonstrates the Cluff technical team's ability to identify and transform overlooked or less understood opportunities. We are particularly excited at the prospect of embarking on our partnership with Shell with both parties sharing a commitment to further development in the Southern North Sea. Most importantly, we now have direct visibility over the route to future drilling activity, and the potential to create further significant value for shareholders. We look forward to building our partnership with Shell and successfully developing these prospects.

I am also very happy to report that the Company has ended the year in a stronger financial position. The Company was able to raise funds by way of equity twice during 2018, raising a total of £2.75 million, before expenses. This allowed the Company to continue the farm-out process while, at the same time, commencing the technical and commercial evaluation of the additional Central and Southern North Sea oil and gas licences awarded in the 30th Offshore Licensing Round.

While continuing to invest in the expansion and development of our licences, we have maintained a disciplined approach to costs and ended the year with just over £1.41 million of cash. The Company remains agile, continues to have no debt or any major financial commitments and keeps its overheads low. Our working capital position has improved from that which was previously guided, and the Company is now funded to the start of Q4 2019.

The outlook for exploration and the North Sea now appears to be improving significantly, underpinned by relatively stable commodity prices and significantly reduced costs. In 2018, only eight exploration wells were completed, however the UK sector expects to see up to 15 exploration wells drilled this year. This points to renewed confidence and crucially the budget now appears to be being made available for exploration. Of particular relevance and interest to us is that a number of these planned wells are in close proximity to the Company's existing licences. Spirit Energy are expected to drill the Andromeda and Aurora Prospects and Oranje-Nassau Energie are also expected to drill the Ossian- Darach prospect this year. Each of these three wells are in our core area of the Southern North Sea where we have our gas licences. Accordingly, any exploration success will further enhance the likelihood of success on our prospects.

The North Sea as a whole is becoming an increasingly attractive place to invest, and this has been evidenced by the increased level of M&A activity and the involvement of private equity backed businesses. The UK's regulatory and fiscal regime is now extremely favourable and with significantly reduced costs and more stable commodity prices, we believe this is an ideal time to be seeking to drill in the North Sea.

On behalf of the Board, I would like to thank our shareholders and other stakeholders for their continued commitment and support. We believe we are building a sustainable business with a strong and diversified portfolio of highly prospective oil and gas assets, with a world class partner on

potentially two of the Company's licences. As such, we anticipate exciting times ahead as we enter the next stage of the Company's development and continue to strive to create significant value for our shareholders.

Graham Swindells

Chief Executive Officer

24 April 2019

Operational Review

Shell Farm-out Success

Following a period of exclusivity, the Company was delighted to announce that it had signed a binding farm-out agreement in relation to Licence P2252 with Shell U.K. on 8 February 2019.

In return for a 70% working interest and operatorship of Licence P2252, Shell U.K. Ltd will pay 100% of the costs of the agreed work programme from the completion date until the earlier of 31 December 2020 or the date on which a well investment decision is made. The agreed work programme comprises the acquisition of not less than 400km2 new 3D seismic across the Pensacola Prospect in the summer of 2019 and associated processing and petro-technical studies required to support a well investment decision.

In addition to the farm-out on P2252, the Company also granted Shell a three-month exclusive option which runs until 30 April 2019, over a 50% working interest in Licence P2437 which was formally awarded to the Company in October 2018 and contains the Selene prospect. In the event that the option is exercised, binding terms have been agreed such that the Company will receive the outstanding balance of the total cash consideration of US$600,000 receivable from Shell. In addition, Shell would also pay 75% of the costs of the first well to be drilled on the licence up to a gross cost of US$25 million with any spend in excess of US$25 million to be shared in proportion to the working interest positions. Until a well investment decision has been finalised, the Company will retain operatorship of the licence and any expenditure incurred prior to a well investment decision will be shared with Shell in proportion to the working interest positions.

Licence Awards - 30th Licensing Round

As previously indicated, the UK Oil and Gas Authority announced the provisional award of licences in the 30th Offshore Licensing Round on 23 May 2018. These awards were formalised on 30 August 2019 and licences issued with an effective date of 1 October 2018. The Company was awarded 10 blocks, including part blocks, covering 1,376km2 (gross) which were consolidated into six new licences. The firm work programme associated with Phase A of the initial term of the licences is restricted to data acquisition, seismic reprocessing and sub-surface studies, and is focused on providing greater clarity around prospect volumetrics and risk.