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MarketScreener Homepage  >  Equities  >  OTC Bulletin Board - Other OTC  >  Discovery Energy Corp.    DENR

DISCOVERY ENERGY CORP.

(DENR)
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DISCOVERY ENERGY CORP. : Entry into a Material Definitive Agreement (form 8-K)

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10/24/2019 | 02:09pm EDT

ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT



                                    General


On October 18, 2019, Discovery Energy SA Pty Ltd, a company formed under the laws of Australia ("DESAL"), the sole subsidiary of Discovery Energy Corp. ("Discovery"), entered into two related material definitive agreements with WESI PEL512 Pty Ltd, a company formed under the laws of New South Wales, Australia ("WESI"). Discovery's management has been advised that WESI is a recently formed entity that plans on becoming a public entity by undertaking a reverse merger with an existing company traded on the Australian Stock Exchange.

The first of the two agreements is a farmout agreement (the "Farmout Agreement"). Pursuant to the Farmout Agreement, DESAL is to assign to WESI one-half of DESAL's 100% working interest in the South and Lycium blocks (collectively, the "Contract Area") of DESAL's 584,651 gross acres prospect (the "Prospect") in the State of South Australia covered by Petroleum Exploration License PEL 512 (the "License"). The assignment to WESI is referred to hereinafter as the "Assignment." The South and Lycium blocks comprise an aggregate of 182,364 gross acres of the Prospect. Immediately after the Assignment, each of DESAL and WESI will own a 50% working interest in the Contract Area. DESAL will continue to own a 100% working interest in a third block ("West") forming a portion of the Prospect and comprising an aggregate of 402,287 gross acres of the Prospect. DESAL and WESI have agreed to work together in good faith and use reasonable efforts to find a mutually satisfactory means to implement the preceding arrangement beyond the terms of the Farmout Agreement.

The second of the two agreements is a joint operating agreement (the "JOA"), which implements certain operational aspects relating to the Farmout Agreement and the subsequent working interest ownership and operation of the Contract Area.

The next section contains a description of the Farmout Agreement and JOA, as they operate as a whole. This description does not purport to be complete and is qualified in its entirety by reference to the actual versions of these documents, which will be filed as exhibits to Discovery's next Quarterly Report on Form 10-Q. All dollar figures set forth below represent Australian ("AU") dollars. On October 18, 2019, the exchange rate was US$1.00/AU$1.46.



                           Description of Agreements


The following is a summary of the terms, provisions and conditions of the Farmout Agreement and JOA, as they operate as a whole:



  * In consideration of the Assignment, WESI (a) will pay to DESAL AU$2.5 million
    in cash (the "Cash Consideration") within forty five (45) days of the signing
    of the Farmout Agreement and (b) will be responsible for all investment
    expenditures of oil and gas exploration and development activities on the
    Contract Area contemplated by an agreed work program and budget (including
    those for which DESAL would otherwise be responsible) up to a maximum of
    AU$30.5 million, excluding certain amounts (WESI's obligations described in
    this (b) are referred to hereinafter as the "E&D Expenditure Obligations").
    DESAL and WESI will bear production and sales expenses pro rata based on their
    respective working interests. Management believes that the expenditures to be
    made pursuant to the E&D Expenditure Obligations will be sufficient to satisfy
    all or the bulk of the work commitment under the License. Quarterly, WESI will
    be obligated to deposit in a designated bank account the amount of estimated
    investment expenditures for the forthcoming quarter (such deposits are
    referred to hereinafter as the "Quarterly Deposits"). After WESI has satisfied
    its E&D Expenditure Obligations, DESAL and WESI will bear the investment
    expenditures of further exploration and development activities pro rata based
    on their respective working interests, except as otherwise described below.

  * To secure the E&D Expenditure Obligations, WESI is obligated to obtain surety
    bonds to cover estimated investment expenditures for the two calendar quarters
    subsequent to the quarter for which the most recent Quarterly Deposit was
    remitted and investment expenditures incurred but not previously paid, as the
    same shall change from time to time, payable to DESAL after any WESI default
    (collectively the "Surety Bonds").











  * DESAL's obligation to complete the Assignment pursuant to the Farmout
    Agreement is subject to certain conditions precedent that must be satisfied
    within certain stipulated time periods (collectively, the "Conditions
    Precedent"), which include the following:




    ** WESI shall have paid the Cash Consideration.
    ** All required third-party consents shall have been obtained.
    ** The Farmout Agreement, JOA and Assignment documents shall have been approved
       and registered by the overseeing government agencies.



The Assignment is to be completed within five days after the satisfaction of the Conditions Precedent. The Farmout Agreement will automatically terminate if WESI fails to pay timely the Cash Consideration, and DESAL has the right to terminate the Farmout Agreement if any of the other Conditions Precedent are not timely satisfied.



  * WESI will act as contract operator with respect to the Contract Area for the
    sole and limited purposes of conducting, carrying out and satisfying in full
    the agreed work program and budget. DESAL shall remain the named operator for
    all other purposes, including maintaining its status as operator of record.
    WESI could become the full operator with respect to the Contract Area after it
    has fully satisfied its E&D Expenditure Obligations.

  * Certain decisions relating to the business activities of DESAL and WESI are to
    be made by an operating committee, in some cases upon the advice of a
    technical subcommittee. Each of the operating committee and technical
    subcommittee will have one representative from each of DESAL and WESI. The
    operating committee is to be guided by certain principles contained in the
    Farmout Agreement. Until WESI has fully satisfied its E&D Expenditure
    Obligations, decisions of the operating committee are to be unanimous;
    provided, however, that if (after completing a procedure provided for in the
    Farmout Agreement) the operating committee cannot agree upon any initial or
    annual work program and budget for operations and activities to be conducted
    pursuant to the Farmout Agreement and JOA, DESAL alone shall be entitled to
    decide all matters remaining unresolved. After WESI has fully satisfied its
    E&D Expenditure Obligations, decisions will be made in accordance with the
    JOA, whose operation is effectively similar to the decision making scheme
    described earlier in this paragraph, except that DESAL would no longer have
    the ability to decide unresolved matters relating to any work program and
    budget, and a deadlock with respect thereto would be possible. Moreover, under
    certain circumstances (such as when WESI's ownership interest in the Contract
    Area increases as described immediately below and when other parties might be
    added to the JOA), DESAL could effectively lose its "veto" power under the
    JOA.

  * After WESI has satisfied its E&D Expenditure Obligations, DESAL in its
    discretion may request that WESI extend DESAL's carried position by WESI
    permanently being responsible for all investment expenditures of further
    exploration and development activities. If WESI accepts this request, the
    following results will occur:




    ** DESAL will assign to WESI an additional portion of its working interest in
       the Contract Area such that after the second assignment WESI and DESAL shall
       respectively own 77.5% and 22.5% working interests in the Contract Area.
    ** WESI will be responsible for all investment expenditures of further
       exploration and development activities.
    ** WESI and DESAL will respectively have rights under the JOA of "operator" and
       "non-operator."











  * If WESI fails to complete any work or pay any amounts for which it is
    responsible, it will be in default and such amounts (less any amounts received
    by DESAL on the Surety Bonds) shall accrue interest. If WESI fails to make a
    Quarterly Deposit after an opportunity to cure or certain insolvency events
    involving WESI occur, DESAL may require WESI to withdraw completely from the
    JOA and the License, and reassign WESI's working interest in and to the
    License to DESAL.

  * The Farmout Agreement contains transfer restrictions and right of first
    refusal agreements governing proposed transfers by DESAL and WESI of their
    individual interests in the License and Prospect. Discovery believes that
    these agreements are reasonable and appropriate.

  * The Farmout Agreement and JOA contain other agreements, representations,
    warranties, and indemnities that Discovery believes are customary and
    reasonable for documents of their nature.

  * The JOA has a specified term that approximates the term of the License with
    some slight variations at the end of the term. The Farmout Agreement does not
    have a specified term, but generally its terms and provisions are expected to
    have little effect after the E&D Expenditure Obligations have been satisfied
    in full. Nevertheless, the Farmout Agreement prohibits WESI from voluntarily
    withdrawing from the Farmout Agreement and the License until the E&D
    Expenditure Obligations have been satisfied in full.



In connection with the entry into the Farmout Agreement and JOA, that certain Securities Purchase Agreement executed on May 27, 2016 initially by and among Discovery and DEC Funding LLC and to which DESAL and Texican Energy Corporation were later added as parties was amended to permit the transactions provided for in the Farmout Agreement and JOA. A copy of this amendment which will be filed as an exhibit to Discovery's next Quarterly Report on Form 10-Q.

© Edgar Online, source Glimpses

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