Reach Energy Berhad (“REB”) has entered into a tri-partite conditional Sale and Purchase Agreement (“SPA”) on 5 March 2016 with Palaeontol Cooperatief U.A. (“Palaeontol COOP”) and MIE Holdings Corporation (“MIEH”), a corporation listed on the Main Board of the Stock Exchange of Hong Kong Limited for the proposed acquisition of 60% equity interest in Palaeontol B.V. (a wholly-owned subsidiary of Palaeontol COOP which in turn is an indirect wholly-owned subsidiary of MIEH) for a total purchase consideration of USD154.9 million, subject to adjustments (“Proposed Acquisition”). The parties have agreed that the enterprise value of 60% (before adjustment of net working capital) of the Palaeontol B.V. group is USD184,800,000 as at 30 September 2015. Palaeontol B.V. is an investment holding company and is the sole interest holder of Emir- Oil LLP.

The Emir-Oil Concession Block is located onshore in the Mangystau Oblast (situated in the southwestern region of Kazakhstan), about 40 km northeast of the City of Aktau which is Kazakhstan’s largest sea-port on the Caspian Sea coast. The Emir-Oil Concession Block has a total contract area of approximately 850.3 km2, comprising the following:

1. Four Producing Fields namely, Aksaz condensate-rich gas field, Dolinnoe oil field, Emir oil field and Kariman oil field with a total contract area of approximately 45.5 km²; and
2. An Exploration Area with a total contract area of approximately 804.8 km2. The following discovered fields and prospects are located in the Exploration Area:
   1. Two Development Fields (namely, the North Kariman oil field and Yessen oil fields) which have been under pilot production since June 2012 and April 2013, respectively; and
   2. Six Prospects (namely, Borly, Aidai, Begesh, East Saura, North Aidai and Tanirbergen) which have been identified outside the Producing Fields for future exploration, appraisal, development and production. Additionally, four Prospects have also been identified which are surrounding the Producing Fields.

The Producing Fields within the Emir-Oil Concession Block are already in production and with established infrastructure of gas pipeline, gas processing plant, oil processing, oil storage and transportation facilities in place. Hence, the Proposed Acquisition is expected to immediately contribute positively to the revenue of our Company. The Emir-Oil Concession Block is in the early stage of its producing life with secured contracts and having the potential for achieving peak production in the future. The strategic location of the Emir-Oil Concession Block in the heart of the prolific Mangyshlak Basin of Western Kazakhstan near the Caspian Sea offers high potential opportunity for our Company to extend its exploration and production activities into the other hydrocarbon areas in the vicinity of the Emir-Oil Concession Block.

The table below sets out the 1P, 2P and 3P oil and natural gas Reserves estimated by RPS Energy (“RPS”) in the Producing Fields and Development Fields and the portion attributable to our Company post completion of the Proposed Acquisition based on Reserves estimates as of 1 July 2016:

Production Volume

Based on RPS’s estimates as set out in the Independent Technical Expert and Valuation Report, the O&G production profiles of the Emir-Oil Concession Block (based on Best Estimate) are set out below:

Estimated CAPEX and OPEX for the Emir-Oil Concession Block

The estimated 2P Reserves annual CAPEX and OPEX of the Emir-Oil Concession Block are illustrated below:

Notes:

# Represents the OPEX for second half of 2016

* In 2036, the OPEX increase mainly comprises of abandonment cost, which is estimated at 10% of the CAPEX incurred. This will be incurred at the end of the Emir-Oil Concession Block term.

(Source: Independent Technical Expert and Valuation Report)

Based on 60% working interest in the Emir-Oil Concession Block, our CAPEX for 2016 is USD17.2 million (or equivalent to RM71.1 million) whilst our OPEX for second half of 2016 and full year of 2017 is USD3.8 million and USD7.9 million (or equivalent to RM15.7 million and RM32.7 million), respectively. Our Company intends to fund the CAPEX for 2016 mainly via the remaining amount in the Islamic Trust Account (after deducting the Upfront Consideration and the payment to Dissenting Shareholders, if any). CAPEX for 2018 onwards is expected to be funded from the internally generated funds of Emir-Oil, from the operating cash flows of the Emir-Oil Concession Block. However, if the oil price remains at the current level in the near to medium term, our Company may fund such CAPEX requirement from proceeds raised via future equity/debt fund raising exercises, if required. The OPEX is also expected to be funded from the internally generated funds of Emir-Oil, from the operating cash flows of the Emir-Oil Concession Block.

Our Board is of the view that the Proposed Acquisition represents an attractive investment opportunity for us for the following reasons:

1. the Emir-Oil Concession Block is in the early stage of their producing life with secured contracts and having the potential for achieving peak production in the future;
2. offers an opportunity for our Company to capitalise and benefit from the continued growth of the Emir-Oil Concession Block due to significant developed Reserves and favourable geological conditions in Western Kazakhstan;
3. several Prospects have been identified within the Exploration Area and surrounding the Producing Fields. The un-risked Best Estimate Prospective Resource was estimated at 255.7 MMstb of oil and this is expected to provide future revenue to our Company over a sustainable period if the prospects are successful O&G discoveries;
4. our Company had embarked on the Proposed Acquisition during the recent low oil price environment. When comparing with completed O&G transactions in Kazakhstan since 2013, the Purchase Consideration per boe of 2P Reserves and the Adjusted Purchase Consideration (Maximum) per boe of 2P Reserves of USD2.89 per boe and USD3.28 per boe respectively are within the range of recent comparable transactions, higher than the simple average but lower than median of recent comparable transactions; and
5. the Emir-Oil Concession Block’s location, with close proximity to the country’s export and distribution infrastructure and being only 40 km northeast of Aktau is ideal to access vital ground, marine and air links for its operations.