Mining and energy project generator Cloudbreak Discovery PLC (LSE: CDL) has entered into an agreement with Iron Forge Holdings (IF3) whereby Cloudbreak will provide IF3 with USD $1.5 million in development capital for the Butte Strawn Energy Project located in Irion County, Texas.
The capital is being deployed as a convertible debenture which, at Cloudbreak’s discretion, can be converted into a 6% Overriding Royalty Interest on the project in addition to other considerations.
IF3 has defined a detailed program consisting of workovers of existing wells, new drilling and enhanced oil recovery techniques to rapidly grow both oil and natural gas production on the project. It is considered to be well financed and planning to grow through the drill program as well as through acquisition of additional brownfield energy projects that have potential to provide near-term returns through similar production growth programs.
Second royalty acquisition for Cloudbreak in Texas
This is Cloudbreak’s second royalty acquisition in Texas and further demonstrates the opportunity in the pipeline of royalties that the company has built and is now executing on. It is in the process of successfully deploying its project generator methodology from the mineral and metals sector into the energy sector and growing cashflow through equity and royalty payments.
The Butte Strawn Field is an 897.2 acre field held by production located on the Eastern Flank of the Permian Basin. The primary producing formation is the Strawn Reef with an average depth of 7,500 feet. Iron Forge Holdings (III) Ltd. has a 100% working interest and a 60% net revenue interest.
Projected production is 560 barrels of oil per day from seven wells from proven recoverable reserves. All in operating cost per barrel is projected at $10.19, including production taxes, acquisition and drilling cost. The field has proven recoverable reserves of 1,134,000 barrels with a PV10 value of USD$40.5 million.
Terms of the royalty deal with IF3
Cloudbreak said it will provide IF3 with a USD $1.5 million debenture on a two-year term and in two tranches withUSD $500,000 on signing and USD $1 million within 90 days of signing. The debenture is convertible into a 6% ORI on the Project at Cloudbreak’s discretion, in addition to other considerations, the company said this week.
IF3 will pay 12.5% per annum interest to Cloudbreak, calculated and paid quarterly in cash or shares in IF3 at the discretion of Cloudbreak on the USD $1.5 million debenture.
As part of the deal, IF3 will grant Cloudbreak 6,000,000 Warrants with a CAD $0.35 strike price and a three-year term from financial close. The Warrants are subject to an acceleration clause.
Cloudbreak will receive first position lien on the project, and an area of interest providing Cloudbreak Discovery with a 6% ORI on any project acquired within a two-mile radius of the Butte Strawn lease boundary.
First refusal on additional acquisitions
Cloudbreak also receives area of influence giving it the right of first refusal to finance additional acquisitions within five miles of the project boundary and apply its existing 6% ORI to that project in addition to terms settled on as part of an acquisition. IF3 will endeavor to enter into a definitive agreement related to a public transaction by 30 September 2022, with completion by 31 January 2023.
Kyler Hardy, President and CEO of Cloudbreak, explained: “Cloudbreak has chosen to focus on brownfield energy projects that can be acquired at favourable valuations and have the potential for rapid returns. Firstly, through workovers and recompletions followed by new drilling locations.”
A key component of Cloudbreak’s energy royalty strategy is identifying operators and management teams with track records of delivering tangible and measurable results. This provides the company with confidence in their ability to execute on the agreed plan around projects that it can participate in though a royalty structure.
“Through this and similar transactions in the future, we see an opportunity to create significant shareholder value by growing Cloudbreak’s cash-flow though structured deals and portfolio royalty acquisitions in the natural resources sector,” Hardy said.
Listen: Podcast with Kyler Hardy, CEO of Cloudbreak Discovery
