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Press Release

Corporate Split by Cosmo Energy Exploration & Production Co., Ltd. and Transfer of 20% Shares in Subsidiary to CEPSA

November 6, 2014
Cosmo Oil Co., Ltd.
Corporate Communications Dept.
Public Relations Office

Cosmo Oil Co., Ltd. (Representative Director and President Keizo Morikawa; hereinafter, "Cosmo" or the "Company") is pleased to announce that Cosmo Energy Exploration & Production Co., Ltd. (Representative Director and President Isao Kusakabe; hereinafter, "Cosmo Energy"), a wholly-owned subsidiary of Cosmo, has entered into a definitive agreement with CEPSA International B.V., a wholly-owned subsidiary of Compania Espanola de Petroleos, S.A.U., (hereinafter, together with CEPSA International B.V., "CEPSA") to sell part of its stake in new Abu Dhabi focused upstream subsidiary "Cosmo Abu Dhabi Energy Exploration & Production Co., Ltd" (hereinafter, "Cosmo Abu Dhabi") as part of its Strategic Comprehensive Alliance with CEPSA.

In accordance with the agreement, Cosmo Energy, which owns a 64.1% stake in Abu Dhabi Oil Co., Ltd. (hereinafter, "ADOC"), will transfer its ADOC shares into a newly established Cosmo Abu Dhabi through an incorporation-type company split (the "Corporate Split"). Cosmo Energy will subsequently sell a 20% stake of Cosmo Abu Dhabi to CEPSA for approximately US$ 217 million (hereinafter, the "Share Transfer") (a series of transactions, hereinafter referred to as the "Transaction").

Key benefits of the transaction to Cosmo:

  • Realizes compelling valuation for Cosmo Abu Dhabi stake, valuing these assets at over 120 billion Yen (US$1.06 billion), and demonstrates value of wider upstream business to the Company
  • Significant cash proceeds of 24.6 billion Yen (US$217 million) to strengthen Cosmo's balance sheet
  • Deepens upstream strategic partnership with CEPSA and in Abu Dhabi
  • Reinforces IPIC's strategic commitment to Cosmo's future development

The Transaction is expected to close in December 2014, subject to customary closing conditions.

The Corporate Split will be made by a consolidated subsidiary of Cosmo through a simple incorporation-type separation, and therefore this disclosure is made on a simplified basis.

I ) Objectives of the Transaction

(1) Background of the Transaction

Based on "Further strengthen alliances with IPIC and Hyundai Oilbank" stipulated as the third policy in the 5th Consolidated Medium-Term Management Plan, Cosmo concluded a Memorandum of Agreement in relation to Strategic Comprehensive Cooperation in Oil Related Business with CEPSA in January 2014. As members of the International Petroleum Investment Company Group (hereinafter, "IPIC"), the two companies have been conducting studies for identifying and developing mutually beneficial opportunities. (Please refer to Press Release on January 21, 2014: Strategic Comprehensive Cooperation with CEPSA in Oil Related Business (http://www.cosmo-oil.co.jp/eng/press/140121 )).

This initial co-operation has provided the opportunity for Cosmo to pursue an economically attractive transaction which allows Cosmo to realize up front value for its upstream oil business in Abu Dhabi, whilst further enhancing the future development and growth prospects of this business.

The oil exploration and production business (hereinafter "E&P") is a core business area in which Cosmo has established its unique strengths through half a century of experience. E&P has consistently delivered value, adding growth, and consistent financial performance for the Company, supporting both balance sheet expansion and underlying earnings performance. The transaction with CEPSA provides a tangible return to shareholders and clearly highlights the value of this business.

Notably the two companies are also in agreement with regard to focusing on obtaining new oil and gas concessions and reinforcing and promoting their E&P businesses. The companies have created an E&P Working Group to identify new E&P business opportunities and foster exchange of experience and know-how. Based on this initiative, Cosmo and CEPSA have agreed upon the transfer to CEPSA of a 20% stake in Cosmo Abu Dhabi.

Furthermore, Cosmo acknowledges that the Japanese oil refining business is currently facing an extremely challenging environment due to declining domestic demand for oil products. In this context, the Company has closed the Sakaide Refinery and considered the option of jointly operating the Chiba Refinery with Kyokuto Petroleum Industries, in accordance with the "Regain profitability in the refining & marketing sector" policy stipulated in April 2013 as part of the Company's 5th Consolidated Medium-Term Management Plan.

(2) Significance of the Transaction

The transfer of shares of Cosmo Abu Dhabi to CEPSA is in line with the "Further strengthen alliances with IPIC and Hyundai Oilbank" policy stipulated as part of the 5th Consolidated Medium-Term Management Plan and aims at reinforcing and expanding the strategic partnership between the two companies.

While Cosmo will receive capital from its strategic partner CEPSA through the Transaction, the Company will remain operator of ADOC. Cosmo is currently in the process of developing the Hail Field with the objective of starting production in Fiscal Year 2016. Production from the Hail Field is expected to nearly equal the combined output from ADOC's three on stream Abu Dhabi oil fields. As a new partner, CEPSA is expected to contribute to the success of the development project, and to support the further expansion of the business in Abu Dhabi.

Cosmo believes that the combined participation in ADOC of Cosmo, which has almost 50 years of experience in offshore oil fields, and CEPSA, with its extensive know-how as operator of onshore oil and gas fields in North Africa and South America, will further improve execution certainty as well as contribute to the enhancement and expansion of the partnership between the two companies.

The Transaction also demonstrates IPIC's commitment, as a shareholder of both Cosmo and CEPSA, to strengthen the E&P business of Cosmo. Cosmo will continue its efforts to achieve an expedited development of the Hail Project while gaining understanding and support from stakeholders in Abu Dhabi, including Abu Dhabi government officials. Concurrently, Cosmo and CEPSA, as Abu Dhabi family companies, have been holding numerous workshops with the Abu Dhabi National Oil Company (hereinafter, "ADNOC"), for discussing the potential acquisition of interests in new E&P projects, and the possibility of creating win-win business opportunities in areas such as sulfur, crude oil marketing and petrochemicals.

Through Cosmo Energy and its shareholdings in Qatar Petroleum Development ("QPD"), United Petroleum Development ("UPD") and ADOC, Cosmo has been involved in exploration, development and production in the Middle East. As announced in the "5th Consolidated Medium-Term Management Plan (FY2013-FY2017)", Cosmo aims at enhancing the profitability of its E&P business through commencing production from the Hail Field and expanding its business portfolio by leveraging its long-standing relationships with oil producing countries.

Cosmo will continue to enhance information disclosure on its E&P business, in order to increase its visibility and ultimately achieve higher business value. This effort is demonstrated by the Company's disclosure of its E&P business' reserves (please refer to the January 21, 2014 Press Release: Announcement of Reserves in Exploration and Production Business (http://www.cosmo-oil.co.jp/eng/press/140121_2)).

II ) Overview of the Transaction

(1) Transaction Structure

Cosmo Abu Dhabi to be established by Cosmo Energy through Corporate Split on November 28, 2014. Cosmo Energy to subsequently transfer a 20% stake in Cosmo Abu Dhabi to CEPSA on December 12, 2014 (tentative).

Transaction Structure

(2) Share Transfer Price

The transfer price is expected to be 24.6 billion yen (*1) (US$217million (*2)), which represents 20% of the equity value of Cosmo Abu Dhabi. The transfer price had been agreed by both parties who have independently conducted a Discounted Cash Flow ("DCF") analysis based upon Cosmo Abu Dhabi's production forecasts, Proved and Probable (2P) Reserves as assessed by Gaffney, Cline & Associate, as well as financial forecasts. The transfer price implies a total value of Cosmo Abu Dhabi of 122.8 (*1) billion yen (US$1,086 million (*2)).

(*1) Estimated based on JPY/USD =113(reflecting current level. Same FX rate is applied hereinafter).

(*2) Certain price adjustment assumed to be made to the transfer price upon closing

(3) Advisors

Bank of America Merrill Lynch acted as exclusive financial advisor to Cosmo and Anderson Mori & Tomotsune acted as exclusive legal advisor to Cosmo on this transaction.

(4) Overview of Buyer of Shares (as of November 6, 2014)

Company Name CEPSA International B.V.
Address of
Headquarters
Rotterdam, Netherlands
Title and Name of
Representative
Director to the Board: CEPSA UK, Ltd. Representative: Carlos Villanueva;
Director to the Board: CEPSA QUIMICA NETHERLANDS, B.V. Representative: Jose E. Aranguren
Business
Description
Integrated Oil Business
Date Established July 18, 1991
Major Shareholders and
Percentage of Shares Held
CEPSA 100%
Relationships
between
Cosmo and Buyer
Capital Relations None
Personal Relations None
Trade Relations None
Related Party
Status
An indirectly-owned subsidiary wholly-owned subsidiary of International Petroleum Investment Company, which is Cosmo's affiliates

(5) Number of Shares for Transfer, Transfer Price and Status of Shareholding Before and After Transfer

The number of shares held before transfer 10,000 shares (Ownership: 100%)
The number of shares to be transferred 2,000 shares (Ownership: 20%, Transfer Price: US$ 217 million)
The number of shares after transfer 8,000 shares (Ownership: 80%)

(6) Schedule of Corporate Split and Share Transfer

Board Approval of Proposed Corporate Split (Cosmo Energy) November 6, 2014
Board Approval of Share Transfer Agreement (Cosmo Energy) November 6, 2014
Execution of Share Transfer Agreement (Cosmo Energy, CEPSA) November 6, 2014
Extraordinary shareholders' meeting (Cosmo Energy) November 25, 2014 (tentative)
Expected Date of Corporate Split (Effective date) November 28, 2014 (tentative)
Expected Date of Share Transfer December 12, 2014 (tentative)

III ) The Effect of the Transaction on the Company's Performance

As a result of the Transaction, Cosmo expects to record an extraordinary profit of 14.0 billion yen as a gain from sale of affiliate stock in its consolidated results for FY2014. The proceeds gained from the Transaction will be kept as retained earnings and mainly used for investments in growth opportunities.

IV ) Overview of Cosmo's E&P Business and ADOC

1. Overview

The Company, through Cosmo Energy and its shareholdings in ADOC, QPD and UPD, is involved in the E&P business, with activities focused in the Middle East. The Group has almost half a century of experience in offshore oilfields and is the largest Japanese oil producer in the Middle East.

In particular, ADOC's oilfields project is one of the largest in scale in the region. In September 1969, the 1st exploratory well successfully found crude oil and commercial production began in May 1973. All produced crude from the Mubarraz, Umm Al Anbar and Neewat Al Ghalan oilfields is presently sold as "Mubarraz Blend" to Cosmo and JX Nippon Oil & Gas Exploration Corporation.

In December 2012, ADOC signed, with the Supreme Petroleum Council of Abu Dhabi, another 30-year concession agreement covering the three existing oilfields and the adjacent Hail Field. (Please refer to the December 11, 2012 Press Release : ADOC Commencement of New Concession Agreement ( http://www.cosmo-oil.co.jp/eng/press/121211)). Currently the Hail Field is in the process of development, targeting first oil in 2016. Commercial production is expected to nearly equal the combined output from ADOC's three on stream Abu Dhabi oil fields.

2. Crude Reserves Estimate (working interest base)(*3)

(as of December 31, 2013)
mmbls

Proved Reserves (*4)

107.0

Probable Reserves (*5)

98.9

Total Proved and Probable Reserves (2P)

205.9

Note: Figures include Hail Field reserves.

(*3) About results of reserves estimate

The assessment of ADOC's reserves which were deemed to have a significant impact on Cosmo's future profitability was carried out independently by Gaffney, Cline & Associate (hereinafter, "GCA"), a leading global independent reserve auditor. Their assessment confirmed Cosmo affiliates' internal assessment of remaining reserves. The assessment was carried out in accordance with the 2007 "Petroleum Resources Management System (PRMS)" prepared by the Oil and Gas Reserves Committee of the "Society of Petroleum Engineers" (SPE), and reviewed and jointly sponsored by the "World Petroleum Congress" (WPC), the "American Association of Petroleum Geologists" (AAPG) and the Society of Petroleum Evaluation Engineers (SPEE). The assessment of QPD's and UPD's reserves was carried out by these companies respectively. These assessments of the reserves do not guarantee the reserves and production from them.

(*4) Proved Reserves

Proved Reserves are those quantities of petroleum, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods, and government regulations. When probabilistic methods are used, there should be at least a 90% probability that the actual quantities recovered will equal or exceed the 1P estimate. (Definition of SPE PRMS 2007 March)

(*5) Probable Reserves

Probable Reserves are those additional Reserves which analysis of geoscience and engineering data indicate are less likely to be recovered than Proved Reserves but more certain to be recovered than Possible Reserves. When probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the 2P estimate. (Definition of SPE PRMS 2007 March)

3. Results of Crude Production

The combined daily average production from ADOC, QPD, and UPD reached 37 thousand barrels oil per day (hereinafter, "bopd") in 1H FY2014 (January to June 2014) while the Company's working interest daily average crude production reached 22 thousands bopd. (Ref.: Reserves to Production Ratio: About 30 years)

V ) The Corporate Split

1. Outline of the Corporate Split

(1) Schedule of the Corporate Split

Please refer to "(6) Schedule of Corporate Split and Share Transfer" in "II) Overview of the Transaction"

(2) Method of Corporate Split

Cosmo Abu Dhabi will be created through an incorporation-type company split ("Corporate Split") from Cosmo Energy.

(3) Allotment of Shares

Cosmo Abu Dhabi will issue 10,000 shares of common stock, all of which will be allotted to Cosmo Energy. Cosmo Energy will transfer to CEPSA 2,000 shares after the effective date of the Corporate Split.

(4) Treatment of Share Purchase Warrants and Bonds with Share Purchase Warrants associated with the Corporate Split

Cosmo Energy has issued neither share purchase warrants nor bonds with share purchase warrants.

(5) Decrease in Capital Resulting from the Corporate Split

There will be no decrease in capital of Cosmo Energy resulting from the Corporate Split.

(6) The Rights and Obligations Transferred to Cosmo Abu Dhabi

Cosmo Abu Dhabi will assume the rights and obligations of all assets, liabilities, and positions in contracts regarding the businesses set forth in the "CORPORATE SPLIT PLAN" dated November 6, 2014.

(7) Ability to Fulfill Obligations

Cosmo Abu Dhabi will not assume any debt obligations.

2. Overview of the Parties of the Corporate Split

 

Transferor Company
(Cosmo Energy Exploration & Production)
(as of November 6, 2014)

Newly established
Company(Cosmo Abu Dhabi)
(Tentative)

Company Name Cosmo Energy Exploration & Production Co., Ltd. Cosmo Abu Dhabi Energy Exploration & Production Co., Ltd.
Address of
Headquarters
1-1-1, Shibaura, Minato-ku, Tokyo 1-1-1, Shibaura, Minato-ku, Tokyo
Title and Name of
Representative
Isao Kusakabe, President and Representative Director Isao Kusakabe, President and Representative Direcor
Business Description
  • Establishment of strategies and plans in the energy E&P business
  • Promotion and management of directly-controlling projects
  • Business management, technical support, operation commission of affiliated E&P companies
  • Search of new energy E&P business opportunities
  • Promotion and management of the said business through holding of shares of ADOC
  • Planning and execution of new oil and gas operations in the Emirate of Abu Dhabi, The United Arab Emirates
  • All related affairs related above
Capital 10,000 million yen 4 million yen
Date Established February 28, 2014 November 28, 2014
(Effective date)
Number of Shares Issued 1,000 shares 10,000 shares
Fiscal Year-End December March
Employees 18 4
Major Shareholders and
Percentage of Shares Held
Cosmo Oil Co., Ltd. 100% Cosmo Energy Exploration & Production Co., Ltd. 100%
Relationships
Among
Related
Parties
Capital
Relations
Wholly-owned consolidated subsidiary of the Company On the effective date of the Corporate Split, Cosmo Energy (Transferor Company), a consolidated subsidiary of the Company, will hold a 100% stake in Cosmo Abu Dhabi, 20% of which will be subsequently transferred to CEPSA
Personal
Relations
Employee has been seconded from Cosmo. Employee will be seconded from Cosmo.
Related
Party
Status
Cosmo's related party Cosmo's related party
Financial
Condition
for Last
12 Months
(*6) (*7)
  Cosmo Energy Exploration & Production (Transferor Company)
Fiscal
Year-End
December
Net Assets 14,309 million yen
Total
Assets
14,340 million yen
Net Assets
per Share
14.34 million yen

(*6) As Cosmo Energy was established on February 28, 2014 and has not closed its book, financial condition as of establishment is shown only for the available figures.

(*7) Overview of Cosmo Energy and Cosmo Abu Dhabi will not change after expected date of share transfer (December 12, 2014).

3. Overview of Business Unit to be Split

(1) Business Description

Operations related to oil exploration and development in Abu Dhabi Emirate from Cosmo Energy through shareholding of ADOC.

(2) Assets and Liabilities (Estimated based on the book value as of February 28, 2014)

Assets

Liabilities

Item

Book Value

Item

Book Value

Current Assets

- million yen

Current Liabilities

- million yen

Fixed Assets

5,160 million yen

Long-term Liabilities

- million yen

Total

5,160 million yen

Total

- million yen

4. Future Prospect

For the impact of the Transaction on the Company, please refer to "III) The Effect of the Transaction on the Company's Performance."

Picture
Left to Right:Mikel Rodriguez、Luis Travesedo、Juan Vera(CEPSA)
Keizo Morikawa、Isao Kusakabe、Hiroshi Kiriyama

[Reference: Overview of ADOC as of November 6, 2014]

Company Abu Dhabi Oil Co., Ltd.
Establishment January 17, 1968
Representative Representative Director and President Satoshi Nishi
Shareholders (*8) Cosmo Energy Exploration & Production Co., Ltd. 64.1%
JX Nippon Oil & Gas Exploration Corporation 32.0%
Kansai Electric Power Co., Inc. 1.8%
Chubu Electric Power Co., Inc. 1.8%
Overview In September 1969, the 1st exploratory well successfully found crude oil. Since May 1973, the commercial production has begun and presently all produced crude from three oilfields, Mubarraz, Umm Al Anbar and Neewat Al Ghalan is sold as "Mubarraz Blend" to Cosmo and JX Nippon Oil & Gas Exploration Corporation. In February 2011, ADOC signed with Supreme Petroleum Council Abu Dhabi another 30-year concession agreement covering the three existing oilfields and an adjacent oilfield named Hail, of which commercial production is expected to reach as much as total production from existing 3 oil fields.

(*8) Stake after elimination of treasury stock

[Reference: Location Map of ADOC Concession Area]

Reference: Location Map of ADOC Concession Area
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