Colombian

[Tackler]

Suroco Energy to acquire NCI Corporacion

2007-06-05 13:05 MT - News Release

Mr. Jeffrey Scott reports

SUROCO ENERGY INC. ANNOUNCES AGREEMENT TO ACQUIRE A LIMITED LIABILITY PARTNERSHIP WITH OPERATIONS IN COLOMBIA, MEXICO AND TEXAS, USA

Suroco Energy Inc. has entered into a letter agreement dated effective May 31, 2007, for the arm's-length acquisition of NCT Corporacion Petrolera Latinoamericana SL. NCT is a limited liability partnership formed under the laws of Spain with offices in Caracas, Venezuela and Bogota, Colombia, and operations in Colombia, Mexico and Texas. NCT has existing oil production of approximately 172 barrels per day and gas production of approximately 133 barrels of oil equivalent (boe) per day (including interests to be acquired by NCT pursuant to the Trevino transaction, as described below).

The board of directors and management of the corporation feel strongly that the acquisition of NCT will result in a number of benefits and opportunities to the corporation. It is intended that upon the completion of the proposed transaction, NCT will carry on as a wholly owned subsidiary of the corporation with current management of NCT continuing to operate NCT. The management team of NCT has extensive experience in the oil and gas industry and includes former senior managers with Petroleos de Venezuela SA, the national oil company of Venezuela. NCT also has a highly skilled technical support staff geared to expanding NCT's production base.

"What we are announcing today is the next level of strategic change for Suroco," said Jeffrey Scott, president and chief executive officer of the corporation. "This transaction will move Suroco to a new level and further enhance the opportunities we have to create value for our shareholders. The extent of our expanded asset base and the exploitation opportunities, together with the experience and relationships of our collective management and board, present exciting opportunities for Suroco. We plan to be aggressive in developing an extensive land inventory and in acquiring other positions on which to build."

Pursuant to the terms of the letter agreement and subject to receipt of applicable regulatory approval, the corporation intends to acquire all of the issued and outstanding participation units of NCT in exchange for 11,625,000 common shares in the capital of the corporation at a deemed price of 80 U.S. cents per share and the issuance of 4,375,000 special warrants of the corporation, as described below.

Holders of units will have the option to elect to receive a per unit cash payment equivalent to the exchange ratio value of the units multiplied by 80 U.S. cents for up to 10 per cent of the units they hold, subject to a maximum total cash limit of $1.28-million (U.S.). Where holders of units choose the cash option, the total number of common shares of the corporation to be issued pursuant to the proposed transaction will be decreased by an equivalent number of common shares of the corporation equal to that value which holders of units receive pursuant to the cash option.

Upon completion of the proposed transaction, three of NCT's current directors, Manuel Trevino, Fernando Puig and Eduardo Lima, will be added to board of directors of the corporation. Five of the current directors of the corporation will remain as directors of the corporation.

Mr. Trevino is currently the president and a director of NCT. Mr. Trevino is a natural gas engineer with a master of science degree from Pennsylvania State University. Mr. Trevino has 25 years of experience in the Venezuelan oil industry, in the areas of strategic planning and management and business development, both with national and international businesses. Mr. Trevino has held positions as principal and executive director of Cerro Negro, Petrozuata, Zuata III, of the Orinoco oil belt's projects, OOB. Mr. Trevino is fluent in English and Spanish.

Mr. Puig is currently a director of NCT. Mr. Puig is an engineer with advanced management studies in IESA. Mr. Puig has 33 years of experience in the Venezuela oil industry and has held high-ranking positions such as president of PDVSA Gas, president of INTEVEP (Centre for Research and Development), president of CIED (Corporate University of PDVSA) and general manager for production for the Western division of PDVSA. Mr. Puig is fluent in English, Spanish and French.

Mr. Lima is currently a director of NCT. Mr. Lima has a master of science degree in thermal sciences and management from Stanford University. Mr. Lima has over 24 years of experience in the Venezuelan oil industry in the areas of exploration and production and business development. Mr. Lima has served as a member of the negotiating team of Petrozuata in respect of the Campo Boscan agreement and was a member of the structuring team for the Venezuelan oil opening (I/II round operating agreements and exploration round). Mr. Lima is fluent in English and Spanish.

NCT's assets include the following:

* Suroriente block: NCT holds 65 per cent of the shares of NCT P&G Corp., a company incorporated under the laws of Barbados, resulting in an indirect participation by NCT of 19.8 per cent in Consorcio Colombia Energy (CCE). CCE has an incremental production contract with Ecopetrol for the operation of the Suroriente block. The Suroriente block (36,528 hectares) is located in the southeast sector of the Putumayo River and south by the San Miguel River on the Colombian side of the border with Ecuador. Oil production from NCT's interest in the Suroriente block is approximately 172 barrels per day.
* Arjona field: NCT holds a 25-per-cent participation in Consorcio Vetra-NCT, which participates with Ecopetrol in a risk production contract for the operation of non-developed and inactive fields for the Arjona field. The Arjona field (11,891 hectares) is part of the Chimichagua block, located in the department of Cesar, in the midst of the Central and the Eastern Mountain ranges in the Valle Inferior del Magdalena basin in Colombia.
* Hato Nuevo field: NCT holds a 16.67-per-cent participation in Consorcio Empesa-NCT, which participates with Ecopetrol in a risk production contract for the operation of non-developed and inactive fields for the Hato Nuevo field. The Hato Nuevo field (525 hectares) is an inactive field located 20 kilometres north of the city of Neiva, Colombia, on the eastern bank of the Magdalena River within the sub- basin of Neiva.
* Hardin field: NCT holds an interest entitling it to 9 per cent of the revenues proceeding from well Barret No. 5 and an interest entitling it to 15 per cent of the revenues proceeding from well Teten No. 1, both wells Barret No. 5 and Teten No. 1 being located in the Hardin field. The Hardin field is located in Liberty county, Texas, approximately 50 miles northeast of Houston, Tex. Gas production from NCT's interest in the Hardin field is approximately 11 boe per day.

NCT has also entered into an agreement (the Trevino transaction) whereby it will acquire a 5.51-per-cent interest in the Pirineo block held indirectly by Mr. Trevino, a director of NCT, in exchange for 704,653 units. Mr. Trevino holds, indirectly, 5.51 per cent of the shares of Monclova Pirineo Gas SA de CV (MPG), a Mexican company originally incorporated under the laws of Mexico as a limited liability society (sociedad de responsabilidad limitada de capital variable) and converted into a corporation (sociedad anonima de capital variable) in 2006. On March, 2005, MPG signed a multiple services contract with Pemex Exploracion & Production for the development, infrastructure and maintenance of the Pirineo block, a non-associated gas field located in the state of Coahuila, Mexico. The Pirineo block (37,000 square kilometres) is located in northern Mexico, in the Cuenca de Sabinas (central-north section), en el Estado de Coahuila. The Trevino transaction is subject to requisite approvals, which are currently outstanding. The gas production from the interest in the Pirineo block to be acquired by NCT pursuant to the Trevino transaction is approximately 122 boe per day.

As at May 8, 2007, NCT had cash on hand of $496,394 (U.S.) and no long-term debt. As at April 30, 2007, NCT had net working capital of $1.63-million (U.S.).

Gaffney, Cline & Associates has been engaged to complete an evaluation of proved and probable reserves and net present values of reserves of NCT in accordance with standards set out in the Canadian Oil and Gas Evaluation Handbook and National Instrument 51-101. This report is expected to be completed in June, 2007.

The special warrants referenced above will be registered in the name of Mr. Trevino and will entitle the holder thereof to acquire a total of 4,375,000 common shares of the corporation in exchange for the Trevino units, at no additional cost, in the event that the Trevino transaction is completed. In the event that the Trevino transaction is not completed within 120 days of the deadline (as defined below), the Trevino units will not be issued to Mr. Trevino and the special warrants will expire and confer no right to acquire common shares of the corporation. The special warrants will contain a call feature whereby upon completion of the Trevino transaction, the corporation shall have the right to compel the exchange of the Trevino units for 4,375,000 common shares of the corporation pursuant to the special warrants.

The closing of the proposed transaction is subject to a number of conditions including, but not limited to:

1. The proposed transaction receiving approval from holders of units holding more than 66-2/3 per cent of units outstanding or approval from that number of holders of units necessary for the corporation to acquire all of the issued and outstanding units;
2. Execution of any other documentation reasonably required to close the transaction, in a form and substance acceptable to the corporation and NCT, including, but not limited to, a mutually accepted definitive agreement incorporating the terms hereof and other terms customary of a transaction of this nature by Sept. 1, 2007 (the deadline), unless extended by mutual written agreement;
3. Receipt of all necessary consents, approvals, exemptions and authorizations of governmental bodies, lenders, lessors and other third parties, including, but not limited to, approval of the proposed transaction by the TSX Venture Exchange;
4. The approval of the corporation's and NCT's board of directors;
5. All necessary securityholder approvals being received;
6. Each issue raised by any due diligence investigation which materially affects the respective businesses and financial condition of either NCT or the corporation being remedied or addressed to the other party's satisfaction, acting reasonably;
7. Formation of a committee consisting of three nominees of the corporation and two nominees of NCT to deal with the co-ordination of operations between the corporation and NCT upon completion of the proposed transaction;
8. The execution of employment agreements by key members of the management of NCT that are to the satisfaction of the corporation and such managers.

Subject to receipt of all necessary consents, approvals, exemptions and authorizations of governmental and regulatory authorities, including the TSX Venture Exchange, concurrent with the closing of the proposed transaction, the corporation has agreed to issue to management of NCT, performance warrants to acquire up to three million common shares of the corporation. Such performance warrants will contain terms and conditions mutually acceptable to the corporation and NCT, including that such performance warrants will have an exercise price based upon the policies of the TSX Venture Exchange, shall expire three years from the date of grant and will vest based on performance milestones of total wellhead production by NCT exceeding net 1,000, 1,500 and 2,000 boe per day for 30 consecutive days, as determined by the board of directors of the corporation.

The corporation has also agreed to lend to NCT, on a secured basis, up to $3-million (U.S.) to finance cash calls and operating costs associated with NCT's oil and gas production. The loan is subject to satisfactory completion of due diligence by the corporation and negotiation of loan documentation and related documentation (including documentation necessary to provide collateral or a security interest in NCT's 19.8-per-cent net interest in the Suroriente block (as described above)). In the event that the corporation and NCT are unable to enter into a mutually accepted definitive agreement by the deadline, then the loan will become due in 90 days with interest payable monthly at a rate of London interbank offered rate (LIBOR) plus 2 per cent. In the event that NCT is unable to repay the loan and any interest payable within that 90-day period, the corporation will have the right to immediately realize on the security.

The letter agreement provides for mutual break fees of $250,000 (U.S.) in the event of non-completion of the proposed transaction for specified reasons.

There are currently 27,366,606 common shares of the corporation outstanding. Upon closing of the proposed transaction, the corporation will have 38,991,606 common shares of the corporation outstanding, 43,366,606 common shares in the event that all of the special warrants are exercised.