Cuadrilla

Background
Cuadrilla is a company incorporated in England and based in Lichfield, Staffordshire. The principal business of Cuadrilla is exploration for unconventional sources of gas and oil in Europe. Cuadrilla holds exploration permits in six different sedimentary basins in the United Kingdom (Bowland and Weald Basins), the Netherlands and Poland, covering in excess of 1 million net acres. In addition, Cuadrilla has exploration license applications pending in Poland and the Czech Republic.

Ownership and funding
Lucas, through its wholly owned subsidiary Lucas Cuadrilla Pty Limited, has a 42% equity interest in Cuadrilla, approximately equal with investor funds managed by Riverstone. The remaining equity is held by management, former employees and consultants. In addition, an employee benefit trust holds shares on behalf of employees which may realise value upon an exit by investors or a capital return to shareholders subject to certain investment return thresholds being met. If all of these investment return thresholds are met, the maximum ownership dilution to all other shareholders is 12%.
Lucas has invested $73.6 million in Cuadrilla and its direct exploration interest since Cuadrilla began operations in 2007.

In association with its investment in Cuadrilla, Lucas owns a direct 25% interest in two of Cuadrilla’s English exploration permits, PEDL 165 in the Bowland Basin and PEDL 244 in the Weald Basin. Cuadrilla is the operator of the exploration programme for these permits and Lucas has entered into operating agreements with Cuadrilla which obliges it to contribute 25% of the direct exploration expenses attributable to these permit areas.

In 2012, Lucas share of future exploration expenditure on its direct interest and equity calls by Cuadrilla will depend on the outcome and timing of the UK’s Government’s review of the Geo-Mechanical Study. Currently, Cuadrilla is approaching total depth on its third Bowland basin well. It is not planning further drilling in the Bowland basin until the UK Government makes it determination on future fraccing activity.

Strategy
Cuadrilla’s strategy since inception has been to identify and obtain exploration permits in prospective unconventional energy sedimentary basins in the European Union, to build a diversified portfolio of licenses across several exploration areas, to explore these areas sufficiently to identify the probability of prospective commercial reserves of gas, condensates or oil, and to invite interest for those areas from prospective larger partners which are better suited in terms of financial, technical and production capability to exploit any prospective reserves which have been identified.

In support of that strategy, in recognition of the challenges and opportunities associated with the relatively small scale of the unconventional exploration support services available in Europe when it commenced operations in 2007, and in order to enhance operating capability and reduce operating costs, Cuadrilla purchased and operates its own drilling rig, hydraulic stimulation and well services equipment. Cuadrilla seeks to minimise exploration risk by targeting basins which have a history of conventional energy production or, where there is available exploration data such as well logs and other geological/geophysical data, basins which are known to contain hydrocarbons. Cuadrilla’s management evaluates prospective basins where large, contiguous land positions can be assembled. Where possible, it seeks to identify multiple prospective plays (shale gas, shale oil, tight gas sands) within the areas it is examining. The Noord Brabant exploration area is such an example, where Cuadrilla believes there is more than one prospective unconventional resource play.

Board and Management
The board of Cuadrilla is composed of three nominees from Lucas, three nominees from Riverstone and two members of the management team. Lucas and Riverstone have no direct role in the day-to-day operations of Cuadrilla. On occasion, Lucas has seconded employees from Australia to complete discrete assignments or provide advice associated with setting up systems such as health and safety, and on-site drilling operations, and Riverstone upon request has made available technical advice from companies in its portfolio of energy investments. The management team is composed of executives with considerable experience in the energy and energy services industry, supplemented by academic and industry consultants.

Exploration Licences
Other than in Hungary, all of Cuadrilla’s exploration licenses and applications are held through wholly-owned subsidiaries incorporated in the countries where the licenses are held. Cuadrilla continues to assess prospective new exploration areas and is also in discussions with parties to acquire or farm-in to certain exploration permits in order to increase its current exploration portfolio in areas which it considers prospective. In addition to applications for new licence awards, Cuadrilla’s land acquisition strategy seeks to take advantage of the fact that it operates its own exploration equipment, by using it to work an area in exchange for obtaining an ownership interest.