Terrace Resources Signs LOI to Buy 87.5% Working Interest in Los Patos Gas Unit

The directors of Terrace Resources Inc. (TSX VENTURE:TZR.P) has announced that the Company has entered into a letter of intent dated January 31, 2011 to acquire an 87.5% working interest and 65.1875% net revenue interest in certain oil gas leases referred to as the "Los Patos Gas Unit" from Eagle Energy and Development Company, a private company incorporated in Texas which is at arm's length to Terrace.

The Acquisition will constitute Terrace's Qualifying Transaction under the policies of the TSX Venture Exchange (the "Exchange").

Los Patos Gas Unit

The Unit is a 320 acre proration unit located in Wharton County, Texas. The Unit is situated in a prolific overpressured Yegua system which is interpreted as an elongated barrier bar system running parallel to the Texas Gulf Coast.

To date, 26 wells have been completed in the system running to the southwest from the prolific Rio Loco Field, producing slightly over 53 BCFG, or an average of slightly over 2 BCF per well. Individual well recoveries have ranged as high as 7.6 BCFG. In the immediate vicinity of the prospect, 17 wells have produced 23 BCFG or approximately 1.4 BCFG per well.

Eagle previously drilled a well in the Unit, known as "Patos Gas Unit #1", which suffered extensive damage when initially completed. A subsequent engineering study was undertaken that determined there is a reasonable probability the well may be successfully re-entered and fracture stimulated to produce gas in the Yegua formation.

Material terms of the Acquisition

Under the terms of the LOI:

  • Terrace will incorporate a wholly owned USA domiciled subsidiary ("Subco"), which will be granted an 87.5% Working Interest ("WI") and a 65.1875% Net Revenue Interest ("NRI") in the Unit, subject to paying certain costs as set out below.
  • Subco will pay 100% of all costs associated with the re-entry and fracture stimulation of Patos Gas Unit #1 (the "Workover Well") in exchange for 100% of the resulting net cash flow (74.5% NRI) until the date that Subco has received aggregate cash flow equal to Subco's capital costs (the "Payout Date"), which are estimated to be a maximum of US$250,000.
  • After the Payout Date, Subco's WI and NRI in the Workover Well will be reduced to 87.5% and 65.1875%, respectively.
  • Subco will be named operator of the Unit.
  • Subco will commence work on the Workover Well within 60 days of the date on which all of the conditions precedent set out below have been satisfied or waived by Terrace.
  • In the event the fracture stimulation of the Workover Well does not result in a commercially productive well, Subco will be responsible for all costs associated with plugging and abandoning the Workover Well and restoring the surface site in accordance with the requirements of the Texas Railroad Commission and the lease provisions.

Upon completion of the Workover Well, the Company may, but is not required, to drill additional wells in which it will have an 87.5% WI at an aggregate estimated cost of US$1.5 million per well.

Conditions precedent

The completion of the Acquisition is conditional upon, among other things, the following:

  • the receipt of a satisfactory report in Form 51-101 in a form acceptable to Terrace and the Exchange;
  • the execution of a formal Farmout Agreement satisfactory to both parties on or before February 28, 2011 or such later date as may be agreed upon by the parties;
  • the receipt of a financial budget and technical plan, acceptable to Terrace, to re-enter and fracture stimulate the Workover Well; and
  • the receipt of final acceptance from the Exchange to the Acquisition and the private placement described below on or before April 30, 2011 or such later date as may be agreed upon in writing by the parties.

It is expected that the Exchange will not require the Company to seek shareholder approval for the Acquisition given that it is an arm's length transaction.

Proposed private placement

The Company also announces a non-brokered private placement of up to 10,000,000 units at a price of $0.09 per unit for total maximum proceeds of $900,000. Each unit will comprise one common share and one share purchase warrant entitling the holder to purchase an additional common share at a price of $0.18 for a period of three years from the date of issue.

The private placement will be conditional upon and will close concurrently with the completion of the Acquisition.

The proceeds of the private placement will be used together with the Company's existing working capital to fund the development of the Unit and for general working capital purposes.

A finders' fee or commission may be paid by the Company in connection with the financing.

Post-Closing status

On the closing of the Acquisition, Terrace will be classified as a Tier 2 Oil & Gas issuer by the Exchange and will have, if the maximum private placement is completed, approximately 40,881,000 common shares and 10,000,000 warrants outstanding.

A yet to be determined number of stock options will be granted, in accordance with the policies of the Exchange, to directors, officers and consultants concurrently with Closing.

In addition, the Company will have, if the maximum private placement is completed, approximately $3.6 million in cash on hand before it incurs the workover costs contemplated by the LOI.

Directors, Officers and other Insiders

On completion of the Acquisition,

  • David Boehm will resign as a director of the Company and William McCartney will resign as the chief executive officer and chief financial officer of the Company.
  • Eric Boehnke will be appointed as the chief executive officer and a director of the Company. Eric is the president and a director of Big Sky Management Ltd., a private company principally involved with providing corporate finance and administrative management services to private and public companies since 1997. Mr. Boehnke has been a director of several public companies and has been financing, both public and private, oil and gas opportunities for the past 8 years.
  • William D. Gibbs will be appointed a director of the Company. He is a degreed engineer with over 35 years of domestic and international experience in petroleum engineering, operations management and executive leadership in the upstream oil and gas exploration and production industry. Mr. Gibbs has held senior executive management positions with a number of private and public energy companies.
  • Jennie Choboter will be appointed the chief financial officer of the Company. Ms. Choboter is a Chartered Accountant with over 25 years of international experience in financial management, mergers and acquisitions, and corporate governance. Ms. Choboter has held a number of senior financial management positions in a variety of industries, including natural resources, insurance, pulp and paper, and technology.

On completion of the Acquisition, the directors of the Company will be Eric Boehnke, William D. Gibbs, Bill McCartney and Murray Oliver. The senior officers of the Company will be Eric Boehnke, chief executive officer, and Jennie Choboter, chief financial officer.

Terrace has not engaged the services of a sponsor and intends to seek a waiver of the sponsorship requirement from the Exchange.

Completion of the transaction is subject to a number of conditions, including but not limited to, Exchange acceptance and, if applicable pursuant to Exchange Requirements, majority of the minority shareholder approval. Where applicable, the transaction cannot close until the required shareholder approval is obtained. There can be no assurance that the transaction will be completed as proposed or at all.

Investors are cautioned that, except as disclosed in the management information circular or filing statement to be prepared in connection with the transaction, any information released or received with respect to the transaction may not be accurate or complete and should not be relied upon. Trading in the securities of a capital pool company should be considered highly speculative.

Source: Terrace Resources Inc.

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