Rheochem to focus on exploration and production after selling drilling fluids business

Rheochem RHEP , the AIM listed oil and gas company, has agreed a deal to sell its drilling fluids business for up to £28m to Newpark Resources Inc NR. The deal clears the way for Rheochem's chief executive Haydn Gardner to refocus the company as a pure play exploration and production company. It already owns a 10% stake in the Athena oil field in the UK North Sea, which is currently being developed.

Newpark is paying around £14.7m up front for the drilling fluids business, with the balance based on its performance over the next 12 months. The initial consideration is enough to pay Rheochem's £8.7m share of the Athena development, wipe out around £4m of existing bank debt and still leave around £2m of working capital headroom. Eventually the company wants to change its name to Lochard Energy Group plc.

The drilling fluids business is the primary cash and revenue generating division of Rheochem's business and the sale will mean it is now wholly reliant on oil and gas exploration and production. First oil from the Athena field is expected in the fourth quarter of 2011. Once the field comes into production, the company expects the first year revenue from its share of production to be more than £37.3m compared with the £12.7m revenue received from the drilling fluids business in 2009/2010.

Mr Gardner said: “I am very pleased to announce this disposal, which completes the strategic review of the company and refocuses the business on oil and gas exploration and production. The sale of the fluids business unlocks significant value for shareholders and allows us to meet our commitments on the Athena field. The company will be issuing an operational update shortly, to provide the market and shareholders with a deeper insight into the existing exploration, appraisal and production portfolio already contained within the business. We are confident in the potential of the portfolio to generate significant opportunities as we progress the assets through the value chain.”

Rheochem's drilling fluids subsidiaries specialise in the provision of drilling fluids and engineering services to the oil and gas exploration industry, including to coal bed methane projects. They also provide these products and services to the geothermal industry, which utilises similar drilling techniques. The major assets that will be sold as part of the disposal include a drilling fluids blending plant and equipment located in Dampier, Western Australia; corporate offices and warehouse at Henderson, Western Australia together with various other plant, equipment and stock.

Deal completion is subject to Rheochem shareholder approval. The Rheochem share price rose by 4% to 15.75p on the news.

Stockopedia