Laredo Oil, Inc. is a management services company managing the acquisition
and conventional operation of mature oil fields and the further recovery of
stranded oil from those fields using enhanced oil recovery (“EOR”)
methods for its sole customer, Stranded Oil Resources Corporation (“SORC”),
an indirect, wholly owned subsidiary of Alleghany Corporation (“Alleghany”).
From its inception through October 2009, the Company was primarily engaged
in acquisition and exploration efforts for mineral properties. After a change
in control in October 2009, the Company shifted its focus to locating mature
oil fields with the intention of acquiring those oil fields and recovering stranded
oil using EOR methods. The Company was unable to raise the capital required
to purchase any suitable oil fields. On June 14, 2011, the Company entered into
several agreements with SORC to seek recovery of stranded crude oil from mature,
declining oil fields by using the EOR method known as Underground Gravity Drainage
(“UGD”). Such agreements consist of a license agreement between
the Company and SORC (the “SORC License Agreement”), a license agreement
between the Company and Mark See, the Company’s Chairman and Chief Executive
Officer (“CEO”) (the “MS-Company License Agreement”),
an Additional Interests Grant Agreement between the Company and SORC, a Management
Services Agreement between the Company and SORC (the “MSA”), a Finder’s
Fee Agreement between the Company and SORC (the “Finder’s Fee Agreement”),
and a Stockholders Agreement (the “Stockholders Agreement”) among
the Company, SORC and Alleghany Capital Corporation, a wholly-owned subsidiary
of Alleghany (“Alleghany Capital”), each of which are dated June
14, 2011 (collectively, the “Agreements”).
The Company and Mark See now provide to SORC both management services and expertise
pursuant to the SORC License Agreement, MS-Company License Agreement and the
MSA. As consideration for the licenses to SORC, the Company will receive a 19.49%
interest in SORC net profits as defined in the SORC License Agreement (the “Royalty”).
Under the SORC License Agreement, the Company agreed that a portion of the Royalty
equal to at least 2.25% of the net profits (the “Incentive Royalty”)
be used to fund a long-term incentive plan for the benefit of its employees,
as determined by the Company’s board of directors. On October 11, 2012,
the Laredo Royalty Incentive Plan (the “Plan”) was approved and
adopted by the Board and the Incentive Royalty was assigned by the Company to
Laredo Royalty Incentive Plan, LLC, a special purpose Delaware limited liability
company and wholly owned subsidiary of Laredo Oil, Inc. formed to carry out
the purposes of the Plan (the “Plan Entity”). As a result of the
assignment of the Incentive Royalty to the Plan Entity, the Royalty retained
by the Company has been reduced from 19.49% to 17.24% subject to reduction to
15% under certain events stipulated in the SORC License Agreement. Additionally,
in the event of a SORC initial public offering or certain other defined corporate
events, the Company will receive 17.24%, subject to reduction to 15% under the
SORC License Agreement, of the SORC common equity or proceeds emanating from
the event in exchange for termination of the Royalty. Under certain circumstances
regarding termination of exclusivity and license terminations, the Royalty could
be reduced to 7.25%.
SORC is funded solely by Alleghany Capital in exchange for issuance by SORC
of 12% Cumulative Preferred Stock. As of June 30, 2017, SORC has received approximately
$274.6 million in net funding from Alleghany Capital. Prior to the Company receiving
any cash distributions from SORC, all accrued dividends (in excess of $100 million
as of May 31, 2017) must be paid and preferred shares redeemed.
Under the Finder’s Fee Agreement, SORC agreed to provide funding for amounts
payable to Sunrise Securities Corporation (“Sunrise”) for certain
finder’s fees relating to Alleghany’s investment in SORC, which
amounts shall not exceed $1,100,000 in the aggregate. During fiscal year 2015,
cumulative fee payments to Sunrise reached $1,100,000, thus fulfilling the total
amount due under the Finder’s Fee Agreement.
Under the MS-Company License Agreement, Mark See granted the Company an exclusive
license to use certain knowhow and expertise. The Stockholders Agreement, which
shall not be effective unless and until the Royalty is converted into SORC common
stock pursuant to the Agreements, provides, among other things, that the Company
shall have certain registration rights with respect to the SORC common stock
it acquires.
The Agreements require the Company to maintain confidentiality of SORC confidential
information, except to the extent such confidential information is required
to be disclosed under applicable law, but such disclosure is expressly limited
to the sole purpose of complying with such law and such disclosure is permitted
only to the extent required by such law.
The UGD method uses conventional mining processes to establish a drilling chamber
underneath an existing oil field from where closely spaced wellbores are intended
to be drilled up into the reservoir, using residual radial pressure and gravity
to then drain the targeted reservoir through the wellbores. This method is applicable
to mature oil fields that have very specific geological characteristics. The
Company has done extensive research and has identified oil fields within the
United States that it believes are qualified for UGD recovery methods. The Company
continues to manage and support SORC’s efforts to pursue and recover stranded
oil from selected mature fields chosen from this group which may be acquired
by SORC in its sole and absolute discretion.
We believe the costs of implementing the UGD method are significantly lower
than those presently experienced by commonly used EOR methods. We also estimate
that we can materially increase the field oil production rate from prior periods
and, in some cases, recover amounts of oil equal to or greater than amounts
previously recovered from the mature fields selected.