NEWS RELEASE
2 January, 2018

Orca Exploration finalizes terms for US$130 million investment by Swala Oil and Gas (Tanzania) plc in the Orca Group

TORTOLA, British Virgin Islands 2 January 2018: Orca Exploration Group Inc. (“Orca” or the “Company”) today announced that it has executed and delivered into escrow definitive agreements providing for an up to US$130 million investment by Swala Oil & Gas (Tanzania) plc ("Swala") in the Orca Group. Swala is an independent oil & gas exploration and production company, the first to be listed on an East African Stock Exchange and having a significant local Tanzanian ownership.

Escrow Arrangements

The definitive agreements for the investment transactions have been signed by the parties and delivered into escrow pending satisfaction of certain escrow release conditions, including satisfaction of the remaining conditions precedent to the completion of the investor's financing transactions, approval of the International Finance Corporation ("IFC") and the TSX Venture Exchange to the investment transactions, and satisfaction of all "Know Your Client" requirements of the registered agent of PAE PanAfrican Energy Corporation ("PAEM") by Swala and Swala (PAEM) Limited ("Swala PAEM"), a wholly-owned subsidiary of Swala. Once these release conditions have been satisfied, which must occur by 12 January 2018, the definitive agreements would be delivered and become effective and the first investment transaction would be completed.

Investment Transactions

Pursuant to an investment agreement (the "Investment Agreement") with Swala PAEM, Swala PAEM has agreed, subject to conditions, to acquire up to 40% of the outstanding shares of Orca's wholly owned subsidiary, PAEM, a Mauritius-registered company and the sole shareholder of PanAfrican Energy Tanzania Limited ("PAET") for a purchase price of US$130 million (subject to certain purchase price adjustments). The investment transactions are based on an agreed value of US$325 million for PAEM (US$265 million net of the outstanding IFC loan to PAET). PAET owns and operates the Orca Group's natural gas exploration, development and supply business in Tanzania.

On satisfaction of the escrow release conditions, Orca would sell 7,933 Class A PAEM Shares (the "PAEM Shares") (7.93%) that it holds of PAEM to Swala PAEM for gross proceeds of US$25,782,250 (US$21,022,450 net of certain purchase adjustments) payable in US$17,055,950 cash and US $3,966,500 face amount of Swala convertible preferred shares. The cash portion of the purchase price for the first investment transaction has been deposited into escrow under an escrow agreement with Orca, Swala and Swala's investors. The first investment transaction must be completed on or before 12 January 2018.

Subject to the completion of the first investment transaction, Orca would agree to sell an additional 32,067 PAEM Shares (32.07%) for gross proceeds of US$104,217,750 (US$84,977,550 net of certain purchase adjustments) payable in US$72,636,358 cash and US $12,341,192 face amount of Swala convertible preferred shares. The remaining investment transactions must be completed on or before 28 February 2018.

The following table sets out the consideration to be received by Orca on each tranche of the investment transactions, before and after taking into account the expected partial repayments of the principal balance of the IFC loan:

 

Swala Ownership
Interest
(No. / %)

Consideration Payable to Orca

Gross Purchase Price

Net Purchase Price

Purchase Price (Cash)

Purchase Price (Swala convertible preferred shares)

First Tranche 7,933 / 7.93%

US$25,782,250

US$$21,022,450 US$17,055,950 US$3,966,500  
Second Tranche 12,067 / 12.07% US$39,217,750 US$31,977,550 US $27,790,204 US$4,187,346  
Third Tranche 20,000 / 20% US$65,000,000 US$53,000,000 US$44,846,154 US$8,153,846  
Total 40,000 / 40% US$130,000,000 US$106,000,000 US$89,692,308 US$16,307,692  

Closing of the second and third tranches would be subject to the satisfaction or waiver of certain conditions precedent, including Swala and Swala PAEM raising the necessary funds to complete the remaining investment transactions and approval by the boards of directors of Orca, Swala PAEM and Swala. No assurances can be given that such transactions will be completed on the terms proposed or at all.

In addition to receiving the approval of the TSX Venture Exchange, completion of the investment transactions is subject to the approval of IFC. Orca expects to enter into an amendment and consent letter with PAET and IFC pursuant to which:

Under the Investment Agreement, Orca would have the right to monetize the benefits of certain assets, and the obligation to bear the burden of certain liabilities of the Tanzanian business that relate to the period prior to 1 January 2017 (the "Effective Date"). Pre-effective date assets include, among other things, the right to receive payment of the arrears of Tanzania Electric Supply Company Limited and arrears owing by Songas Limited as at the Effective Date, being a total of US$125.3 million, less an estimated US$51 million in TPDC Profit Gas payable under the Production Sharing Contract for the Songo Songo field on receipt of net revenues realized from these arrears. Pre-effective date liabilities include, among other things, any tax liabilities, liabilities resulting from litigation or other dispute resolution processes, and any environmental liabilities related to operations conducted by PAEM and its subsidiaries, which occurred or relate to any period ending on or before the Effective Date. Pre-effective date liabilities do not include any liabilities to IFC under the IFC Loan or certain related agreements. Pre-effective date assets of US$80 million cash, US$9 million of working capital and US$4 million of Tanzania Electric Supply Company Limited arrears were distributed to Orca during 2017. Further details regarding the pre-effective date assets and liabilities retained by Orca under the Investment Agreement are available in Orca's material change report, and in the copy of the Investment Agreement available under Orca's issuer profile on SEDAR at www.sedar.com.

Orca Chairman and Chief Executive Officer, W. David Lyons commented, “This is a transformational transaction for Orca. To the broader Orca Group, this investment is strategic in both underpinning the intrinsic value of our business and providing a platform from which to grow and diversify our company and deliver value to our shareholders. In respect of our investment in Tanzania, Orca has for some time sought the right partner for a minority stake, and we welcome Swala’s participation, and importantly Swala’s ability to attract and engage both recognized international institutional investors as well as Tanzanian investors to the business.”

Swala Convertible Preferred Shares

The issuance of the Swala convertible preferred shares is subject to receipt of the approval of the shareholders of Swala and approval of the Dar es Salaam Stock Exchange. If Swala is unable to obtain such approvals within 45 days of the effective date of the Investment Agreement, then that portion of the purchase price payable in Swala convertible preferred shares must be paid in US dollars plus interest on the balance of the purchase price owing at a rate of 10% per annum from the closing date until the date of payment.

Under the Investment Agreement, Swala will use its best efforts to cause the board of directors of Swala to authorize the creation of 50 million Swala convertible preferred shares, and to obtain the approval of Swala shareholders to the creation and issuance of the Swala convertible preferred shares to Orca. The meeting of Swala shareholders to consider the creation and issuance of the Swala convertible preferred shares is expected to take place before 2018.

Further details regarding the Swala convertible preferred shares are available in Orca's material change report, and in the copy of the Investment Agreement available under Orca's issuer profile on SEDAR at www.sedar.com.

Shareholders' Agreement

In connection with the Investment Agreement, Orca and Swala PAEM have entered into a shareholders' agreement (the "Shareholders' Agreement") with PAEM for the operation and management of PAEM. The Shareholders' Agreement governs the material rights and obligations of both parties in relation to their ownership of PAEM, including transfers of the PAEM Shares, the election of directors of PAEM, funding arrangements and other matters.

The Shareholders' Agreement entitles each PAEM shareholder, subject to certain exceptions, to acquire the other party's PAEM Shares in the event of a change in control (the "Compulsory Transfer Right"). Under the Shareholders' Agreement, upon a change in control of either Orca or Swala (the applicable party, the "Seller"), the other party (the "Buyer") will have the option to purchase the Seller's PAEM shares. The Compulsory Transfer Right may be exercised by the Buyer by providing written notice of its intention to exercise the right within 45 days after the Buyer receives notice to the Seller, which notice must include the proposed price for the Seller's PAEM shares. If the Seller and Buyer are unable to agree on a price for the Seller's PAEM Shares, the value will be determined by an independent expert. If the Buyer does not provide notice to the Seller of its intent to exercise the Compulsory Transfer Right, or is unable to finance the purchase of the Seller's PAEM Shares, then the Compulsory Transfer Right will expire without any transfer of the PAEM Shares.

Orca will retain the right to appoint a majority of the directors to the board of PAEM notwithstanding the completion of Swala's entire 40% investment in PAEM. Subject to certain exceptions, decisions of PAEM shall be made by a simple majority vote of the directors of PAEM.

PAEM's board of directors will be made up of five directors. Shareholders of PAEM will be entitled to nominate one or more directors to PAEM's board based on the percentage interest held by the shareholders (a "Nomination Right"). Each Nomination Right will be represented by a 20% block of interest in PAEM. The right of any PAEM shareholder to a Nomination Right will correspond to each whole or majority block of a 20% interest of PAEM held by such shareholder. Upon the completion of the first investment transaction, Swala PAEM will hold a 7.93% interest in PAEM. Orca will retain the Nomination Rights for directors. Assuming completion of all the investment transactions, Swala will own a 40% interest in PAEM and will have two Nomination Rights, with Orca retaining three Nomination Rights.

In the event that Swala's shareholders' interest in PAEM is 5% or more, but Swala is not entitled to a Nomination Right, Swala would be entitled to nominate one person, as an observer, to receive the same information and notices as directors, and to attend board meetings, but not to vote. If at any time either party ceases to be a shareholder of PAEM or again becomes entitled to nominate a director, it shall no longer have the right to nominate an observer.

The Shareholders' Agreement also provides for certain restrictions on transfer of the PAEM Shares, rights of first refusal, drag along and tag along right and events of default. Further information regarding the Shareholders' Agreement is available in Orca's material change report, and in the copy of the Shareholders' Agreement available under Orca's issuer profile on SEDAR at www.sedar.com.

Call Option

In connection with completion of the first investment transaction, Orca and Swala PAEM will enter into a call option agreement (the "Call Option Agreement") with a third party security trustee acting on behalf of the Note holders (the "Security Trustee"). Orca currently expects the terms of the Call Option Agreement to provide that, except in certain circumstances as described below, PAEM and PAET will not undertake any new business that is not consistent with the current expected business activities of PAEM and PAET. Specifically, it is expected that that Call Option Agreement will prohibit PAEM and PAET from undertaking any new business that would be reasonably likely to cause: (i) PAEM to issue a funding request to Swala PAEM during the 12 months following the commencement of such new business; or (ii) a reduction in the regular distributions payable by PAEM to Swala PAEM, which would in either case result in Swala PAEM's debt coverage ratios falling below 1.15. Swala PAEM's debt coverage ratios are to be calculated by dividing the amount of Swala PAEM's available funds, by the amount of interest payable on the senior secured notes ("Notes"), issued by Swala PAEM in connection with the financing Swala PAEM's investment in PAEM, over the applicable 12 month period.

If PAEM or PAET propose to undertake any new business, Orca or Swala PAEM must first seek the consent of the Security Trustee. If the Security Trustee provides its consent, then PAEM or PAET may undertake such new business. If the Security Trustee refuses to provide consent, then PAEM or PAET (as applicable) may only undertake such new business if Orca exercises its call option under the Call Option Agreement (the "Call Option").
If the Security Trustee refuses to provide consent to any new business, Orca may exercise the Call Option. The Call Option is expected to provide for an exclusive and irrevocable right to Orca to acquire some or all of the PAEM Shares held by Swala PAEM or the Security Trustee in trust for Swala PAEM (the "Call Option Shares"). It is expected that the price for the Call Option Shares will be the same price per PAEM Share as Orca received under the Investment Agreement and that the price for the Call Option Shares will be payable in cash and Swala convertible preferred shares in the same ratio as Orca received under the Investment Agreement. The Call Option may only be exercised once, and expires upon the earlier of: (i) Swala PAEM's repayment of the Notes; (ii) Swala PAEM securing additional financing of not less than $20,000,000; (iii) 31 December 2019, and (iv) the completion of Orca's acquisition of the Call Option Shares.

About the Songo Songo Project

The first gas-to-power project in Sub-Saharan Africa, the Songo Songo Project was initiated by the Government of Tanzania, with the technical and financial support of the World Bank and private sector investors, including the predecessor to Orca. During the period July 2004 – December 2016, Orca estimates that the total economic rent in direct cash payments made to the Government as a result of producing Songo Songo natural gas were US$408 million (or 78%), with PAET earning US$113 million (or 22%), all while enabling the IPP, Songas, to generate power for the state utility, TANESCO, at US$0.05/kWh being the lowest cost thermal generated power in Tanzania.

Beyond the direct cash payments to the Government of Tanzania, the Songo Songo Project has had a significant positive impact on Tanzania’s economy. It has helped to increase energy supply security by reducing the national grid’s dependence on hydropower and importantly has also reduced the use of imported liquid fuel for power generation and process heat production in major industries. From September 2004 to December 2016, Orca estimates that Tanzania has saved over US$5 billion (over TZS 11 trillion at current exchange rates) by substituting Songo Songo natural gas for liquid fuels. 

About Orca Exploration Group Inc.

Orca is an international public company engaged in natural gas exploration, development and supply in Tanzania through its wholly-owned subsidiary, PAET. Orca trades on the TSX Venture Exchange under the trading symbols ORC.A and ORC.B. Orca’s Project Agreements are more fully described in the Company’s 2016 Annual Information Form, and available on www.orcaexploration.com.

About Swala Oil & Gas (Tanzania) plc

Swala is an independent oil & gas exploration and production company, the first to be listed on an East African Stock Exchange and having a significant local Tanzanian ownership. Swala holds exploration blocks in the world-class East African Rift System with a total net land package in excess of 14,000 km2. New discoveries have been announced by industry participants in a number of licences along this trend that extend the multi-billion-barrel Albert Graben play developed by Tullow Oil into the eastern arm of the rift. Swala has an active operational and business development programme to continue to grow its presence in the hydrocarbon provinces of East Africa and globally. More information on Swala is available at swalaoilandgas.com.

For further information please contact:

W. David Lyons,
Chairman and CEO
+44-7717-100-200
wdlyons@orcaexploration.com

Neither the TSX Venture Exchange nor its Regulation Service Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

Forward Looking Information
This news release contains forward-looking information. More particularly, this news release contains statements and information concerning, but not limited to, the expected satisfaction and timing of escrow release conditions; the receipt of regulatory and third party approvals; the expected timing for closing the investment transactions; the potential completion of the remaining investment transactions; Swala's ability to obtain the necessary financing; the satisfaction of the release conditions to the escrow arrangements; the expected terms of negotiated agreements with IFC; Swala obtaining the necessary board and shareholder approvals to create and issue the convertible preferred shares; the expected levels of investment by Swala and related PAEM board Nomination Rights; the expected performance of PAEM's business; and other matters. Although management believes that the expectations reflected in the forward-looking information are reasonable, it cannot guarantee future agreement, levels of activity, performance or achievements since such expectations are inherently subject to significant uncertainties and contingencies. As a consequence, actual results may differ materially from those anticipated in the forward-looking information.

Forward-looking information involves substantial known and unknown risks and uncertainties, certain of which are beyond Orca's control, and many factors could cause the actual results to differ materially from those expressed or implied in the forward-looking information presented by Orca, including, but not limited to: that the third parties perform their obligations under the Investment Agreement and other related agreements; risks associated with obtaining third party or government approvals; risks associated with international activity; the uncertainty associated with negotiating with governments; that PAEM and PAET are able to carry on their business activities as expected, and other risk factors. Actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking information and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking information will transpire or occur, or if any of them do so, what benefits Orca will derive therefrom. Readers are cautioned that the foregoing list of factors is not exhaustive.

Such forward-looking information is based on certain assumptions made by Orca in light of its experience and current knowledge of the circumstances, as well as other factors Orca believes are appropriate in the circumstances, including, but not limited to: that Swala will be able to obtain financing to close the investment transactions; that the escrow release conditions will be met on a timely basis; that the necessary approvals will be obtained; that third parties will perform their obligations under the agreements; that Swala will obtain the necessary approvals to create and issue the preferred shares; that PAEM and PAET are able to carry on their business activities as expected; and other matters.

The forward-looking information contained in this news release is made as of the date hereof and Orca undertakes no obligation to update publicly or revise forward-looking information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.

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