WTI $109.77 -52c, Brent $113.56 +14c, Diff -$3.79 +66c, USNG $8.80 +6c, UKNG 137.4p -0.6p, TTF €85.510 -€0.44

Oil price

Another quiet spell in the oil market as all the usual factors remained on the case. China has closed down parts of Beijing as Covid cases rise and seems likely to continue. On the positive side we keep getting rumours that the EU are close to a deal to sanction Russian oil ‘by the year end’ which is what you might expect from them.

Over in the US the API stats showed a small build in crude of 567/- barrels but a decent draw from the strategic reserves was responsible, stocks at Cushing drew by 731/-. As one might expect in the week before Memorial day, and the start of the driving season, there was a big draw in gasoline of 4.273m barrels and a small draw in distillate. The EIA numbers later today should rubber stamp that.

Finally all the low quality freeloaders and wastrels remain in their expensive hotels in Dav-oh and the interesting thing is that the quality of WEF attendees has been significantly lower than in previous years. Watching CNBC is a non-stop train of these wastrels who interview to justify their presence as do CNBC to justify their attendance, it must be costing them a fortune to have such a team out there.

Gulf Keystone Petroleum

Gulf Keystone has announced that the Board has approved the declaration of a special dividend of $50 million.

Gulf Keystone will be seeking shareholder approval at the Annual General Meeting on 24 June 2022 to pay total dividends of $75 million, comprising the previously declared $25 million annual ordinary dividend and the $50 million special dividend declared today.

The annual ordinary dividend of $25 million is expected to be paid on 15 July 2022, based on a record date of 1 July 2022. The special dividend of $50 million is expected to be paid on 29 July 2022, based on a record date of 15 July 2022.

Both dividends will be payable in pounds sterling and converted from dollars at the spot rate leading up to the relevant record dates. The Company will disclose the US dollar and pounds sterling rate per share for both dividends prior to their ex-dividend dates.

As at 24 May 2022, the Company had a cash balance of $218.0 million, including the recently received February 2022 invoice payment.  

The company also confirms that a gross payment of $55.8 million ($43.7 million net to GKP) has been received from the Kurdistan Regional Government (“KRG”). The payment is comprised of gross $45.1 million ($35.3 million net to GKP) for Shaikan crude oil sales during February 2022 and gross $10.7 million ($8.4 million net to GKP) in relation to the arrears from the outstanding February 2020 invoice.

The arrears related to the November 2019 to February 2020 invoices have now been fully recovered.

Jon Harris, Gulf Keystone’s Chief Executive Officer, said:
“Following payment of $115 million of dividends year to date, we are delighted to declare today a special dividend of $50 million, consistent with our strategic commitment to balance investment in growth with shareholder distributions. The declaration brings total dividends for shareholder approval at the upcoming AGM to $75 million and increases total dividends declared in 2022 to $190 million. Assuming timely payment of invoices and strong oil prices, we expect continuing strong cash flow generation in 2022, providing flexibility to consider further shareholder distributions, optimisation of the capital structure and a potential increase in capital expenditure with progress on the FDP.”

This is good news indeed from GKP who are paying out another special dividend and shareholders will have a very pleasing time in July when both this and the $25 ordinary dividend are paid out. It must also have been very helpful in this decision making process that the KRG have come good with a net $43.7m for Shaikan sales in February 2022 and the outstanding February 2020 invoice. 

The shares, like others in Kurdistan offer exceptional value and show that capital expenditure in the region returns substantial gains which swiftly make their way back to investors. 

Petrofac

Petrofac continues to grow its presence in Africa, with the award of a new contract to provide offshore operations services for bp’s Greater Tortue Ahmeyim (GTA) Project.

The scope of work encompasses the provision of specialist personnel, plant and equipment to support offshore operations at the floating production storage and offloading (FPSO) and liquefied natural gas (LNG) hub in Mauritania and Senegal. The contract was awarded following competitive tender.

Nick Shorten, Chief Operating Officer for Petrofac’s Asset Solutions business said:
“We are proud to support bp’s ongoing investment in the Mauritania and Senegal region. We will continue to drive excellence, supporting bp to operate safely and responsibly through their ongoing operations.”

The GTA gas field, which is set to produce around 2.5 million tonnes of LNG per year, is located offshore on the border between Mauritania and Senegal.

Petrofac is piece by piece rebuilding the order book consistent with the high quality, margin enhancing and internationally focused one of previous years. I am extremely confident that this is only the start of what will happen later this year and more importantly next year.

PFC shares have risen over 50% since April of this year and my extremely positive stance on the stock is whilst not shared by many others is rewarding investors. I would strongly suggest that there is still room for significant growth this year and next.

Predator Oil & Gas

Predator has announced that Mag Mell Energy Ireland Ltd. will be publishing in Ireland a white paper document today at 10.00am titled “Keeping Ireland’s Energy Flowing” which focusses on how Ireland can repurpose existing infrastructure at the Kinsale Head Gas Field to help insulate itself from the rising gas prices and ensure security of energy supply during the transition to renewables.

The Mag Mell white paper and Press Release on the reuse of Kinsale infrastructure for LNG can be downloaded after 10.00am from the Company’s website in the MEDIA section “Recent News” at:

https://www.predatoroilandgas.com/

The Mag Mell Project can also be followed on the Company’s social media platforms:

https://www.linkedin.com/company/mag-mell-ireland/posts/?feedView=all

TWITTER @magmell353

Paul Griffiths, Executive Chairman of Predator Oil & Gas Holdings Plc commented:
“Shareholders are encouraged to download the Mag Mell white paper which gives a clear and concise explanation and analysis of the potential for an FSRU solution to Ireland’s security of energy supply”.

I think that this is a really important project not just for Predator but much more importantly Ireland and whilst it has been around for a long time it hasn’t received the publicity it deserves. The future for Irish energy supply has for too long been obscured by policies designed to pander to renewables that will never provide the country enough energy. The Mag Mell project is designed to repurpose existing infrastructure and very much worth a look. 

SDX Energy

The boards of directors of Tenaz and SDX have announced that they have reached agreement on the terms of a recommended share-for-share combination between Tenaz and SDX. The Combination is to be implemented by means of a court-sanctioned scheme of arrangement between SDX and the Scheme Shareholders under Part 26 of the Companies Act 2006, with the entire issued and to be issued ordinary share capital of SDX being acquired by Tenaz.

Under the terms of the Combination, each Scheme Shareholder will be entitled to receive:

• 0.075 New Tenaz Shares for each 1 SDX Share
• The Combination values the entire issued and to be issued share capital of SDX at approximately £21.4 million, and the Combination represents a premium of 24 percent to the SDX Closing Price on AIM of £0.0825 per SDX Share on 24 May 2022, being the latest practicable date prior to this Announcement. This also represents a premium of 38 percent to the SDX 3-month volume-weighted average price of £0.0816 per SDX Share assuming Tenaz’s 3-month VWAP of C$2.41 per Tenaz Share.
• The Combination represents a value of approximately £0.10 per SDX Share based upon the Tenaz TSX Closing Price of C$2.19 per Tenaz Share on 24 May 2022, being the latest practicable date prior to the date of this Announcement.
• Immediately following Completion, existing SDX Shareholders will own approximately 36 percent and existing Tenaz Shareholders approximately 64 percent of the issued and outstanding shares of the Combined Group (based on the fully diluted ordinary issued share capital of SDX and the fully diluted share capital of Tenaz, in each case as at the date of this Announcement).
• The Combination requires approval by SDX Shareholders in connection with the Scheme and approval by Tenaz Shareholders in connection with the issuance of New Tenaz Shares. Further details are contained in the full text of this Announcement.

Strategic rationale for the Combination
Tenaz is focused on the acquisition and sustainable development of energy assets capable of returning free cash flow to shareholders. Since the recapitalisation of a publicly-traded Canadian entity in late 2021, Tenaz has targeted the acquisition of conventional and semi-conventional oil and gas assets in international markets. Tenaz has an experienced management team that seeks to identify, evaluate and acquire producing properties in lower-competition international jurisdictions, where there is the potential for greater operational improvements and higher returns on capital.

SDX and its assets across Egypt and Morocco are well suited to Tenaz’s stated objectives and corporate M&A strategy. Both countries fall within Tenaz’s primary geographic focus and create a production base from which to build a regional presence of significant scale. Egypt is a resource rich country that recognises the importance of the oil and gas industry to both its energy security and economic development.  Consequently, Egypt is supportive of its business community and the sustainable development of its natural resources. Morocco has a desirable fiscal environment and growing local natural gas demand that supports the exploration and production of hydrocarbons. Morocco is a material net importer of energy and is anticipated to maintain strong energy pricing for the existing and future development of SDX’s assets.

SDX Shareholders should benefit from joining forces with a management team that has a history of capital markets outperformance through executing a similar strategy as currently identified by Tenaz. In addition, SDX Shareholders should share in the growth and free cash generation of Tenaz’s existing asset in Canada.

Financial rationale for the Combination

Tenaz recognises the importance of scale and has a clearly communicated objective of building a sustainable production base in excess of 100 mboe/d, with the aspiration of both capital growth and cash returns to its investors. In turn, SDX brings a portfolio of production, exploration and development assets, a healthy balance sheet and a strong technical team, to complement that of Tenaz. In addition to a track record of successful acquisitions, Tenaz’s management team has a history of effecting operational improvements following successful integration of acquired assets.

The Combination advances a number of objectives for the shareholders of both companies.  The new entity will have substantially more capital markets scale than either of the two companies separately, and will be positioned for further acquisitive growth via Tenaz’s strategy.  The Combined Group will have an even stronger balance sheet, and cash generation will be enhanced by the elimination of duplicative headquarters functions.  The Combined Group will have diversified sources of cash flow, with both North American and MENA oil and gas present in the product mix.  Finally, the combination of the technical teams from each company will promote the employment of appropriate technical methods to the new entity’s asset portfolio, including applying a broader range of experience in sustainable operations to SDX’s asset base.

SDX Shareholders will receive the New Tenaz Shares at a valuation implying a premium to the prevailing volume-weighted average price of a SDX Share, and a meaningful participation in Tenaz with its strong asset base and management expertise, proven access to capital, and pipeline of organic growth opportunities and future acquisition targets.

The Combined Group

Further details of Tenaz’s strategic intentions for the Combined Group are set out in paragraph 10 below. Upon Completion, the Combined Group will be called Tenaz Energy, headquartered in Calgary, Alberta, Canada and listed on the TSX. Recognising the advantages that interlisting might offer to Tenaz and its current and future shareholders, Tenaz is exploring the possibility of a future admission to trading on a UK exchange of Tenaz Shares but there can be no certainty in this regard or as to potential timing.

The Combined Group will draw on the talent, assets and financial resources of both companies to seek to optimise the benefits of the Combination for customers, shareholders and other stakeholders. The Combination will benefit from the experienced Tenaz management team that has a history of capital markets outperformance through executing the same strategy as identified by Tenaz today. Both teams have strong records in the area of sustainability, and are dedicated to advancing the conditions of communities in their operating areas.  With respect to employees, the Combined Group believes in equity incentivisation of employees, with expected attendant benefits in performance for all shareholders.  For the benefit of all stakeholders, HSE (health, safety and environment) is a very high priority, and both companies have strong programmes of practical and effective HSE management.

Certain key members of the SDX management team will continue to have an ongoing, or in some cases, a temporary role in the Combined Group. Subject to Completion, Michael Doyle and Catherine Stalker will be appointed as non-executive directors of Tenaz.  Two members of the SDX management team, Mark Reid and Nick Box will continue as consultants to Tenaz for a period of up to six months from Completion. Each will receive a fixed fee equal to 50% of their current annual base salaries in respect of their half-year of services. Rothschild and Co has confirmed that, in its opinion, the terms of the consultancy arrangements with Mark Reid and Nick Box are fair and reasonable so far as the other SDX shareholders are concerned. It is expected that the SDX Directors will step down from the SDX Board upon Completion. Otherwise, and as more fully described below, Tenaz does not envisage any immediate material changes in the day to day operations of SDX as a result of the Combination.

Recommendations

SDX Board
The SDX Directors, who have been so advised by Rothschild & Co as to the financial terms of the Combination, consider the terms of the Combination to be fair and reasonable. In providing its advice to the SDX Directors, Rothschild & Co has taken into account the commercial assessments of the SDX Directors. Rothschild & Co is providing independent financial advice to the SDX Directors for the purposes of Rule 3 of the Takeover Code.

Accordingly, the SDX Directors intend to recommend unanimously that SDX Shareholders vote in favour of the Scheme at the SDX Court Meeting, and in favour of the SDX Resolutions to be proposed at the SDX General Meeting, as the SDX Directors who hold SDX Shares have irrevocably undertaken to do in respect of their own beneficial holdings (and the beneficial holdings which are under their control) of 5,040,636 SDX Shares, representing, in aggregate, approximately 2.45 percent of SDX’s issued ordinary share capital as at the close of business on the Latest Practicable Date.

Tenaz Board

In order to effect the Combination, Tenaz will be required to seek the approval of the Tenaz Shareholders to issue the New Tenaz Shares at the Tenaz Special Meeting. The Combination is accordingly conditional on such approval being obtained.

The Tenaz Directors consider the Combination to be in the best interests of Tenaz Shareholders as a whole and intend to recommend unanimously that Tenaz Shareholders vote in favour of the Tenaz Resolution to be proposed at the Tenaz Special Meeting, as those Tenaz Directors who are interested in Tenaz Shares, and certain Tenaz officers, have irrevocably undertaken to do in respect of their own beneficial holdings (and the beneficial holdings which are under their control) of 2,347,075 Tenaz Shares representing, in aggregate, approximately 8.25 percent of Tenaz’s issued common shares as at the close of business on the Latest Practicable Date.  

Commenting on the Combination, Anthony Marino, CEO of Tenaz, said:
“This Combination is an important step in the execution of our strategy for international growth. The Egyptian and Moroccan operations are within our primary regions for long-term focus, and we believe that these are high quality assets with numerous desirable organic investment opportunities.  In addition, we believe that these areas offer opportunities for continued consolidation and resulting growth. Finally, we expect that the combination of our technical teams will enhance the operating, HSE and sustainability performance of these assets and future assets that we may acquire as we pursue our corporate strategy.”

Commenting on the Combination, Michael Doyle, Non-Executive Chairman of SDX, said:
“The SDX Directors, after evaluating a number of strategic options, believe that the future of SDX would be best served by becoming part of a larger entity. We are therefore delighted to have found in Tenaz a company whose management team have a successful track-record of building an E&P company and creating value for shareholders.

The SDX Directors believe Tenaz’s strong balance sheet and experienced management team will enable it to continue to source and fund exciting organic and inorganic opportunities. The existing cash flow from Tenaz will also assist the combined entity in pursuing further growth.”

Well what a surprise this was not. I have been writing for some months about what might have been going on at SDX and my spies have been remarkably accurate. The first thing that has been correct has been that WAHA with its 18.65% stake has defined energy as ‘not a core sector’ to invest in so that stake has been offered around all over the place so no surprise that it got back to me.

The rest of the top ten holders above 3% who hold just under 50% between them are not known to be likely to accept the bid or not, apart from the board who have accepted for their 2.45% holdings there are no indications in the document about their views. Put it another way, the bid is worth around 10p but the stock is actually down 2% on the news of the bid at 8.1p, hardly showing signs of a counter bid or arbs circling for a higher bid. 

It actually gets worse because as the company is only going to be quoted on the TSX after the bid (although there is  a vague ‘exploration of a listing on a UK exchange but with no certainty’, so no then) which means that there is likely to be downward pressure on the London price making acceptance almost inevitable. 

When I met with the company in December I thought that at around 8p the shares were undervalued and after writing a positive note and with some good well results the shares ran up to 11.65p but it wasn’t to last and with the rumours abounding about the stock overhang the shares fell back. 

I have always thought that the company comprised of an exciting and growing side that is Morocco where the gas price is high, the market full of opportunities and the most favourable fiscal regime and Egypt where the assets are at the lower yielding South Disouq. Accordingly I could never get to a valuation anywhere above the price today and I have a feeling that Mark has done as good a deal as is possible under the circumstances and as they say, in the absence of anything else.

Exactly 4 years ago SDX shares were 73p and since then despite constant production the shares have ended up being taken out at 10p, nothing to write home about. There are two lessons to learn from this, firstly with depleting production, companies need to continue to invest to maintain an attractive valuation which in itself needs to have a helpful shareholder register who can fund growth requirements, this was not the case at SDX. So, beware major shareholders who might seem keen supporters one day and not interested the next…

KeyFacts Energy Industry Directory: Malcy's Blog