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. 

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.”

KeyFacts Energy Industry Directory: Tenaz Energy   l   KeyFacts Energy: SDX Energy Egypt country profile 

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