Note: All figures are in USD converted at $0.91 USD / AUD. All figures below are USD unless marked AUD.  The price listed above is in local currencies, but the other items in the table are USD.

This stock trades around 600k shares per day in Australia (AZX.AX), but also has an illiquid pink sheet (AZZEF) in the U.S.

Thesis

I’m going to keep this one short and sweet as it doesn’t take a genius to understand this thing (and I’m thankful for that). I believe Antares Energy is a buy with conservative upside to AUD 0.66 per share (~25% upside), but potentially much more than that if the company elects to do 1031 tax election for its asset sale and keeps the value creation machine going.

Antares Energy is an ASX-listed junior oil and gas producer that has executed an agreement to sell its Permian-basin assets (substantially all of its assets) to an undisclosed party for USD $300m. The deal is expected to close in January 2014. The company currently has 255mm shares outstanding, roughly $58.5mm drawn under its term loan, $17.8mm of convertible notes (strike price AUD 0.667), and around $13mm in cash. If we estimate conservatively that the company has a tax basis of $100mm in these assets (which we cannot know for sure and isn’t worth much debate), the sale should generate after-tax proceeds of roughly $230mm and should result in a post-transaction, post-tax NAV for the company of roughly AUD 0.66 per share, assuming full conversion of the notes (30mm shares) and that the current AUD 13mm cash balance will be fully invested in the Permian asset before it is sold. Should the company elect to take the cash and reinvest it in other oil and gas properties (which I imagine is the most likely scenario), it can defer income taxes through a 1031 election and use the extra $70mm or AUD 0.27 per share of cash to invest on behalf of shareholders. At that point, it would have a net cash balance of AUD 0.93 per share to reinvest in a new project.

History

It’s probably not worth going too far back, but let’s just say in 2009 Antares was on its way to insolvency before they got lucky (or maybe they were smart?) and ended up with a ~18,000 net acres position in the Yellow Rose and Bluebonnet projects in the Eagleford Shale, which they sold to Chesepeake in 2010 for ~$156mm. The company then took those proceeds and reinvested them in the Permian Basin, acquiring a total of ~32,000 net acres, primarily in Dawson County in the Northern Midland Basin. It appears as though, between drilling capex and asset purchases, they have around~$150mm (plus probably some in 2013 as well) invested here. So, you’ve had a company that went essentially from nothing to the Eagleford, and then from the Eagleford to the Permian. The Permian investment is impressive, turning ~$150mm into $300mm in around 2.5 years. This company has essentially created something quite some substantial out of nothing.

Management and Board

Admittedly, I’ve never met the management team and board, but they seem to be doing the right things. The company buys back stock when the price is low, and so does the CEO James Cruickshank, who personally owns 10mm shares. The board has never personally sold any stock and the company’s share-based plans appear to set pretty lofty share price performance hurdles to vest the incentive compensation. Their track record of value creation over the last few years and their willingness to optimize the capital structure makes it appear, to me at least, that they do have the best interest of shareholders at heart. I would be surprised if Antares stock wasn’t the bulk majority of the CEO’s net worth, but I have no way of knowing that for sure. The alignment with shareholders appears to be there.

Future Prospects

I have absolutely no idea what the company has planned for the future when it completes this sale. I suppose it could take the after-tax proceeds and liquidate the company for AUD 65-70c, but my guess is it will probably take the proceeds and re-invest them, deferring the substantial taxable gain. If the company does this, which seemingly makes the most economic sense, it will have AUD 0.93 per share of net cash to utilize. Personally, I would probably prefer this to a liquidation, as there is still a long runway for value creation in the U.S. oil and gas business for skilled, entrepreneurial companies. Management seems like they know what they are doing, so unless they don’t think they can reinvest profitably, I guess they should pursuing investments with solid IRRs. I suppose it’s worth mentioning the risk that this Permian sale doesn’t close, but I don’t assume the risk is any greater here than with any other deal.

Summary

Antares is a solid long because it’s trading at a big discount (25%) to after-tax NAV (or liquidation value), which offers a huge margin of safety and it has the potential to compound value over time if Antares is successful in redeploying the $300mm proceeds from the Permian sale. The biggest risk with the stock is that they destroy value with whatever they decide to do next.