Description

POE, last Mon, announced its intent to sell its Thai subsidiary (“Siam”) for an enterprise value of C$35mm despite:

(1) Siam’s ~C$6mm in quarterly (footnote 1) free cash flow using $115 UK Brent and avg production (footnotes 2 and 3)

(2) Siam having net cash of >=C$15mm by this June quarter that the buyer would receive 

But a less than 2 year payback that can be locked in at the current curve (footnote 4) is not all this buyer may receive. The payback could be one year with tax efficiency:

1. Siam’s free cash flow is after a 50% Thai tax. Thai taxable income could be reduced by interest expense from Siam debt: “Interest on money borrowed for the purpose of acquiring profit or for the purpose of the business is deductible.” (emphasis added) (footnote 5)

2. “Dividends received from foreign investments are exempt from tax if the Thai company receiving the dividends holds at least 25% of the shares with voting rights of the company paying the dividends for a period of not less than six months before the date on which the dividend was received and the dividend was derived from the net profit in the foreign country taxed at a rate of not less than 15%. In the event that a ‘special law’ in a particular foreign country provides a reduced tax rate or exemption for the net profit, the limited company that receives the dividends is still eligible for the tax exemption.” (ftnote 6)

3. Siam’s free cash flow stems entirely from a Joint Venture (JV), of which Siam owns 50%. The other 50% is owned by a public Thai producer, Sea Oil, whose only source of profit is this JV. Sea Oil has 692mm shares out, implying its market cap is US$100mm. (footnote 7)

4. Sea Oil borrows at 5% pre-tax

Here’s what I would do: 

The PV0% (ftnt 8) (the undiscounted PV) after tax of Siam’s proved, probable, and possible reserves was C$96 at the end of last year using US$70 UK Brent. The corresponding PV0% pre-tax is ~C$200mm but at the current curve this number jumps to ~C$240mm. 

There are oil producers trading at ~50% free cash flow yields at the curve. 

I would go to a lender like Cibolo Energy Partners (Cibolo) and propose the following:

I borrow over $100mm against Siam’s fully hedged production and invest it in the cheapest, most stable energy producers WHILE hedging these producers’ production over ~5 years.

I estimate Cibolo would charge 12% (+/-1%) based on the following example:

On Sept 15, 2017, Hemisphere Energy announced Cibolo’s term loan: 

“Hemisphere has entered into a first lien senior secured credit agreement with Cibolo providing for a multi-draw, non-revolving term loan facility of a maximum aggregate principal amount of up to US$35.0 million, with an initial commitment amount of US$15.0 million.

The interest rate for the New Credit Facility is the three-month United States dollar London Interbank Offered Rate ("LIBOR") with a LIBOR floor of 1%, plus 7.50% payable quarterly, for a five-year term with a maturity date of September 15, 2022.

In conjunction with the New Credit Facility, the Company has issued 13,750,000 warrants (the "Warrants") to Cibolo.  Each Warrant entitles Cibolo to purchase one common share of Hemisphere at an exercise price of $0.28 prior to September 15, 2022.  The exercise price of the Warrants represents a 40% premium to the 30-day volume weighted average price ("VWAP") of Hemisphere’s common shares at market close on September 14, 2017.”

My view: I calculate each warrant to be worth $0.08 (+/-$.01) using IV of 50% to 70% based on HME’s production at the time having an operating cost of $24/bl in 2018. Thus the option value is $1.1mm on Cibolo’s $15mm loan commitment, or 7.5% plus 8.5%, implying a pre-tax loan cost of 16% +/-1%. 

CanAsia:

POE announced that shareholders will also receive one share of CanAsia per share of POE.

CanAsia trades at $0.06 (the premium to the $0.79 per POE share cash bid for Siam) and represents POE’s ownership of Andora, C$0.14 (ftnt 9) in net cash per share, and exploration success in Thailand (ftnt 10).

What is CanAsia worth?

The short answer is a lot more than $0.06 per share. 

I see several ways to justify this answer. 

One is the $0.14 in net cash per share. Just the value of exploration success in Thailand, given its familiarity, is not worse than unprofitable biotechs, which trade above 50% of net cash. 

Moreover, POE spent C$1.6 million buying back shares in 2021. At C$0.07, C$1.6 million would buy 23 million shares, at which point C$5.4mm over 27 million shares would be C$0.20/share.

Two is CanAsia’s value in Andora. 

Though 10 years ago, on Aug 10, 2012, POE announced it:

 “increased its ownership of Andora Energy Corporation ("Andora") from 52.5% to 71.8% through an additional $24.7 million investment in Andora common shares.”

Buying 19% of Andora for C$25mm implies the equity value of 100% of Andora was C$128mm. 

How different was the view of the long term oil price then vs today? 

I do not know because I do not know what the futures curve priced for 2017 WTI in Aug 2012. I know that from Aug 2012 to Aug 2014, WTI was $96 per barrel +/- 10%, suggesting that the backwardation was not as steep as today, in turn suggesting that the long term price was above $66 per barrel, which is where WTI trades in Dec 2027 today. 

Nevertheless, due to converts that POE issued Andora, POE’s ownership is over 80%. 

Over 80% of C$128 implies over C$2 per POE/CanAsia share. 

But that C$2 pales compared to the C$10/share value implied by overvalued oil producers like BPT.  BPT’s US$500 million market cap would be $0 if Andora is a $0 and yet Andora’s equity is far more sensitive, has far more leverage to changes in WTI. Moreover, BPT is passive, it will not use its rich valuation to acquire cheaper producers. 

The third way has 2 parts, 3(a) and 3(b). 

3(a) takes the WTI price as far out as WTI trades, which is $66 in Dec 2027, quantifies a reasonable range, say $50 to $80, and uses that range to derive values. 

3(b) quantifies how much CanAsia could produce by 2027 fully hedged. 

The Andora NPV tables that POE published in 2016 and 2019 imply Andora’s sensitivity to WTI.

Footnotes:

(1) Free cash flow is “Economic adjusted funds flow from operations” minus capex and can be forecasted with exceptional accuracy (for years) because price can be locked in via the futures curve through 2027.

(2) 1400 bopd, which probably will be too high for 2Q22 as the avg this past April and May was ~1150 bopd

(3) Siam generated free cash flow of C$4.3mm in 1Q22 (at $99 Brent), e.g. C$17mm annualized, despite producing only ~80% of the average production in the previous 4 quarters

(4) Despite 4.5 year reserve life using proved and probable reserves and 5.8 including possible.

(5) source: https://taxsummaries.pwc.com/thailand/corporate/deductions

(6) Source: https://taxsummaries.pwc.com/thailand/corporate/income-determination#:~:text=Capital%20gains%20on%20the%20sale,otherwise%20exempt%20under%20a%20DTT.

(7)Assumes Sea Oil price of THB 5 per share. As Seal Oil has book value of THB 1,700mm, of which THB 1050mm is their 50% of the JV, perhaps Sea Oil has excess cash of THB 700mm, or THB 1 per share. If you assume all of Sea Oil’s market cap is from this JV (as it is the sole profit source) and you assume THB 4 per share of enterprise value, the implied value of 50% of the JV is US$80mm vs POE agreeing to be sold for enterprjse value of US$28mm and Sea Oil is not tax efficient.

(8) the undiscounted  or 0% discount PV; not the PV10, which has a 10% discount rate

(9) C$7 million is $0.14 per share (see June 6, 2022 press release for C$7 million)

(10) “potential exploration and development activities in Thailand through participation in an anticipated future bid round for new oil concessions.” ibid

Catalyst

activism and/or new bid