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Could Starchild be the reincarnation of onceatrader aka Honest John?
LGO-fan: To justify my case further, I would add, why seek one farm-in partner for SWP when we could have 7 for Saffron 3-9? The deal could be a ‘pay to play’ deposit on signature, proof of Capex availability at +/- $3m each, and a spud by end of 2022. Result: 9 saffrons in a franchise type arrangement, rather than waiting 3-4 years for a full field development with its associated capex risks and delays. Upon each successful Saffron, the farmee would have first dibs at wells and developments nearby.
Win big or lose little.
GL
Starchild
it all depends on the numbers, i.e. the business case. Might not be a bad idea.
My post yesterday provided some basic valuation parameters, one of which was how much CEG was worth in a takeover, to argue its MCap is very much undervalued at £14m. There was some cerebral feedback posted. Thanks.
To be clear, unless there was another long-term PoO collapse, the company does not need to merge with a 3rd party for survival. As such, any takeover would have to be hostile and at a premium to pass the 75% shareholders’ vote.
However, the BoD should consider an alternative to self-funding S3-S9. Today, subject to S2 NOT being a failure, Arena have agreed in principle to lend substantial funds (with CLN rights @4.2p) to start the development of the SWP in two initial phases. The pros are obvious. If all the Saffron ducks line up in a row, and PoO remains > $60/b for several years, with wells consistently producing despite production declines mitigated with CO2/water interventions, CEG will do very well. But why take this risk? If Percy-1 was a success, it would have been farmed out. The whole SWP is potentially the size of a decent offshore oil field, so why treat it differently?
If I was advising the BoD, which again I emphasise that I am not, I would strongly suggest SWP and its potential 220mboe be farmed out. There was interest to do so for S2 in CERP days with a 25% - 75% split, reverting to 75% - 25% in CERP’s favour, after the farmee had recouped all their Capex.
To be totally frank, unless the Arena deal is clarified, I consider it a risk. Why is the Arena deal a hybrid loan based on conversion rights @ 4.2p which is fair enough, yet CEG must provide security of all its assets? This implies it is ostensibly reserve based lending with a Lombard type ‘have your cake and eat it’ type guarantee. What happens if S3-S5 production rates go into decline before the debt is serviced?
Let’s cast our minds back to February. Had BPC announced the Percy-1 spud had been a success with a potential 220mboe (the minimum offshore commercial parameter was stated at 150m-200mboe), there would have been substantial BoD criticism if BPC further announced that instead of a farm-out, it would seek and use $60m in exotic funding or an OO/placing to get to the next stage.
So why go it alone with SWP? By undertaking a farm-out, CEG would be the ones who would have the cake that could be eaten. It would save $10m - $60m Capex and totally remove risks associated with exotic financing, yet CEG could potentially earn a substantial ROI and be a cash cow. The week such an announcement was made, CEG’s MCap would soar, based on potential NPV underpinned with a CPR.
Today CEG has two USPs for leveraging such a move: its tax credits and PoO predictions for the medium term. A third leverage USP could be this week: A successful Saffron 2.
Thoughts?
News awaited
IMHO. DYOR. GLA.
Starchild
https://www.lse.co.uk/profiles/starchild/
you really seem to be expecting a lot from this. What is there to expect apart from what we have seen al those years? A rise, followed by yet another equity raise. A next drill, too slow after S2 to be truly accretive production wise. (by the time S3 is drilled, S2 will have suffered such strong decline rates, that by the time S3 is here we will be back to square 1). Even if they did have the cash for S3 (which they don't) T&T authorities will d**k around for so long that by the time the can start S3, S2 will be producing peanuts or will need water flow/CO2 injection. So it will be water paddling at best. Lots of noise to stand stil and never ending equity raises in between. Only hope is to get acquired by a company with an astute BOD.
Depends on flow rates from the well currently undergoing production testing.
another nuclear option: sell all assets, get rid of all staff but a view, become a cash shell, get acquired. (tax credit are a good asset).
Thank you Starchild - a good read.
Just a couple of points I'm putting across for others to think about:
1. Does CEG still have $10m sat in the bank as at today? It's been 2 months since they gave us that figure. Would be interesting to know what their cash balance is now and what they used to pay for company cost and S2 costs.
Is that $10m to Stena finalised? If paid in shares, yes the company will hold that cash but be prepared to see some serious dilution because of it.
2. Agree with PoO.
3. Not sure where the idea of a takeover is coming from? Speculative? In which case the market is going to ignore.
4. Add cash? Where from?
5. Tax credits can't really be used as an current asset as an action is required for this to be crystallised. It's like having a safe full of gold bars and you don't have access to the key (yet or ever will).
6. Percentage to use?
7. Agree that it is worth "something" but with the lack of news recently, I doubt unless CEG gives an RNS saying they plan to do something with it (which I doubt will be in the next 1 or 2 years as CEO openly said Bahamas only play a small part in the portfolio and they don't have the cash to do so). The market is going to continue to give this a 0 value.
8. Same as point 3, not sure where this idea comes from.
9. True but I'm not even going to think about what this will do to the SP.
10. Did it succeed? Only 38% of shareholders took the deal. The rest were sold to institutional investors. I think the 38% is the key figure to walk away with. That only slightly over a third of the investors thought this was a "discount".
Conclusion: I agree that if S2 succeeds, then CEG is undervalued. I disagree that the SP will soar because this is only one well and is not enough to turn the company around. It will increase but not soar.
If they continue to drill wells (S3, S4, S5) and they all succeed AND an annual report is released showing CEG can stand on it's own two feet then the SP will soar.
If S2 fails I argue that the company is over valued i.e SP will continue to fall. They will be carrying a lot of debt (especially if they signed the Arena agreement which I will be annoyed at BOD if they don't release an RNS tomorrow to confirm whether they have signed it or extended it or in talks with someone else), have expenses to cover on a daily basis and the only thing they have in their pipeline is the Suriname field which CEO already said is a smaller version of the Saffron fields.
I think talking on behalf of typical investors, after the P1 fail, if S2 also fails, no one will even bat an eyelid at Suriname.
On that note, I'm still in but this is a very high risk play.
GLA
Simply answered, it is how much the market values it, which on Friday's close was £14m.
There are many ways to value public companies. One is P/E ratios. Majors are 17x, but CEG is not a major nor making a profit yet. Others: https://www.investopedia.com/articles/investing/110613/market-value-versus-book-value.asp and https://www.investopedia.com/articles/basics/11/common-multiples-used-in-oil-and-gas-valuation.asp
IMO, CEG’s true value is substantially more than its current MCap. The maths (approx) and assumptions:
1. Unless Stena debt is paid in shares, all the $10m cash CEG had (on 31/5/21) will be used to pay it. This leaves zero cash. If paid in shares, the net cash will be an asset.
2. @ $60-$65 PoO, based on RNS 29/6/21 (https://polaris.brighterir.com/public/challenger_energy_group/news/rns/story/rng62px ), CEG is earning $8m/yr gross, with $4m G&A/yr.
3. In a hypothetical takeover, strip out G&A and other costs such as CEG BoD expenses. Assumption: most G&A will be within the acquirer’s current budget. This happened when BPC merged with CERP in 2020. Especially if the acquirer is Trinidad based, with additional savings based on efficient use of local manpower, tech expertise, and automation.
4. Add cash if applicable (point 1)
5. Add $25m net tax credits for T+T which is a USP. Although ring fenced, this increases the NET ROI to the acquirer.
6. Add a percentage of 1P/2P/3P reserves and contingent ones.
7. Add Bahamas IP (we will know the gov position soon). Refer to mini Percy-1 autopsy here https://www.cegplc.com/operations/bahamas/ . With or without a license this IP is worth ‘something,’ even if is not monetized for years for other spuds north and west Cuba.
8. For a non-hostile M&A to succeed, the sale would have to be at a premium based on points 1-7 otherwise the 75% vote will not pass. Note, when CERP was facing covid/PoO collapse, not only did it not have access to Capex, but was haemorrhaging Opex/G&A cash. Due to this, it was arguably sold in a fire sale for £24m. (Note: CEG’s MCap reached £45m in 2018, albeit less evolved than assets now)
9. Whatever happens with S2 testing, CEG is not in the same predicament as CERP was in 2020. CEG could at any time use the nuclear option and outsource everything at the asset level.
10. And the OO/Placing @3.5p was arguably perceived to be at a discount otherwise it would not have succeeded.
Conclusions: IMHO, the current SP/MCap is very much undervalued. If S2 is a success, the SP should soar based on substantial de-risking of future Saffrons and additional income purely from S2. However, if S2 is a total failure, I would argue based on the above metrics, CEG is still worth a premium to the current £14m MCap if local operators have the inclination to play M&A Game of Thrones.
IMHO. DYOR. GLA. Enjoy Sunday and be nice.
Starchild
https://www.lse.co.uk/profiles/starchild/