Member Info for AA2020

All seems rather quiet in Cairn-land

In my mind, what is done is done. The capital raise will obviously all go ahead. Looking forward, the big risk as I see it is SF and friends swoop in and bid for the company at a low ball price, like last time. Albeit this time, at somewhere between 5-7p. Even at 10p it would significantly undervalue the equity. I therefore have been scratching my head as to WHY the new Board are talking a big game around all the improvements and turn-around initiatives (cost cuts, higher vessel utilisatations, higher day rates, significant interest savings, etc.). I mean, that's all wonderful stuff, but it doesn't do them any favours IF the grand plan all along is to launch the next bid at a low ball price. Additionally, while they may get over 50% of the votes with any low ball bid, they would be a far cry from the 90% required for a squeeze out and de-listing.

@ sirimcbbonus "and when they do, who is there to mop these up ? Seafox of course."

Seafox can't mop any more up - they are already at 29.99% without triggering a bid.

@ sirimcbbonus - agree with all the points re: corporate gov issues.

Re: the "unnecessarily low price" - it had to be at a discount to prevailing share price. And given the microcap nature and other uncertainty around the company, I suspect it required a heavy discount in order to get it done. Could it have gotten through at 4 or 5p instead? Probably.

And if shareholders vote against the capital raise and the capital raise therefore does not succeed, warrants are issued and/or the company is back to square one with the banks. It's clear they need to get a capital raise done. What exactly do you dislike? The idea of the capital raise or the terms on which it is being offered?

Fergus - there is only going to be just a tad over 1 billion shares in issue on completion....not "billions of shares issued." And if there were to be a share consolidation, which is far from certain, that has no real significant impact on your overall holding and cost/profit position, save for any rump portion of shares (e.g. if its a 1 for 10 consolidation and you have a share holding ending with a number other than zero). But that "loss" wouldn't even equate to the cost of a pint of beer.

@4C - you don't fancy taking up your allocation then??

I have been interested throughout this whole saga on what the thoughts are of Aberforth. I suppose given their exit last week, their thoughts are now clear. But why they would exit now and not long ago, is beyond me. They knew all along there would be capital raise at a significant discount (likely needed the steep discount to ensure and give comfort to the underwriter Panmure that they wouldn't be left holding a significant chunk of shares). And they knew all along of the governance issues. So, if they weren't comfortable with the position, they should have exited months ago at 7-10p.

I will most likely take up my whole allocation, since it would average down my in-price to only 7.4p. This business isn't being liquidated or put into administration or having the vessels sold off one by one to SF on the cheap. So, worst case scenario as I see it, is SF and friends come along and bid at 5p. Even assuming that bid price were successful, I would be significantly better off in terms of a smaller loss compared to not taking up my allocation. So, attractive risk/reward.

I don't see what the fuss is all about?? Shareholders knew there was going to be a $25m capital raise!! It really doesn't matter at what share price the new shares are offered at.....as long as you have the spare capital to subscribe for your allocated portion. Let's just be glad it's only $25m which they are raising and not the original $75m (which would triple the cash call). If you don't have the spare capital to subscribe, then, well yes, you get diluted.

Re: comment below that there will now be billions of shares in issue, no, there will only be 1,016m at completion. Only 665.9m new shares are being issued. The 370.7m mentioned as part of the Placing is just the underwritten bit to make up the difference (if needed) not taken up under the Open Offer.

Re: the comment this does nothing for the debt and is just for additional liquidity. Erm, no, this is all about the debt. Read the document. The money being raised will be used to incrementally reduce debt.

Oh, and all the talk in the past on this board about having to place at par value or higher (10p) was misguided, as I said at the time. Par value is a meaningless accounting figure - can companies can easily reorganise the shares to issue new shares at whatever price they can. As now very clearly exemplified.

(forgot to finish last post before posting) ... hence to the extent that is at all a relevant factor then potentially this does all eventually work out positively in some way....

I'm not sure how naive or desperate an assumption this is - but surely it can't look good for a member of the UK House of Lords to be associated with a company that is screwing over minority shareholders and shredding up all notions of fit and proper corporate governance?

I agree - it is pretty painful to watch. Why are there no details around at the very least the plan and strategy for the $25m capital raise which needs completing in the next 6 weeks? Why no investor results presentation call for the market? Why no capital markets day since they've been in control? One would think they really don't give a toss about other shareholders, or they are just incompetent and don't get basic shareholder communication best practices. Or they are playing games. I suspect it's the latter. I suspect it's better than 50/50 chances they are just winding down the clock to the early June deadline to be able to bid again. And I suspect anything in the low 20s pence range and they would succeed. On the other hand, what do they want to achieve by owning more of the company? They already have control for all intents and purposes, so perhaps it would just simply be to deploy more capital to a high return opportunity. Who knows. If they are not playing games, then on the capital raise given the time remaining it's pretty clear it will probably be some sort of accelerated placing with some institutions (including themselves) and not a rights issue which would allow us retail investors to partake. All becomes very clear in the next few weeks!!

@ Duster it all depends on business developments and time frame. Assuming they deleverage over the next couple of years to a normal level and EBITDA climbs higher through revenue and opex improvements, they should easily have a c. USD 600m Enterprise Value. Knock off 100-200m net debt as a sustainable run-rate level and the increase in shares assuming only a $25m raise, then you get to a share price of around 50p medium to long term. Obviously can be much higher if day rates for the fleet move into a structural bull market (it is so cyclical). Would guess more in the 20p range for most of this year though. Of course no crystal ball! But risk/reward is impressive. I think many of the worries minority shareholders have had over the past 12+ months, especially around intentions of SF, are being rapidly alleviated.

This is good news and very obviously a better deal than before. Obviously it took a bit of time but these things always do.

Interesting that it reads as if they may very well never need to do the full $75m equity raise. They leave open the possibility of a broader refinancing after the $25m raise happening soon. If they are able to drive material cost reductions, efficiencies, contract wins, slowly improving day rates etc over the next 12-18 months then it appears they MIGHT manage to avoid the additional $50m raise. That $53m in interest savings for 2021 and 2022 is also uncanny and I can't help but think is being seen as temporarily "in-lieu" of the remaining $50m raise . It will go straight to extra cash in their pockets and hence net debt reduction. I can see a scenario where they clean up the business significantly over the next 12-18 months and refinance with a different set of banks and never have to raise more than the $25m now.

It's also interesting that they refer to "strategic and tactical alternatives" for the business once the balance sheet has de-levered. That obviously refers to either an eventual merger with SF or some other form of M&A/sector consolidation.

It's also interesting that SF and Mazroui are named as specifically working together re: NDA, committing to participate pro-rata in the upcoming $25m raise, etc. Where is Horizon in all of this? Horizon were of course key to getting them over 50% control. If Horizon are of a different mindset now then that is positive for us minority shareholders as SF have less power.

I also don't expect this to fully re-rate until the equity raise is complete. And I hope the $25m raise is structured as a rights issue in order to enable us all to participate. Although if not, can still at least partially offset any dilution by buying the corresponding entitlement amount in the open market.

Well done GMS and SF. Patient LTH's will benefit.

I struggle to see how they won't get at least SOMETHING somehow. They clearly outlined three parallel tracks: resolve this directly with the GOI, seize assets, or sell the award to a third party and let them deal with and chase it. Let's assume they get nowhere with GOI over the next few months, it then becomes a decision of seizing assets versus selling to a third party.

Re: selling the award to a third party, I would be surprised if they got north of 50% of the total award value from a third party. However, it is interesting that third parties have approached Cairn about this to begin with. If you are the third party, your only real avenue is seizing assets...because if getting the award directly off the GOI were feasible then Cairn would have achieved it themselves. So, third parties, by approaching Cairn, must clearly think the mechanisms for asset seizure are strong and robust. That I think in and of itself bodes well...CNE just need to seize a few assets, let the whole situation blow up even more in the press and GOI will capitulate.

Just listened to the full one hour webcast, mainly for the analyst Q&A at the end. You get the sense most of the sell side analysts were a little flummoxed. The main concerns expressed appear to be around:

1) Political risk of Egypt vs UK north sea. Apparently there has been a history of not receiving payments on time. Although the company were quick to point out this situation has significantly improved in recent years. So perhaps some of the adverse share price response is around this risk - i.e. getting into some of the challenges faced by Genel over in KRG.

2) Capex levels associated with the Egyptian assets which will be needed to deliver the strong rebound in forecast volume ($80-90m net to Cairn per annum for next few years). So, some concerns around what that means for bottom line cash flows

3) A question was raised about whether this strategic shift is to position the company for implementing a regular dividend policy rather than ad-hoc special dividends. Clear response from ST that they are not at that scale yet and so isn't something being considered, although always possible in medium term. They will continue down the route of ad-hoc special divis

4) Very clear that they are looking to do some other asset acquisitions. Emphasised that they didn't need to sell the UK assets to buy the Egypt assets and they should be considered separately. Proceeds from UK asset sales likely to be recycled into other acquisitions rather than distributed to shareholders.

My initial reaction was one of - whoa, this is quite a strategic shake up. What on earth are they smoking up in Edinburgh. But on further review, it appears not entirely daft.

1. They are essentially selling the north sea assets at an EV/2P of c. 17.8x......and buying egyptian assets at an EV/2P of c. 4.1x (including max earn out consideration in both cases and before any purchase price adjustments to account for cashflows between effective and completion dates). That's not bad!

2. Financially its almost identical swap in terms of headline values, but they are getting about 3.4x the 2P reserves. That's not bad!

3. Egyptian asset opex/bboe is c. $6 vs c. $20 in North Sea. That's not bad!

4. Significant exploration and development potential and long-life producing assets in Egypt versus rapidly declining north sea assets (just look at the table in the notes of the announcement which show the minimum volumes in the earn out formula to get a sense of how rapidly these fields will be declining in the next few years) with minimal 2C attached to convert into future production. That's not bad!

5. Agree, am not entirely comfortable with the fact 2/3 of Egyptian assets is gas. Especially given they say all gas sales are sold domestically at a fixed price to the national operator. Would imagine it's not the most attractive fixed price either, but then the overall tax and fiscal regime appears like it's pretty attractive which offsets some of this. This is also offset by the fact we still very much have oil price exposure from Kraken/Catcher for the next few years as part of the earn-out, without any of the on-going capex from these fields.

6. I like the implicit dig at India by the explicit statement in the announcement that Egypt has created an attractive environment for foreign investors.

7. The $1.725bn updated value of the India award is new. All previously reported figures reference $1.2bn plus interest and costs which take it to $1.4bn. The fact that this has now escalated to $1.75 is wonderful.

8. They clearly signal they might consider a quick monetisation of the award to a third party. Any ideas on what a realistic recover % rate net to Cairn might be for this, based on precedents? I suspect anything above 75% is probably too optimistic. The announcements also have a tone which suggests they are not looking to acquire any Indian assets as payment. It appears they would sooner sell the award on to a third party before accepting Indian assets in lieu.

9. There is a comment below that "CNE could get an additional $75m - $125m per year" in contingent consideration. You are reading it wrong. That is the sum total over the earn-out period based on their base case estimates for production and oil prices.

I agree - the wording and tone was the first thing that struck me. It sounds more definitive and confident - less cautious and tentative. I suspect they are pretty much almost there....

Well, it's the end of January. Should have an update on the bank discussions any hour or sometime Monday at latest...

It's only been just over three weeks since they said in the RNS they need a few more weeks. Let's cut them a little slack. These things take time to negotiate - especially with several different banks and especially one might say in the particular region in question where business and negotiations are (speaking from personal experience) done in a slightly different way and can be dragged out with lots of haggling and back and forth between various different parties. It's a process! Remember that under the old BOD, a year or so ago when they were having to get recurring monthly covenant waivers, they only announced to the market on the last trading day of each month that the banks have granted the waivers for another month, and so on and on for what was I believe the best part of half a year. Re: the actual terms of what is to be agreed - indeed I very much hope that between their arguably more aggressive approach, seemingly better regional relationships and the operational improvements in the business that they can manage to reduce the quantum of the equity raise a bit.

I think several of the new Board members are direct Man Cap employees. So it is not at all unusual that they aren’t buying shares for their own personal account!

I wouldn’t read too much into the new Board having not bought any shares yet. Ultimately these guys are agents of SeaFox and Man Capital. So they actually indirectly have a boat load of shares!! They may very easily have some sort of incentive mechanism negotiated directly with SF/Man Cap. The new Board buying shares directly might also be prohibited as they might (not sure) technically be considered concert parties with SF and of course SF are at their 29.99% limit.