Member Info for pauldrayton

Yes I’m probably being a bit negative but like Mozza I thought the strategy was production first then exploration & development as bolt-ons. Going for exploration first was always going to be more dilutive.

Having said that I suspect they know these prospects very well and will believe they have plenty of upside.

Helge Hammer talked early on about the need for 2 or 3 deals to get into the realms of where they want to be so hopefully this is just the first. I’m sure it’s not the only thing they’ve been working on over the past 18 months.

Let’s see what they have to say over the coming days & weeks and I will try to be a bit more positive from now on!

Well the book has now closed so I guess we will find out the final price in the morning. Having been expecting 120-150p and hoping for higher, I’m now resigned to 75p. It’s frustrating because even a valuation a few million quid higher would have made a big difference to us initial investors and I would have expected a bit more value added for this deal, the debt facility, the management & all the work done thus far.

Anyway I have emailed the company to vent a little bit - just to make myself feel better because I’m pretty p*ssed off today if I’m honest!

What I'd like to see now is a significant take up of placing shares by the founders & management (and I mean significant, not a few thousand here & there) and no options at 75p for the future. Any future benefit from be gained from the LTIP.

Then a clear explanation of both this deal and the short-term strategy from now, preferably via an interview or updated presentation. In particular what their current outlook is on acquiring production & whether they are continuing with M&A now.

At least the LTIP is triggered at £2 so they’re going to have to deliver some serious value from here on if they want to benefit from that.

Other than that I’m also looking forward to seeing the Admission Document and finding out a bit more about what the next 18 months have in store.

A disappointing day but it is exploration and it is AIM. Onwards and upwards now hopefully, and at least there is something to talk about!

Agreed. Although if the first well (Prospect A) is successful that alone should underpin a share price of over £1 and everything else is upside.

But I do hope they are looking at doing a production deal in addition to this because I’m like the institutions and don’t have the stomach for too much exploration!!

What’s quite galling is that this placing effectively ends up valuing the company at cash. There is virtually no value in the price for this deal whatsoever. Even if it was valued at £5million the placing price would have been 120-125p instead.

The market has also answered what kind of discount institutions want for ‘probable’ value and the answer is 75%. This deal values the company at about £43.5million and they will have £25million at the end even if every well is dry. They are therefore risking £18.5million for a probable value of £73million (so 25% of probable value), and a large amount of potential upside from there. Even if the chances of success were a quarter of what they are, the institutions should get their money back.

The institutions clearly don’t want to take on much risk at all, which is what I was concerned about. They should have canvassed the casino punters instead because I guarantee they’d have paid a lot more for those odds!

Anyway it is what it is - we need a successful drilling campaign now!

I’m sort of hoping you might be right Mozza in that their hand was forced slightly to do this deal now when they would have preferred to secure a production deal first. With only a few months until drilling starts, I doubt they could have waited much longer if they wanted to be involved.

The question for me is - is this it now? Are they done in terms of M&A in the short term or are we likely to see more deals filter through over the next few months?

I honestly don’t know whether their production ambitions have been thwarted or whether this just happened to be a deal they got over the line first.

An interview and updated presentation setting out their strategy would be most welcome.

Shareholders didn’t buy in for exploration though, they bought in for production and exploration was supposed to be a bolt on. This deal was not in line with their stated strategy so that’s why it’s a little frustrating to say the least.

Very disappointing but institutions don’t like risk and exploration is tough to finance at the moment.

At least there should only be around 56-60m shares in issue and there is still upside so long as they have some success with the drill bit.

But this feels like a real kick in the teeth for long term shareholders who have had to wait 18 months to be diluted 20-25% lower than the IPO.

Bit of a shambles so far for this team in terms of execution.

Haha I didn’t say they are eager to put out an RNS tomorrow, just that I wouldn’t be surprised if they do. It doesn’t bother me either when news comes - I’d rather they took their time and raised at the best possible price.

I’m hopeful that once the financing of this particular deal is sorted, we will hear more about their future intentions. Are they working on other deals? Have any of the other processes they were involved in progressed? Are they still looking for production in the short term? Have any of the processes that were put on hold last year been restarted as they were expecting?

Malcy seems confident of getting an interview with HH and there should be an AGM presentation at the end of the month as well.

I wouldn’t be surprised to see an RNS at some point tomorrow or 7am on Thursday.

A bookbuild is often done in about 5 working days and I can’t imagine they will be waiting until Thursday morning to finalise it.

Aren’t those standard resolutions every year for all companies?

The bookbuild is supposed to be complete by 8am on Thursday (10th June) according to the RNS.

If any of the 3 or 4 largest prospects are successful then this deal will start to look like a bargain, and hopefully they will get a few successes.

First step - as little dilution now as possible. We should know by Thursday at the latest.

The risk/reward when assessing the placing price is an interesting concept. I’m just musing again with theoretical scenarios and I realise this is fag packet stuff but let’s use Canaccord as an example.

Canaccord have 1,000,000 shares bought at £1 (10% of the company’s shares). Let’s assume that the existing institutions are the only ones involved in this placing and they all bought up the placing shares at the same % as their current holding. Let’s also assume a placing price of £2 again, so they would need to issue 17.5million more shares to raise £35milllion. The institutions currently hold around 50% so Canaccord would have to buy 20% of the placing shares (3.5million) which would cost them £7million.

They would then hold 4.5million shares which cost them £8million, so an average of £1.78.

As I mentioned the worst case scenario would be 7 dry wells and a share price of 91p (reflecting the £25m remaining in cash). That’s a 49% loss for them if everything comes up dry.

The probable case would result in a share price of £3.45, reflecting a 94% gain.

If all wells were successful it would provide them with a 523% gain, and in the extreme case of total P10 success it would be a 1753% gain.

Now I know that institutions are not gamblers but those are pretty good odds even if they bought in now at £2. Gamblers would certainly accept a potential 49% loss for a probable 94% gain (especially with the possibility of it being much higher). If you walked into a casino the house would make you pay more than the probable return so they would be asking you to pay at least £6 now for the placing shares rather than £2.

It will be interesting to see how the institutions compare in their risk/reward demands but perhaps we should canvas the punters in Monte Carlo rather than Blackrock et al!

Yes there is even higher potential upside but I’m trying to think along the lines of how a cautious institution might approach it - they don’t like to gamble quite as much as the average AIM punter ;-).

We know they get a tax rebate on the carry element of $27.3m (£19.28m), plus £11.2m left over in cash if every hole is dry. So am i right in thinking that’s a total of £30.48m left in cash even if every hole is dry?

If so, let’s call it £25m after corporate costs.

So the downside case would be a company valued at cash of £25m.

Now if they did a placing at £2/share, with 27.5million shares in issue that would value the company at £55million. The value of being involved for the potential of these 7 wells would be £30million, and the downside if every hole was dry would be a share price of 91p (£25million in cash).

The probable case based on best estimates and CoS would be £73million in asset value plus £25million in cash although they would have spent a bit more on well testing so call it £95million total, a share price of £3.45.

If every well was successful it would be £291million in asset value but again they would have spent even more cash on well testing so call it £305m total, a share price of £11.09.

The P10 upside of 324mmboe would be valued at $1.296bn (£907m) or a share price of £32.98 although we’d have to probably factor in some appraisal drilling.

I know these are fag packet calculations but have I got this right? Happy to be corrected if not. Obviously corporate costs are a guess and could be higher. The potential upside is clear but the question is how much value do you put on that potential. Does £30million seem reasonable? If so it would equate to a £2 placing but it’s very hard to know how the institutions will look at it.

Yes the lack of a tangible asset on the balance sheet is the fly in the ointment because there is the chance that all (or most) of the wells are unsuccessful, so how much risk are the institutions prepared to take?

A very crude way of looking at it would be to analyse the probability of success and end values. Obviously probability is only reliable when repeated many times but let’s have a look at it for a bit of fun whilst we wait.

Below is a list of the best case resources with Longboat’s percentage ownership and then chance of success:

103 x 0.15 = 15.45 x 0.25 = 3.86
41 x 0.2 = 8.2 x 0.41 = 3.36
41 x 0.09 = 3.69 x 0.27 = 1
27 x 0.09 = 2.43 x 0.22 = 0.53
36 x 0.1 = 3.6 x 0.55 = 1.98
24 x 0.2 = 4.8 x 0.51 = 2.45
159 x 0.25 = 39.75 x 0.15 = 5.96
254 x 0.1 = 25.4 x 0.26 = 6.6

Total = 25.74mmboe

Although in reality it could be anywhere from 0 if none are successful to 103.32mmboe if all are successful.

They quote an average transaction value “exceeding $4/boe” - as these wells are close to existing infrastructure they may be worth more but let’s call it $4 for this exercise.

That would equal a probability of $103m (£73m) of value at the end of the campaign but again it could range from 0 to $412m (£291m). Yes there is upside with high case estimates and follow on appraisal drilling but let’s use best case estimates for now.

So I suppose the question is - how much would you pay for the ‘probability’ of £73m but the possibility of £0 to £291m?

Then add in the cash left after the tax rebates and take away corporate costs, and you have your company value (and therefore the placing price).

daveri mentioned a shortfall before but if my calculations are right (and please correct me if I’m wrong) there shouldn’t be one unless at least one well is successful (in which case we don’t mind!).

They are raising £35m and have £7m in the bank so are left with approx £42m (possibly slightly less). Each well costs $6m (£4.25m) for a dry hole so that would total £29.75m, leaving them with £12.25m in cash minus corporate costs but with a tax rebate on the exploration costs.

If every well is successful they could cost up to $14m (£9.9m) maximum including testing and sidetracking. That’s a total cost of £69.3m so they would be using the debt facility to fund the extra costs but it would mean they’d had success will the drillbit, and again a large portion of the exploration costs would be eligible for a tax rebate.

To determine the price of the placing, we need to look at what impact it has on the final valuation which isn’t huge because they have only 10million shares in issue.

Once the placing is complete they will have £42m in cash, a debt facility and a portion of these 7 wells. The question is what value can be attributed to those 7 wells. Every £1 on the placing price values the company at an extra £10million in total.

Eg.

If they place at 50p, it would result in 70million more shares (80million total), valuing the company at £40million (less than cash).

If they place at £1, it would result in 35 million more shares (45million total), valuing the company at £45million.

If they place at £1.50, it would result in 23.3million more shares (33.3 million total), valuing the company at £50million.

If they place at £2, it would result in 17.5million more shares (27.5million total), valuing the company at £55million.

And so on....

In the short term it’s all about what they can get the placing away at. I think the tax rebate & debt facility will help, but we will just have to wait and see because we haven’t seen the full details of the deal & how it’s going to be financed exactly.

I’d like to see a placing price of £2+ but that might be a bit hopeful given it’s for exploration rather than producing assets. I’d be a bit disappointed at anything below £1.50 to be honest, but the most important thing is that they get some success with the drillbit and Q3 isn’t too much longer to wait.

You’re right it does say that on his profile, although he has only updated it recently to working for Longboat because he didn’t appear last time I looked a week or so ago.

Perhaps he was a consultant who has been made permanent. Not that it really matters but the team does seem to be growing which is good to see and hopefully a sign that they’re going to be busy.

Morten Rye-Larsen seems to be the other new appointment so far as Exploration Manager.

A fancy new website too now with some additional faces!