Irenic Capital Addresses Capricorn Energy’s Shareholder Update and Reiterates Opposition to Proposed NewMed Transaction
“Irenic believes Capricorn’s
In our view, Capricorn’s flawed analysis of the NewMed merger’s potential value only reinforces the need for shareholders to support Palliser’s efforts to facilitate a reconstitution of Capricorn’s Board. By catalyzing prompt and meaningful boardroom change, we believe shareholders can ensure that a comprehensive and impartial review of all strategic options is conducted. Palliser has Irenic’s full support for its Requisition Proposal at the upcoming general meeting of shareholders.”
Response to Capricorn’s
NewMed Offer Premium
The 46% premium (pro-forma for payment of the upfront cash dividend) of the NewMed transaction relative to the standalone value of Capricorn as continuously referenced by management is based on stale market assumptions, including NewMed’s share price from
September 28, 2022.
Capricorn appears to intentionally omit the following facts:
- NewMed’s share price has decreased approximately 12% since the initial transaction announcement.
- The shekel has weakened approximately 10% versus the pound since the initial transaction announcement.
- In total, the portion of the share consideration of the deal (pro-forma for payment of the upfront cash dividend) has decreased by approximately 20% since the initial transaction announcement.
- The 46% premium is in fact a 9% discount today. In other words, the NewMed combination gives Capricorn’s shareholders
GBp 78for something that is worth GBp 87at current market prices.
- The trading of Capricorn’s shares reflects the degradation in value of the proposed combination, given they are trading approximately 3% through the terms of the NewMed transaction (and have done so for several months now).
- The 46% premium (pro-forma for payment of the upfront cash dividend) of the NewMed transaction relative to the standalone value of Capricorn as continuously referenced by management is based on stale market assumptions, including NewMed’s share price from
Proposed NewMed Combination’s “Value Creation Potential”
In our view, it is illogical to assume that the Core net asset value (“NAV”) and Total NAV estimate by Palliser (including the entire existing net cash balance that represents approximately 55% of Palliser’s Core NAV) should be penalized through application of the market discount that
UK-listed E&P comparable companies currently trade at, but then not to assume that a similar discount should apply to the combined Capricorn-NewMed entity moving forward.
NewMed is currently trading as a tightly held, shekel-denominated certificate on the Tel Aviv Stock Exchange with less than
$4 millionaverage daily trading volume over the last 3 months.
- NewMed is trading at or near the sole estimate of its own NAV, as put out by sell side analysts. It is generally perceived as richly valued by local investors giving full credit for its multiple development phases as the single meaningful publicly listed natural gas story on the Tel Aviv market.
It is a reasonable assumption that, once NewMed’s shares transition to a
London Stock Exchangepremium listing and a significantly lower percentage of the combined Core NAV is represented by cash, a similar discount as for UK-listed peers will apply to the entity.
In addition, gas-exposed E&P companies have generally been trading richly over the past year given the escalation in natural gas prices following the
Ukraineinvasion but have weakened significantly over the past few weeks.
- In our view, it is illogical to assume that the Core net asset value (“NAV”) and Total NAV estimate by Palliser (including the entire existing net cash balance that represents approximately 55% of Palliser’s Core NAV) should be penalized through application of the market discount that
Capricorn stated its current estimate of value for the
Egyptasset at just $71 million(plus an incremental $264 millionof 2P value upon spending of associated CapEx).
While we recognize that the asset has produced meaningful operating cash flow in FY22 (including
~$50 millionas reported in 1H22 alone), Capricorn paid $323 millionfor the asset just 18 months ago for a price agreed at much lower commodity prices.
- Capricorn’s new value assessment, if true, suggests substantial value destruction by current management in a relatively short period of time.
- In addition, unlike every sell side analyst and the independent valuation by ERCE, the Company misleadingly excludes any value for the asset’s 2C phase from its calculation of value but gives credit for the 2C phase in its pro-forma production profiles.1
- While we recognize that the asset has produced meaningful operating cash flow in FY22 (including
- Capricorn stated its current estimate of value for the
Cash Balance Adjustments
Capricorn is assuming an 18-month budget for G&A expenses and debt service of over
$200 millionversus the approximately $35 millionof reported G&A expenses in the first half of FY22 (i.e., an implied approximately $105 million18-month budget at the same level).
- However, Capricorn previously stated it had already completed a workforce reduction program, leading to a reduction of one-third in 2022, and we believe that G&A could be scaled down significantly further.
- The reference to debt service leakage within G&A effectively assumes that the Company’s 2P CapEx spend will effectively result in no incremental reserves, requiring repayment of a significant quantum of its reserve-based lending facility. This strikes us as an illogical assumption that has also been highlighted by Stifel in its
January 5th research note.
- In total, the estimate on page 22 of the Company’s Investor Presentation appears to overstate G&A leakage to the tune of close to
$100 million, at a minimum.
Similarly, CapEx is assumed at approximately
$250 millionfor the 18-month period versus the Company’s FY22 mid-point guidance of $185 millionthat included approximately $78 millionof pre-committed exploration CapEx (much of which is rolling off).
- The estimate on page 22 implies a scaled-up budget for the next 18 months at the same level of FY22 mid-point guidance.
- This is unrealistic leakage based on the rolling-off of commitments on exploration assets and could be significantly lower.
$47 millionof Egyptexploration CapEx is greater than 2x the total Egyptexploration CapEx for FY22 as guided.
Even under these punitive assumptions, Capricorn’s numbers imply that the Company would have sufficient liquidity to distribute around
$600 millionthrough June 2024.
- Capricorn is assuming an 18-month budget for G&A expenses and debt service of over
- The continued assumption of zero incremental cash flow benefit from the large receivable balance with EGPC appears illogical considering the significantly lower historical balance (as reported in the Company’s Investor Presentation on a monthly basis).
We understand the issue with the receivable to also be largely a Capricorn-specific issue. In fact, its JV partner has not reported a similar issue; it rather appears to reflect Capricorn’s poor management of local stakeholders.
We believe there is reasonable likelihood that the majority of the more than
$100 millionbalance will ultimately accrue to the Company’s benefit (it was as low as $50 millionas recently as 2021).
- We believe there is reasonable likelihood that the majority of the more than
Contingent Value Rights (“CVR”)
- It is difficult to see how a passive CVR right with straightforward claims to underlying cash flows would cause a conflict between new third-party CVR holders and the Company once separated (as noted by Capricorn).
The value assumption for the
Senegalproceeds implies a greater likelihood of first oil after 2023, which appears overly punitive given recent Company messaging on project progress.
Further, the Company seems to overstate the payable on its
Egyptasset by approximately $6 millionversus currently embedded PV based on futures.
Upfront Dividend & Historical Cash Return
It is misleading to refer to the
$620 millionupfront cash dividend to be accruing to public shareholders when $15 millionis, in fact, going to satisfy dividend equivalent rights of Capricorn’s own employees.
The Company’s notion of
$780 millionin historical shareholder distributions over the past two years is an equally misleading representation of the level of organic distributions the business would be able to achieve on a standalone basis.
$266 millionwas returned in FY20 and FY21, disregarding the initial $500 milliontender offer following the Indiatax refund receipt; and of that approximately $266 million, the vast majority related to capital return of the upfront portion of the sale proceeds from its Senegalasset in FY21.
- Only approximately
Further, the reference to
$5.5 billionin historical shareholder returns over the past 15 years is comprised in large part of the Company’s Indiarefund dividend – a product not of current management’s astute operation of Capricorn’s assets, but rather of the sale of past management’s assets.
- The true distributions for the business would be significantly lower than management is trying to make shareholders believe.
- It is misleading to refer to the
1 Please refer to page 13 of Capricorn’s
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