PANAMA CITY, Republic of Panama, July 6, 2015 /CNW/ – Horizon Capital Management Inc. (Horizon) issued today a public statement calling upon all shareholders of Americas Petrogas Inc. (Americas Petrogas or the Company) (TSXV: BOE) to VOTE AGAINST the special resolution (the Transaction Resolution) at the annual and special meeting of the Company currently scheduled to take place on July 29, 2015 (the Meeting), that would approve the sale by the Company of all of the outstanding common shares of Americas Petrogas Argentina SA (APASA) to Tecpetrol International SA and its affiliates (Tecpetrol) and related transactions (the Proposed Transaction).
Juan Argento, Senior Advisor of Horizon, said, Horizon believes that the Proposed Transaction undervalues the Company, is opportunistic given current market conditions, inappropriately incentivizes management and insiders of the Company at the expense of the minority shareholders and is not in the best interests of the Company or its shareholders. The Company is selling its principal assets at the worst possible time, keeping the cash consideration instead of distributing it to shareholders and disclosing no details of how it intends to use such funds.
In its public statement Horizon is demanding that the Companys Board of Directors (the Board) postpone the Meeting so that it takes immediate action to address these issues including by (i) renegotiating the deal with Tecpetrol or finding another partner, (ii) maintaining at least some of the upside in the assets that are the object of the Proposed Transaction, (iii) avoiding selling the only producing assets of the Company, and (iv) presenting a clear plan to the Companys shareholders that includes significantly reducing selling, general and administrative (SGamp;A) expenses.
Founded in 2004, Horizon is a merchant banking firm with advisory and principal investment activities and with substantial focus on the oil and gas industry in Latin America.
The text of the public statement to Americas Petrogas shareholders is as follows:
Dear Fellow Americas Petrogas Shareholders:
We are a significant shareholder in Americas Petrogas. We are extremely disappointed with the terms of the Proposed Transaction with Tecpetrol for the following reasons:
The Proposed Transaction completely changes the nature of the business of the Company.
- Shareholders invested in a company with valuable oil and gas assets that had tremendous upside potential. If it proceeds, the Proposed Transaction will result in the Company disposing of (i) all of its principal oil and gas assets including all producing assets and (ii) all of its oil reserves and most of its gas reserves. The Company will be left with only those oil and gas assets that are less attractive to investors and an early-stage mining operation in Peru with uncertain future value (ie, the Bayovar property).
- According to the latest drilling results released by the Company on May 13, 2015, the Bayovar property contains mostly inferred resources (that are highly uncertain) and a very low level of indicated resources. Based on the valuations of other publicly-listed companies at a similar stage of development and with a similar level of resources we attribute a value of less than USD 5 million today to this property.
- In sum, if the Proposed Transaction proceeds, shareholders will be left with a Company that has no production or revenues, and assets that are very early stage, less attractive and of little value.
The valuation of the Proposed Transaction is unattractive.
- The Company is selling approximately 121,000 net acres of oil properties that include (i) the conventional fields that provided all current production and revenues, (ii) all of its oil reserves and most of its gas reserves, and (iii) the most valuable unconventional acreage (Los Toldos area), in exchange for total consideration of USD 63 million, or USD 520 per acre.
- Furthermore, assuming a value of USD 30 million for the conventional assets (based on public comparable companies), the Company is selling the unconventional assets for USD 33 million or a mere USD 346 per acre.
- It is difficult to reconcile this valuation with historical comparable transactions. In 2013, the Companys Chief Executive Officer, Barclay Hambrook, was on record saying that the valuation of comparable transactions in Argentina had averaged more than USD 10,000 per acre.
- In fact, Chevron and Dow Chemical farmed into Yacimientos Petroliferos Fiscales (YPF) properties in 2013 at an implied value of USD 10,000 and 10,900 per acre, respectively.
- More recently, on August 28, 2014, after oil prices began to drop, Petronas farmed into a YPF property at an implied value of USD 10,280 per acre.
- In North America, comparable transactions in Bakken, which has very similar characteristics to Vaca Muerta, reached values of up to USD 50,000 per acre before the drop in oil prices. More recent transactions in May 2015 have been completed at approximately USD 14,000 per acre.
- While we are aware that the fall in oil prices has temporarily affected valuations, Vaca Muerta continues to be considered the most attractive unconventional shale opportunity outside of North America. Besides YPF, companies such as Exxon, Shell and Total continue to enthusiastically invest in Vaca Muerta despite the current price environment.
- If the Proposed Transaction is approved it will be done at the Companys peril and that of its shareholders.
It is a terrible time to sell.
- The Proposed Transaction has been entered into at a historical low-point in the valuation of the Company. The shares of the Company traded as high as CAD 4.38 in February 2012, and more recently, at CAD 1.57 in April 2014, before oil prices started declining. That is, respectively, approximately 19 times and seven times the June 16, 2015 closing price of CAD 0.23.
- Most analysts expect oil prices to progressively recover in 2016, 2017 and beyond.
- Importantly, Presidential elections in Argentina in October of this year will result in a new government that many expect will be significantly more business-friendly. This change will likely facilitate attracting fresh capital for the oil and gas industry and will likely have a significant positive impact on asset valuations.
- We understand it is a tough time for small Eamp;P companies in Latin America. But peer companies are not selling assets at this time. They have instead cut capital expenditures, slashed SGamp;A expenses and postponed drilling commitments in order to adapt to the current price environment and effectively capitalize on the future recovery of the sector.
- The Proposed Transaction is an irresponsible short term fix and the Board knows or ought to know that there are better ways for the Company to address its current issues that will be in the best interests of the Company and its shareholders over the long term.
The Board is misleading shareholders with statements in the management information circular that suggest there are no alternative transactions or sources of capital available to the Company.
- Despite the difficult market conditions, there is alternative financing available to the Company. Many comparable companies in Argentina and elsewhere in Latin America have secured financing during this difficult period. Throughout 2015, many of the Companys closest peers (ie, junior Canadian companies with oil and gas assets in Argentina) including Crown Point Energy, Andes Energia and Madalena Energy, were able to raise capital in order to continue investing in each of their respective businesses in Argentina. Other Canadian junior companies with assets in Latin America including Canacol, Parex and Pacific Rubiales, also secured equity and debt financings in 2015.
- Horizon has been and continues to be very active in advising multiple Latin American oil and gas companies in their capital raising and Mamp;A efforts.
- We expect that the Company must have received a number of alternative offers that would allow its shareholders to participate in the upside (even if these offers were to contain a lower cash consideration component payable to the Company). Horizon would have considered such offers considerably more accretive to long term value.
- Horizon has had conversations with different parties that have expressed interest in (i) farming into the assets of the Company and / or (ii) providing financing to the Company.
- Like most of its peers, the Company should reduce SGamp;A, cut capital expenditures and push out drilling commitments while securing enough financing to continue its operations until the conditions in Argentina and the global oil and gas market improve, which could be as soon as Q1 2016.
- The Board and management seem to have put their short term interests above the long term interests of shareholders by maximizing cash proceeds to the Company now to continue to fund their outsized compensation and excessive spending instead of maximizing the prospects of long term value creation for all shareholders.
The Company is unnecessarily giving away most of its upside.
- Instead of selling the assets, the Company could have partially farmed out the assets to a new partner, reducing its capital requirements while keeping a substantial part of the upside.
- In fact, it would have been possible for the Company to negotiate to be freely carried by a new partner, meaning the new partner would have been responsible for 100% of the capital expenditures on the assets while earning less than 100% working interest on the assets.
- This transaction structure is typical for assets at this stage of development and was used by the Company when it farmed out the Los Toldos blocks to Exxon in 2011. In that instance, Exxon agreed to fund up to USD 76.3 million to earn a 45% working interest in the Companys Los Toldos blocks. This arrangement was a much more attractive transaction for shareholders and was completed at a time when the assets were significantly more risky. Since then, three exploration wells were drilled in Los Toldos with positive results, which has significantly de-risked the assets and therefore enhanced their attractiveness to new investors.
- As a result, we simply do not believe the Company is unable to find a partner that is willing to fund additional investments in Los Toldos and its other assets. This approach would allow the Company and its shareholders to benefit from the tremendous upside potential that is inherent in these assets.
The Proposed Transaction is not providing any cash consideration to the shareholders while rewarding insiders and management.
- The cash consideration offered by Tecpetrol will be paid to the Company and to management and not to the shareholders, despite the fact that the Company is effectively exiting its principal business. The cash consideration should instead be paid to shareholders.
- According to the Companys management information circular dated July 29, 2015, the Company will be responsible for paying up to $6 million worth of change of control and severance payments whereas shareholders will not see a penny.
- Shareholders will be left with limited options. Selling stock in the secondary market is an inferior alternative given (i) the illiquidity of the stock, and (ii) the fact that the current market price is significantly below the cash consideration per share agreed in the Proposed Transaction. Furthermore, the Board has failed to explain the value proposition for shareholders if the Proposed Transaction proceeds.
The interests of the largest shareholder in the Company, Indian Farmers Fertilizer Cooperative Limited (IFFCO), which has committed to vote in favor of the Proposed Transaction, might not be aligned with the interests of the rest of the shareholders.