Expected Company Sale
Jeremy Raper has recently highlighted an interesting setup at Otto Energy which holds a number of minority interests in producing oil and gas wells across the Gulf Coast. The company launched a strategic review in March after a 48% shareholder said it wants out. Management seems highly focused on the company sale. In June, the CEO was replaced with a caretaker, who will oversee the sale and will receive a A$300k bonus if the transaction gets completed by Mar’24. OEL has also issued an update saying there has been significant interest in the company and its assets. In a sale scenario the potential upside could be considerable as the company currently trades close to 1x FCF – i.e. EV=US$27m on assets that should be generating around US$23m of annual FCF. Half of the market cap is in cash. The company has also quite an elevated US$5m G&A expense, which could be easily eliminated by a strategic buyer. With 6 months into the strategic review process already, the resolutions is expected before the year-end.
Note: The ‘Ideas Elsewhere’ section is intended to highlight interesting event-driven investment ideas by other authors. These ideas are not my own, and I am simply summarizing them to bring attention of SSI subscribers. I do not intend to actively follow the developments of these ideas, so you should expect limited updates or follow-ups in the comments section.
This seems to be a gem in the making. It’s basically $FAR with a better valuation and a more imminent liquidation event. FCF math is a little questionable though. Probably underestimating extraction costs and overestimating revenues closer to asset end life. Nevertheless, current crude price jump gives short-term cash flows upside from your figure. Let’s see if that translates. I’ve invested a modest amount here and will look to ramp up on any pullback.
https://wcsecure.weblink.com.au/pdf/OEL/02717888.pdf
Could anyone please explain the implications of the 19.8m impairment disclosed on 28 September 2023 in the annual report with respect to the $0.025 valuation Raper stipulated in his twitter thread which is referred to above?
The impairment is related to cost overruns and lower than expected performance of OEL’s Green Canyon 21 asset. The company performed recompletion for several zones of a GC 21 well, however, despite recompletion one of the zones was not contributing to well production. The impairment was recorded to account for the lower net present value of the cash flows expected to be generated by the asset during its remaining life.
While this is clearly not a positive, the impact on the valuation/FCF is minimal. Green Canyon’s production stood at 32k BOE in FY23 compared to OEL’s total production of 843k BOE. Assuming no further production from GC 21 (which is overly punitive as the asset is still producing), the company would still trade below 1.5x EV/FCF based on Jeremy’s previous FCF calculations.
Thank you. I don’t know anything about energy but conducted a similar analysis. I basically looked at the BOE lost from GC 21 relative to proved and probable reserves and estimated a 7% reduction in BEO for the firm. Overall a negative but nothing that torpedoed the thesis.
Below is my baseline analysis for OEL.lse
As company financial report lags, I downloaded the current production data for their wells (BOEM, TXRRC, LADNR), as this data only lags a few months, I derived current decline rates from this data and ran a DCF on each field. The assumptions used for product pricing were forward oil and natural gas futures. I took the middle point of company data for lifting cost ($17.50/bbl). I ran the DCF at PV-15%. For the upside potential in the Lightning field, I ran the upside of three new wells at NPV-30% with 75% of the production of the current Lightning well. Also assumed was the elimination of the G&A in an asset sale scenario.
Below are my results:
OEL.lse
Est. value per share
PV-15% ($MM)
SM71 $9,581,396
Oyster $3,399,716
GC21 $6,559,418
Mosquito Bay $2,633,802
Lightning $9,670,884
Lightning Upside (PV30) $12,368,730
Total Reserves Valuation $44,213,946
PANR stock $ 1,200,000
Cash $25,000,000
Total Valuation $70,413,946
Shares 4,795,000,000
Perf. Rights 23,900,000
Options 72,500,000
Fully diluted shares 4,891,400,000
Share Value $0.0144
Projected Free Cash Flow (FCF)
SM71 Oyster CG21 Lightning Mosq. Bay Totals
2024 $5,825,981 $1,641,441 $2,753,905 $3,342,864 $1,333,991 $14,898,181
2025 $2,896,743 $1,200,025 $2,016,943 $2,900,863 $1,136,368 $10,150,942
2026 $1,495,457 $623,086 $1,495,800 $2,189,672 $934,657 $6,738,672
2027 $753,522 $311,083 $1,084,098 $1,587,940 $- $3,736,643
Awesome, thanks for bringing your intelligence and experience to the comments, much appreciated.
Failed to provide FX conversion in my analysis – .015 usd = 2.25 aud
RETURN OF CAPITAL TO SHAREHOLDERS
UP TO A$40 MILLION IN EARLY 2024
Otto Energy Limited (ASX: OEL) (Otto or the Company) is pleased to announce that the
Board of Directors has resolved to return up to A$40.0 million, or A$0.008 per share, to
shareholders in early 2024, the first step of the formal review process to maximise
shareholder value announced 29 March 2023. The capital return will be subject to
shareholder approval as an ordinary resolution at the Company’s upcoming Annual
General Meeting on 30 November 2023.
It is intended that the Company will use existing cash reserves on Otto’s balance sheet for
the purposes of the capital return.
The ongoing review process also includes an assessment of a potential partial or full sale
of the Company and/or its assets. The Company will inform the market and its
shareholders regarding any developments in this process when available.
The strategic review was initiated due to the Board of Director’s belief that Otto’s shares
have consistently traded at a discount relative to the intrinsic value of the underlying
assets.
Are we aware of any tax implications or would this likely get an ATO ruling similar to FAR’s earlier capital return?
This one tanked today and seems to be trading around net cash value.
Any insight into what might be going on? As it stands 67% (at 0.012) of the market cap (0.008) will be coming back the of May….
I think its around the time the CEO needed to sell the co for his bonus.
Thought that incentive ended 31-Mar-24 for the person they brought in rather than the CEO but I might be misremembering.
Probably right, am not up to date this name.
OEL announced a delay in capital return to Aug 2024, citing delay in getting ATO ruling. while many companies announced and completed capital return first and obtain ATO ruling afterward, is OEL management slightly over conservative on this front?
How can they complete it and then obtain the ruling? Wouldn’t that make it too late for the ruling to have any impact? It would just be treated as decided by the ATO at the time. Whereas getting the ruling in advance then allows the ability to appeal it if the ATO attempts to treat it as something other than a return of capital, no?
That said, I don’t get why the ATO is taking so long to provide a ruling. Guess providing a ruling that benefits taxpayers is a not a priority when they can focus on extracting taxes to the point where nobody has any disposal income left anyway….
if you have a look at Calima energy and pointsbet holdings you will see that they proceeded with capital return prior to ATO ruling granted.
I would copy and paste the relevant extracts from the announcements, but like everything in Australia it is overly regulated and restricted so here is the summary:
20-Jun-23 OEL appointed Steve Herod to sell the assets having terminated the previous CEO Mike Utsler. John Jetter was meant to work with Herod to complete the M&A.
20-Dec-23 the CFO Sergio Castro resigned.
20-May-24 John Jetter announces retirement effective 30-Jun-24
8-Jul-24 Steve Herod resigns “to pursure other interests”.
So, they bring in Herod who was meant to sell the assets with the aid of John Jetter. They don’t get it done by Mar-24, that date at which the Herod would get a transaction bonus. Subsequently the CFO resigns, Jetter retires with the deal still not done and Herod quits.
Okay, what now? It appears there is no market for their assets and everyone involved is giving up. Now people, seemingly without M&A experience at at the helm?
There’s a quick workaround if you have a mac: screenshot the filing, then use your mouse or trackpad to select and copy the text. It works like a charm. I assume there should be similar options for Windows users.
I’m not cool enough for Mac. Also their closed systems irks me.
The long way around is to use Google translate to translate from English…. To English then copy and paste. ;-)
Thanks for the tip nonetheless, much appreciated.
I’m also curious about what is going on.
The press release makes it sound like they are cutting costs by merging the CEO and CFO position. Possibly runoff/liquidation?
Would you please explain what you mean by run off in this situation? As I understand it, runoff is a term related to the non reinvestment in financial instruments that possess a pre defined terms e.g., a bond portfolio.
In terms of liquidation, how is this substantively different from what they were attempting? i.e., large return of capital, attempted sale of remaining assets (and presumably a winding up and return of capital post sale)? To me the only difference is, in a liquidation you might sell at below market value because the entity no longer possess the means to continue to operate the assets, whereas in a sale process you would seek to attain a fair market value at a minimum.
I’m forever lost in financial terminology despite a background in accounting/finance/insurance so it would be good to understand the nuances of what you communicated.
Thanks
Sorry, I probably misused the word. Operate the assets while FCF is positive without reinvestment and then shut down.
Payment date was extended once again to October 30th, more than a year after capital return was announced.
Looks like our new mate Philby is keen on a punt because nobody wants to buy this steaming pile of horse shit….
OTTO TO PARTICIPATE IN PRODUCTION ACCELERATION
WELL AT SM 71
HIGHLIGHTS
F5-ST production acceleration well targeting the prolific D5 sand which has already
produced over 5 MMbbl of oil at SM 71, is to be drilled as a sidetrack out of the
existing F5 well bore (currently temporarily abandoned).
Otto interprets the F5-ST primarily as a production acceleration well with an
anticipated flow rate of 500-1,500 bbl/d oil (8/8ths) and a 60% probability of
commercial success. Upside exploration potential exists.
Total field production expected to increase to 1,350 – 2,350 bbl/d (8/8ths) in SM 71
field, if well successful.
Well to be drilled from Enterprise 264 Jack-Up rig with spud date expected during late
September / early October 2024.
What does that look like (help from chat GPT because I got NFI):
Cash Position
Cash Balance as of 30 June 2024: A$60.8 million
Proposed Return of Capital: Up to A$40 million (delay delay, bloody delay)
Remaining Cash Balance: A$20.8 million
Project Outlay and Funding
Total Outlay for Otto:
Amount: $5.8 million USD (approximately A$8.7 million based on a conversion rate of 1 USD = 1.50 AUD)
Components:
Drilling and completion costs: $5.65 million USD
Additional hook-up costs: $0.15 million USD
Probability of Success
Probability of Commercial Success: 60%
Revenue Estimates
Assumed Oil Price: $75 USD per barrel
High-End Production Estimate
Production Rate: 1,500 barrels per day (bbl/d)
Daily Revenue=1,500bbl/d×$75/bbl×40.625% (Net Revenue Interest (NRI) in the SM 71 lease) =$45,703.13USD
Annual Revenue=$45,703.13×365≈$16.7 million USD
Expected Revenue (60% probability) =$16.7million×60%=$10.02 million USD
Low-End Production Estimate
Production Rate: 500 barrels per day (bbl/d)
Daily Revenue=500bbl/d×$75/bbl×40.625%=$15,234.38USD
Annual Revenue=$15,234.38×365≈$5.56million USD
Expected Revenue (60% probability) =$5.56million×60%=$3.336million USD
I can just imagine the conversations…
[meeting] Boys, let’s sell this shitbox!
[meeting participant] yeah righto… the yanks will buy anything…. why don’t we turf old mate and get a yank in to sell to the other yanks…. they’ll buy anything if you whack some stars and strips on it mate….
[other meeting participant] too right, you really know your stuff don’t ya mate?!
[on reflection months later] gees mate, nobody wants to buy this shitbox….
[board member] yeah, let’s get rid of the yank and bring in Philby up the ranks… he’s a good bloke and loves a punt….
[yelling own the corridor] Philby, did you see the Crows get up against the Demons last night?
[Philby] Yeah, that young bloke they got can really kick a ball can’t he?!
[board member] Bloody oath! Btw, the yank we got couldn’t sell this shitbox to another yank…. want to have a go?
[Philby] What did you say? Sorry, I was looking at the two flies on the wall….. I got $1,000 on the one of the left….
[board member] Righto, you’re on!
[fly on right wins]
[Philby] Damn….. I lost…. ummm….. just use the company’s cash pile…. I was going to use the cash to start the barbie but you can take what I owe you….
[board member] So what about the job…..
[Philby] Yeah, righto, I’ll give it a burl…..
[Philby on reflection] Gees, this shitbox is hard to sell…. let’s have a punt….. nothing to lose, well none of my many anyway [Philby own nearly no shares]……
Seriously though, what now? It really no longer appears to be a special situation. If/when the 0.08c is returned the stub might work out based on the “60%” probability….” guess they were a few beers deep when they decided that 50% odds weren’t a good marketing so came up with the ‘magical 60%’….
starting with a share price of 1.2c and deducting the 0.8c (nothing says ‘scam stock like billions of shares outstanding and a fraction of a cent share price) we have 0.4c which will be backed with cash of about AUD 20m/~USD 13m less 5.8m capex = USD 7.2 / 4.795bn = 0.15c of cash…..
[random person] OI! Philby! mate, your heard of a reverse split champ, or your going to destroy shareholders with a insane minimum bid ask spread?!
[Philby looking at TV] Come on the Crows!!!!
IBKR sent me a message saying the dividend will be paid on 8/28. Wondering if this is a mistake from all the delays or if they received approval?
Cash Dividend: OEL@ASX
OEL@ASX (Name: OTTO ENERGY LTD) announced a cash dividend with an ex-dividend date of 20240820 and a payable date of 20240828.
The declared cash rate is AUD 0.008.
Yeah, me too, I think it’s an error based on a legacy dividend date which they duly missed…
Philby says “it is an exciting time for Otto Energy shareholders with the Enterprise 264 rig on location and the drilling of the F5-ST well at SM 71 to commence shortly”. Almost too much excitement! 60%!
I’m surprised he didn’t state the “60%” as “4/6” in accordance with his local book maker at the track…
-Still no tax ruling, distribution date was pushed back again to December 20th.
-Trading halt to temper shareholder excitement surrounding the annoucement of 60% success probability drilling results.
i must admit i’m getting impatient w the delay
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02869645-6A1232474
Philby continues to punt (with shareholder money), another USD 3.7m required to complete this well.
The downside continues to potentially grow with the cash burn, and the length of time to return capital is concerning.
But they have brought in a new director: https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02868963-6A1232183
The most interesting aspect of his appointment is that his experience “has included a broad spectrum from company incorporation through to takeovers and other large corporate transactions. He has acted as a director for Australian and dual listed entities with US operations”
One can be hopeful that the drilling eventually proves successful and this new guy and sell the assets…
The well failed but Philby is still pleased according to the press release. Nothing can stop him.
The new director is a professional company director. It’s a great job.
The Company has been in discussions with the Australian Taxation Office and expects that a final
class ruling will be received within 28 days. Otto acknowledges the unexpected length of time to
finalise the distribution and thanks shareholders for their patience over this period.
Shares are trading at a market cap of $48M AUD whilst Cash Balance alone is at $55M AUD.
So they’re returning A$0.008/share vs A$0.012 current price. Payment date is on June 16, if there are no further delays. Do you know whats the outlook for the remainco? It seems like it will be virtually illiquid. Will it be allowed to stay listed?
Not ideal, but here is a useful illustration of proven reserve model. I don’t think you need to see a stellar cash conversion to even see a 2x from this current valuation. The capital return, along with the remaining cash, provide a pretty safe cushion.
https://x.com/Pussenius/status/1862469561867542540/photo/1
It does look cheap. Pro forma for the capital return, you are currently paying A$10m for the company’s pro forma net cash position of A$13m and a FCF-generative business. Profitability and FCF generation were negative in H1 FY25 due to significant exploration expenditures. But given the big overhead cuts (55% year-over-year in H1 FY25) and potentially normalizing exploration expenditures, the company might generate more than A$5m in normalized annual FCF.
My key concern is the lack of catalysts that might help unlock the value. The previous strategic review ended with the company unable to sell its minority stakes. A lower oil price environment likely doesn’t help either. So there’s big risk you’ll just get stuck with totally illiquid or even potentially delisted stock, with limited/no visibility.