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?