When MXP BoD’s failed to secure a farm out deal on the deep prospects – they decided to raise the cash and go it alone. 100% interest in a potential 467mmboe discovery would have been a massive transformational result for shareholders. As it happens, they are teetering on the edge of a possible discovery some 1500m above the TD like a bunch of chancers in a coach hanging over a cliff – “Hang on a minute, lads, I’ve got a great idea!” (The italian job, Michael Caine).
The great idea is to suspend the well while the directors all edge to the end of the coach. Now what?
Well, the large institutions might have a few ideas themselves – with Macq leading the charge. You see, when a company potentially ends its hunt for elephants – it instantly becomes a different proposition – one that hunts squirrels instead? There’s no doubt that MXP’s Shallow wells can deliver a very sustainable and cash generative business – but it’s never going to be transformational like the deeps. Investors that bought into the 17p placing may well prefer to see maximum value brought in pronto rather than hang in there for the next couple of years with moderate growth that would make a FTSE 100 company look attractive.
So – here are the credentials for the ‘sales’ leaflet
1. MXP have a very profitable shallow well program which has proven to be cheap vs production gains/cap ex costs. Most wells are heading towards greater valued export status.
2. MXP have a bucket load of seismics which are worth $15mln+ alone
3. MXP have a deep prospect with a tough salt seal to crack but just 1500m left to TD. It’s a well that would have cost any other exploration team around $25mln. It could cost a different expert team just $5mln to complete it. They have many other sizable targets all with 100% interests.
4. They have manageable debt that any cash rich or larger company can pay off or continue with very easily.
The company is currently valued at just £33mln today.
Perhaps UBS’s reason for buying recently is that they know the best way forwards for MXP might well be to hang up the ‘for sale’ sign. I don’t agree with this but then I don’t hold over 21% of the shares. I also don’t know what the alternative is but my gut says it’s going to be dilutive – after all, desperate funding often is. MacQ, UBS and Henderson own a combined 35%+ so it’s not a pi discussion – it’s for the big boys to decide.
Who might be interested?
Lets take Dragon oil for instance. They recently made an approach for Bowleven but soon walked away after the market moved BLVN 3 fold upwards.
Dragon have assets just across the border to the north in Turkmenistan. They know the region, the politics and the Caspian basin well. They are looking for massive exploration opportunities but also reserves and production. They are cash rich and have bank loan facilities with companies familiar with the region.
At £33mln and 3.22p per share, if Dragon offered MXP shareholders 14p per share or even 17p per share – they would still be gaining a bargain. The II’s involved – particularly MacQ might not think twice should an offer come in at the higher ranges.
Of course any predator would be wise to make an offer in the low single digits and work their way up – but a bidding war might not be a great idea as seen by events on COVE.
It doesn’t have to be a cash deal. An all share deal would allow MXP holders to still retain an interest in the deeps just within a company that has the cash pile to drill them and drill them properly.
Deals like the Ophir/Dominion is a great example of smaller companies seeing the writing on the wall and joining forces with the bigger guns.
If Dragon snapped MXP up tomorrow for 14p per share – I wouldn’t be too disappointed if it meant that I had Dragon shares and an opportunity to see the deeps drilled and the company grow. The investment would be derisked to some extent yet still have the upside potential.
I expect the II’s involved might well be looking for suitors. Perhaps UBS buying up 26mln shares suggests they feel the path forwards from here is a company sale at a much higher value?