A small US investment firm called Pope Asset Management LLC owns 17.3% of Tethys Petroleum (LSE: TPL), and is trying to get shareholder backing to remove chairman and founder Dr David Robson, finance director Denise Lay and all but two of the Central Asia-focused oil and gas firm’s non-executive directors. This would leave chief executive Julian Hammond in place, and he would be joined by Pope’s four nominated directors.
Pope claims to specialise in identifying mispriced assets, and clearly believes Tethys’ management is holding the firm back. Tethys has underperformed over the last year or so, suffering falling production and requiring a $15m equity raise in May.
Can things get any worse?
Admittedly, not all of the delays Tethys has suffered have been of its own making.
However, I’m concerned by its high staffing costs and low director share ownership: the biggest director holding is that of founder Dr Robson, owning just 0.3% of the company’s shares. This isn’t encouraging for shareholders, as Dr Robson may be more interested in his $1.3m salary than the value of his shares, which are only worth around £160,000.
Big potential
Independent experts estimate Tethys’ Tajikistan exploration acreage could contain gross unrisked mean prospective resources of 27.5bn barrels of oil equivalent. This was enough to enable Tethys to farm-out a 66% share to Total SA and China National Petroleum Corporation for $63m in 2013.
Successful exploration of these assets could be transformative for Tethys, even allowing for further farm-downs to fund the estimated $40-$70m cost per well of exploring these assets.
However, the start of seismic work in Tajikistan has been delayed, and the first well is not likely to be drilled 2016.
Is Tethys poised to recover?
It’s tempting to see Tethys as a seriously undervalued exploration play, with cash flow backing from production assets, but caution is needed.
Tethys has failed to make its Kazakhstan production business self-funding, and has agreed to sell 50% plus one share of its Kazakh assets to a Chinese private equity fund for $75m, subject to Kazakh state approval.
The dilution this implies will limit the benefit to Tethys of next year’s expected threefold rise in gas production, and looks to me like a short-term fundraising measure that could prove costly in the future.
Although Tethys offers significant upside potential at 16.5p, the risks are also high, unless the firm can start generating cash to fund its share of future exploration expenses and avoid excessive shareholder dilution.