Shares in Kazakhstan-focused oil and gas producer Tethys Petroleum (LSE: TPL) rose by 27% to 9.9p this morning. The gains were triggered by news that Nostrum Oil & Gas (LSE: NOG) has proposed a possible cash and share offer of 11p per share for Tethys, valuing the firm’s stock at £37m.
Tethys shares hit a 52-week low of 2.8p in April, when the company was forced to announce that it was out of cash and unable to meet its obligations. The shares have since risen by more than 150%, thanks to a refinancing deal with AGR Energy.
Details of a comprehensive refinancing package were confirmed at the start of July, with AGR agreeing to subscribe for new shares worth US$47.7m at a price of C$0.19 per share. However, this placing will increase the number of Tethys shares in circulation by 94% if it goes ahead. According to Tethys, AGR would be expected to hold up to 51% of the enlarged share capital of the firm following the placing, effectively giving AGR control of Tethys.
The Nostrum offer could prove to be more attractive for private shareholders. The offer price of C$0.2185 (about 11p) per share is 15% higher than the C$0.19 AGR was willing to pay for its new shares, and is 45% higher than last Friday’s closing price of about 8p.
Is there a downside?
Nostrum has a market capitalisation of £1.1bn and reported sales of $781m in 2014. The firm’s operations are centred around its oil and gas fields in Kazakhstan and it’s a credible buyer for Tethys, in my view. However, as I write, Tethys shares are trading at about 9.5p. That’s still 14% below the 11p per share value of Nostrum’s proposed offer, and reflects the potential downside of a Nostrum deal.
Firstly, Tethys shareholders will be denied the potential upside that could come from a rise in production and a recovery in the price of oil. Only a year ago, Tethys shares were trading at 20p.
At the end of 2014, Tethys had estimated unrisked mean recoverable oil resources of more than 400m barrels and proven and probable reserves of 27m barrels of oil equivalent. The Nostrum offer values Tethys’ share capital at £37m, or just $2.10 per barrel of reserves. That’s pretty cheap, compared to industry norms.
Secondly, while it is credible, Nostrum’s offer looks like an opportunistic attempt to grab some decent assets at a distressed price. The board of Tethys, which now has a refinancing deal with AGR in the bag, might reject the Nostrum offer.
Buy or sell?
In my opinion, the pros and cons of holding Tethys shares are quite evenly balanced. Although Tethys should, in theory, be able to generate superior returns for shareholders by remaining an independent business, the firm has a history of under-performance.
What’s more, if AGR becomes a majority shareholder as expected, future fundraising could be on less generous terms. Private investors could find themselves repeatedly diluted. The board of Tethys has not yet commented on the Nostrum approach. When they do, the share price could rise — or fall — sharply.
Tethys shares remain a speculative hold, in my view, but are very risky.