Shares in struggling oil and gas producer Tethys Petroleum (LSE: TPL) rose by as much as 20% this morning on news of a 10.7p per share possible takeover offer from FTSE 250-listed Nostrum Oil & Gas (LSE: NOG).
The possible offer of C$0.2185 (approx. 10.7p) per share represents a 56% premium to the closing value of Tethys shares on Friday and would value the company at about £36m.
Tethys also said this morning that a previously agreed $47.7m refinancing deal with AGR Energy and Pope Asset Management would no longer be going ahead. As a result, while today’s offer may be a far cry from two years ago, when Tethys shares traded at more than 40p, it could prove to be a lifeline for Tethys shareholders.
As part of this deal, AGR had provided a $5m short-term loan to Tethys, which will no longer be available. To replace this, Nostrum has agreed to provide a similar $5m facility while it carries out due diligence on Tethys.
It’s probably fair to say that if the Nostrum offer is not successful, Tethys could be forced into administration, or face a heavily-dilutive fundraising that would leave very little value for existing shareholders.
Nostrum has until 9am on 24 August to complete its due diligence checks on Tethys, after which it will have two business days to decide whether to make a formal offer.
Nostrum may be a good buyer
The board of Tethys has already agreed to recommend Nostrum’s offer unanimously to shareholders if it is confirmed.
Interestingly, Tethys says that shareholders would be able to choose whether to receive payment in cash or Nostrum shares. While cash might seem to be the obvious choice, I’ve been wondering whether Nostrum shares could be a more profitable choice.
Nostrum is a £1bn business with substantial operations in Kazakhstan, where Tethys’ main production assets are also located. In 2014, Nostrum reported turnover of £781m and a profit of £146m.
The firm’s share price has proved more resilient than many other oil and gas firms over the last year, falling by just 33%, compared to 68% for Tullow Oil and 62% for Premier Oil, two similar-sized firms.
One reason for this may be that Nostrum appears to have been able to finance the majority of its capital expenditure from its own operating cash flow in recent years. The firm has even been able to pay a reasonable dividend, which is expected to offer a yield of around 2.6% this year.
Nostrum’s current valuation indicates that its proven and probable (2P) reserves are currently valued at around $4 per barrel. That doesn’t seem expensive.
Most Tethys shareholders are likely to be sitting on a big loss. Accepting Nostrum shares instead of cash could be one way of clawing back some losses on Tethys.
This isn’t the first time that Nostrum has looked at Tethys with a view to buying the smaller firm. In my view, this latest offer is very likely to succeed. If I was a Tethys shareholder, I would choose Nostrum shares instead of cash, and hold on for the chance of a longer-term profit.