Touchstone Exploration Inc (AIM:TXP, TSX:TXP, OTC:PBEGF) has agreed to acquire Trinidad oil and gas peer Trinity Exploration & Production PLC (AIM:TRIN), in an all-share deal, worth £24.1million.
Trinity shareholders are set to receive 1.5 new Touchstone shares for each Trinity share they own.
Based on Touchstone’s closing price of 41.25p yesterday, the notional deal price values Trinity at a 71.9% premium to Monday’s closing price of 36p per share.
Trinity’s current shareholders will account for just shy of 20% of the enlarged company.
Combined production will amount to around 11,700 to 12,400 barrels of oil equivalent per day.
"We believe this acquisition represents a compelling strategic opportunity which will deliver enhanced scale, balance sheet strength, and growth opportunities,” Touchstone chief executive Paul Baay said in a statement.
“The business combination will create an upstream oil and gas company of increased scale in Trinidad, enhancing our ability to deliver growth in reserves, production and cash flows for the benefit of our combined shareholders and local stakeholders.
“The combined group will be able to invest in multiple development programmes and accelerate the growth potential of the enlarged asset base, thereby giving us the potential to materially enhance long-term value".
Jeremy Bridglalsingh, Trinity's chief executive, meanwhile, added: “Our two companies have operated in close proximity over many years.
“The premium offered demonstrates the value Touchstone sees in Trinity's team and operations and its confidence in the future potential of the enlarged business."
Trinity shareholders representing 38.9% of the company have already provided irrevocable undertakings to vote in favour of the combination.
Boosted cash flows and an enhanced portfolio
Touchstone noted that Trinity previously reported pre-hedged earnings of US$18.5 million, and it expects to report operating cash flows between US$10 million-US$12 million for the 12-month period ending 31 December 2023.
Whilst Touchstone, with its ramping up of production from new fields, is expected to generate US$32 million of funds from operations.
The company said it sees that the combined company would have the resources, capacity and flexibility to invest in multiple development programmes concurrently to accelerate the potential of the combined asset base.
Touchstone also believes that the enhanced cash flow potential will also allow greater optionality over capital allocation decisions and provide for a sustainable approach to future shareholder distributions.
Trinity's assets will provide additional development inventory for funds generated from production.
The enlarged company is expected to benefit from a catalogue of attractive exploration and development prospects from Trinity's onshore Hummingbird portfolio and Buenos Ayres Block, as well as its TGAL discovery at the offshore Galeota block, along with Touchstone's Ortoire licence area and Cipero, Charuma, and Rio Claro blocks
Touchstone expects the cost synergies to be significant and believes it can significantly reduce the combined overhead base.
Indeed, it noted that it believes it will be able to integrate and operate the enlarged portfolio of assets with limited additional overhead to Touchstone's current cost base.
The acquisition is expected to be cash flow accretive in the first full year after the completion before those synergies are realised.
Trinity’s board has recommended its shareholders approve the takeover deal when asked to vote at its EGM. The deal is also subject to approval in Trinidad.
It is expected that the transaction will be completed before the end of the third quarter.