Headlines
• Union Jack Oil*** (LON:UJO – 0.13p) – $4.9mm – $33.6mm (0.11p – 0.74p) – Force Majeure: While disappointing, nothing in yesterday’s news has changed our estimate as we believed that approval is just a matter of time. There is little doubt that this will impact the share price, but at this stage, save for the changes to timing, until we have updated information, we will maintain our previous assumptions.
• Magnolia Petroleum (LON:MAGP – 0115p) – Management Services Company: What shareholders need to understand from WED & Management is how long it will take for the $19mm to be raised, and what the likelihood of success is. To our mind, the only change to the transaction should be the use of JV vehicle, or saving that, a proportionate issue of shares to the deployment of the capital. But in doing that, Management would face a greater exposure to the demands of the shareholders. In doing this deal in this manner, by diverting attention from its “day to day” operation, obfuscates the cost structure, which we believe is excessive for the current, and future, asset base.
• In Brief:
o Volga Gas*** (LON:VGAS – 57p) – $155mm (159p) – Testing Continues
o RockRose Energy (LON:RRE - SUSP) – Readmission
News Items
Union Jack Oil*** (LON:UJO – 0.13p) – $4.9mm – $33.6mm (0.11p – 0.74p) – Force Majeure
Yesterday’s news that once again the committee decided to reject the Wressle planning application, contrary to their own Planning Officer recommendation proves for once and for all that Labour run councils have lost the plot and care about nothing except their own self-interest. The last time we wrote of this sad state of affairs we stated:
If the public record of the statements made at the planning meeting are correct the rejection of the Wressle development planning application was not based on the merits of the application, but in reaction to the Environment Agency's handling of the flood response in the recent past.
On this basis, the councillors have overstepped their remit and while they may have a point about the Environment Agency, they have opened themselves up to legal challenge. We also believe that the focus on the British Steel boreholes, which we assume draws water from a shallower aquifer, is a red herring and can’t have been formulated by anybody with an understanding of the engineering, and the abject stupidity in the statements suggests something else is at work, especially as its not driven by engineering or fact.
The planning approval process must only be concerned with planning matters and, with no respect any concerned, they should do their jobs, not grandstand. This will be disappointing for all involved, especially UJO, but we are confident that planning permission will ultimately be granted.
We believe that the operating team should call Force Majeure as neither it, nor the OGA, are responsible for. To be clear, we believe that the OGA will not enforce any time limited clauses in this case and will support the operating group as it pursues higher authorities, to the high court if necessary.
While disappointing, nothing in yesterday’s news has changed our estimate as we believed that approval is just a matter of time. There is little doubt that this will impact the share price, but at this stage, save for the changes to timing, until we have updated information, we will maintain our previous assumptions.
Magnolia Petroleum (LON:MAGP – 0.115p) – Management Services Company
Today's announcement is an interesting development for a company, and one that on the face of it makes sense for shareholders, albeit it with a wrinkle which leaves its impact lessened. The management services deal with Western Energy Development LLC (“WED”) is one that in isolation would be a good use of the Company's under-utilised Management team, as the fees would certainly help offset the cost base's erosive effect on shareholder value.
However, what we don't understand is the reasoning behind offering 29% of the Company's shares for the privilege of management contract. We believe that this would have been better and more simply arranged as a JV structure, with each party (WED and Magnolia), participating in the economic benefits of the JV's activity alone. That way, the JV would be charged management fees on a day rate basis that reflects the man days of work undertaken. What WED gets under this structure is participation in the Company's pre-existing assets. Consequently, shareholders are entitled to ask what exactly they are getting in return for their paper.
By our estimation, the Management cost element of the fully deployed $19mm fund (once it has been raised, if the text of the RNS is to be taken litterally, i.e., only permission has been provided to raise $19mm) amounts to $385,000 (assume to be per year). This is made up thus:
Category Value
Management Fee ($500/$500m) $185m
Earnings (capped) $200m
Total $385m
If we assume this lasts for 10 years, at which point the valuation contribution tails off due to the time value of money anyway, it provides ~$2.4mm to the current value. On a pre-dilution basis, and here we assume that the current portfolio is perfectly valued by the market, this gives an uplift in value to 0.18p. However, the dilution effect on the overall portfolio means that this is reduced to 13p per share.
This means that the 25% interest in the asset base has to generate 0.05p per share, or $1.36mm, of value for shareholders, to be able to call this transaction value neutral for pre-existing shareholders. Of course, this ignores the acre fees, which is a single transitory effect, and even if taken in year 1, and therefore not subject time effects, implies that the Company will be buying or leasing 2,715 acres to leave the pre-acquisition position value neutral for shareholders, which isn’t outrageous, but has to incurred in full within 3 years, otherwise its impact is diluted.
On balance, we believe that this is a good deal for shareholders, which could have been better, as the value increase from this transaction is more than diluted by the questionable issue of shares to WED, but is a better deal for the Management team, which now needs to be the focus for shareholders.
What shareholders need to understand from WED & Management is how long it will take for the $19mm to be raised, and what the likelihood of success is. To our mind, the only change to the transaction should be the use of JV vehicle, or saving that, a proportionate issue of shares to the deployment of the capital. But in doing that, Management would face a greater exposure to the demands of the shareholders. In doing this deal in this manner, by diverting attention from its “day to day” operation, obfuscates the cost structure, which we believe is excessive for the current, and future, asset base.
In Brief
• Volga Gas*** (LON:VGAS – 57p) – $155mm (159p) – Testing Continues: Todays update underlines the impact of the continued gas plant testing on the sweetening unit. We believe that there is likely to be at least one more month of disruption, at which time, depending on the results of the pre-commissioning runs, the plant will be back to full capacity. Our valuation is unaffected by the continued plant trials.
• RockRose Energy (LON:RRE - SUSP) – Readmission: Today's announcement is the first serious step that Andrew Austin has made on the road to repairing his tarnished reputation, and one which we are glad to see. Those with a long memory will remember the debacle surrounding his personal holding in iGas and First Equity, which whether misrepresented or not, tarnished his reputation. We have never doubted Andrew Austin’s deal ability, but whats needed to ensure that there is no repeat of iGas’s issue, is a strong support team around him, to ensure that the risks are adequately accounted for and match the rewards appropriately.