Capricorn Energy is too cheap given also its producing assets writes Gary Newman...

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Capricorn Energy (CNE) has seen its share price weaken since it announced a tender offer as opposed to a special dividend, which many investors had been expecting. The oil and gas company, which was known as Cairn Energy until recently, finally settled its dispute over its former assets in India and as a result received a tax refund of $1.06 billion, but instead of distributing a chunk of this money back to shareholders via a widely expected dividend it instead has opted for a $500 million tender offer alongside a $200 million share repurchase programme.

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Under the terms of the tender offer the company will purchase shares up to a total value of $500 million and will pay a 5% premium to the VWAP for the five days prior to the closing of the offer on April 5, by which time anyone wishing to tender their shares for purchase must have done so. This is all subject to approval at a general meeting on March 25. If insufficient shares have been tendered, then there is still a possibility that investors will receive the remainder of that money via a dividend. In addition to this, the company will launch a $200 million buyback programme, which should give plenty of support to the share price – especially as any larger holders who want to sell will likely have already done so as part of the tender process. That could well include JP Morgan Chase which has just dropped its holding below the 3% notifiable threshold, and ABRDN which recently went below 5%. So, although this isn’t what all shareholders wanted, it should add strength to the share price going forwards.

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If we assume that the strike price will be somewhere around the 205p level – based on the recent share price – then that suggests that if fully taken up, circa 186 million of the 495 million shares in issue will be taken out of circulation after the tender. At the end of 2021, the company had net cash of $133 million - $314 million gross, less the $181 million of debt used to fund the Egypt acquisition – and has since received $1.06 billion. So, in total should have around $1.2 billion, ignoring any cash flow generated since the end of the year. That means cash is around £916 million at current exchange rates, versus a market cap of circa £950 million. This seems crazy when you consider that basically the business is being valued at roughly the amount of cash it now has, and seemingly no account at all is being taken of its operational cash flows as Capricorn is far from a cash shell. It holds working interest stakes of between 26-50% in the various producing assets that made up Shell’s Western Desert portfolio in Egypt prior to its sale. These assets produced net oil and gas of 36,500boepd during 2021, which was towards the upper end of guidance, and are expected to increase that to 37,000 to 43,000 boepd on average during 2022, at an average production cost price of $4.5-5.5/boe. This growth in production will come at a price though, and development expenditure in the $90-110 million range has been earmarked for Egypt, along with exploration expenditure of around $100 million or so across Egypt (to add to the resource base), UK (Jaws and Diadem exploration wells), plus Mexico (the final exploration well at its 30% owned Yatzil prospect on Block 7). Whilst these exploration assets are interesting and some of them look promising for future development, especially where discoveries have already been made, currently the main focus is the Egypt assets, which generated gross profit of circa $36 million during 2021.

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The company is also still earning money from the sale of its UK assets, as the terms of the deal allowed extra payments at higher oil price, and that generated an extra $76 million during 2021, with further payments to come this year and next – which at current oil prices should still be significant, even though the percentage that Capricorn is entitled to reduces. There is also potential for cash inflows from Senegal, which the company recently sold, and where an additional payment of $100 million is due on first oil, but could be higher depending on the oil price at the time. Overall, the company currently has 2P reserves of 37.4mmboe, which is basically being ignored by the market in terms of valuing the company, and the same goes for the cash flows being generated by producing this oil and gas. Taking all of that into account, and unless you really dislike the current producing and development assets that the company has, then the current share price of just over 190p seems too cheap and implies that the company will be buying back shares in the tender offer at a price that is roughly supported by current cash balances. For me this isn’t attributing anywhere near enough value to its assets or their potential - with NAV at the end of 2021 (including the tax refund) being roughly $1.8 billion (£1.37 billion) - and I’m more than happy to continue to hold the  shares, and not tender any, especially with such a big share buyback to support the share price and absorb any selling.

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Filed under: Capricorn Energy, Bearcast, FeverTree, Tern, SEEEN, Capital Metals

2022-03-16 13:38:57

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