Horizon Partners ("
Horizon"), a privately-owned
firm that manages the Horizon Absolute Return Fund Limited
(
“HARF”), which is a shareholder of TransGlobe
Energy Corporation (
"TransGlobe" or the
"Company")
(TSX: TGL), issued
today a public statement urging all shareholders of TransGlobe to
VOTE AGAINST the proposed plan of arrangement
pursuant to which Vaalco Energy, Inc. ("
Vaalco")
would acquire all of the issued and outstanding common shares of
TransGlobe in a stock-for-stock business combination transaction
(the "
Proposed Transaction"). The Proposed
Transaction will be considered at a special meeting of the Company
currently scheduled to take place on September 29,
2022 (the "
Meeting").
Juan Argento, Managing Partner of Horizon, said, "Horizon
believes that the Proposed Transaction severely undervalues the
Company, and is not fair to or in the best interests of the Company
or its shareholders. Moreover, payment of the purchase price
in Vaalco shares is extremely unattractive and not without
significant risk. Not only have Vaalco shares declined by
approximately 25% since the Proposed Transaction was announced
reducing the value to be received by TransGlobe shareholders if the
Proposed Transaction is completed, but even such reduced value is
predicated on speculative expectations of uncertain future
exploration results, given Vaalco’s very limited certified reserves
and short reserve life. Finally, the share exchange ratio of 54.5%
(for Vaalco shareholders) to 45.5% (for TransGlobe shareholders)
unfairly favours Vaalco shareholders and is not in the best
interests of TransGlobe shareholders, as TransGlobe is a
significantly more valuable company than Vaalco, according to the
relevant tangible comparable metrics."
Horizon believes that TransGlobe shareholders should
VOTE AGAINST the Proposed Transaction so that the
Company can instead pursue certain alternatives that we currently
anticipate would result in greater long-term value to all
shareholders of CAD 9.11 to CAD 9.73 per share as compared with the
CAD 4.10 per share shareholders will be forced to accept if the
Proposed Transaction is approved at the Meeting. These alternatives
include (i) securing the effective date adjustment payment from the
Egyptian government2, valued in the Company’s balance sheet at USD
67.5 million, (ii) pursuing a sale of the Company’s Canadian
business, which Horizon estimates has a value of USD 85 million to
USD 120 million and rationalizing Canadian CAPEX to maximize free
cash flow; (iii) payment of a distribution to shareholders in an
amount equal to at least 75% of the sum of (a) the net proceeds
from the above alternatives (i) and (ii), and (b) the Company’s
2022 free cash flow which the Company estimates at USD 70 million3,
(iv) continuing to operate and grow the Company’s Egyptian
business, which is expected to generate USD 64.4 million of free
cash flow in calendar year 2023, as per Capital IQ, and (v)
considering other potential transactions identified in the
future.
Consistent with such course of action, Horizon currently
estimates that the Company is in a position to generate
approximately CAD 5.09 to CAD 5.71 per share in cash within the
next 12 months, while maintaining its full stake in its core Egypt
assets, which Horizon estimates are worth at least 1.0x its
December 31, 2021 reported after-tax NPV10 of P1 reserves of USD
226.9 million or an additional CAD 4.02 per share.4
Horizon is a privately-owned firm with advisory and principal
investment activities and with substantial focus on the energy
industry. Horizon Capital Management, Inc., part of Horizon,
manages Horizon Absolute Return Fund Limited, a British Virgin
Islands Approved Fund that primarily invests in listed
international oil and gas companies and is a shareholder of
TransGlobe.
The text of the public statement to TransGlobe shareholders is
as follows:
Dear Fellow TransGlobe Shareholders:
We are extremely disappointed with the terms of the Proposed
Transaction with Vaalco for the following reasons:
The value of the Vaalco shares, which represents the
form of consideration to be received by TransGlobe shareholders for
the sale of their TransGlobe shares, has dropped approximately 25%
to USD 231 million since the Proposed Transaction was
announced.
- The value of the
Vaalco shares dropped from USD 6.23 on July 14, 2022, the date the
Proposed Transaction was announced, to USD 4.69, as of September
12, 2022. This change effectively reduces the value of the
consideration to be paid to TransGlobe shareholders from the
announced USD 307 million to a significantly lower USD 231 million,
equivalent to CAD 5.44 to CAD 4.10 per share5, representing a
decline of approximately 25%. If the Proposed Transaction is
approved by shareholders at the Meeting, this decline in value
would impact all TransGlobe shareholders since there is no
adjustment mechanism in the arrangement agreement to protect the
shareholders.
At USD 231 million, the Proposed Transaction severely
undervalues the Company. As a stand-alone company, Horizon
believes TransGlobe is in a position to monetize USD 287 million to
USD 323 million, or CAD 5.09 to CAD 5.71 per share in cash, in the
next 12 months, and be achieved with TransGlobe continuing to hold
its full stake in its core Egyptian business, as compared to the
CAD 4.10 per share value TransGlobe shareholders will be forced to
accept if the Proposed Transaction is approved at the
Meeting.
Monetization Events |
|
MM USD |
|
CAD / Share6 |
|
Range |
|
Range |
|
|
|
|
|
Effective Date Adjustment Payment from the Egyptian Government |
|
67.5 |
|
1.20 |
Second Half 2022 After Tax Free Cash Flow |
|
46.8 |
|
0.83 |
First
Half 2023 After Tax Free Cash Flow |
|
32.2 |
|
0.57 |
Sale
of TransGlobe Canadian Business |
|
85 - 120 |
|
1.50 - 2.12 |
Net
Cash Position (as of June 30, 2022) |
|
55.8 |
|
0.99 |
|
|
|
|
|
|
|
|
|
|
Possible Monetization in the Next 12 Months |
|
287.3 - 322.3 |
|
5.09 - 5.71 |
- Horizon believes
TransGlobe is in a position to monetize USD 287.3 million to USD
322.3 million, or CAD 5.09 to CAD 5.71 per share, in cash, within
the next 12 months, while continuing to hold its full stake in its
core Egyptian business, as follows:
|
a) |
Collect the effective date adjustment payment from the Egyptian
government, which the Company has recognized as a receivable of USD
67.5 million in its most recent financial statements. Horizon
believes such estimate is conservative and the Company could
realize a higher sum. |
|
b) |
The Company’s guidance for 2022
free cash flow on their June corporate presentation is USD 70
million, assuming average Brent price of USD 95. The Company’s free
cash flow totaled USD 23.2 million for the first half of 2022 and
therefore management expects USD 46.8 million for the second half
of 2022, assuming average Brent price of USD 95. |
|
c) |
As of September 12, 2022, Capital
IQ average estimate for 2023 free cash flow is USD 64.4 million. We
assume that half of such cash flow will be generated in the first
half of 2023. This seems conservative given 2022 guidance and the
expectation of higher production in 2023. In their March 17, 2022
report on the Company, Cannacord Genuity estimates total production
of 14,234 boepd vs. 13,012 for 2022. |
|
d) |
Horizon believes that
TransGlobe’s Canadian business could be sold for USD 85 million to
USD 120 million, based on a simple comparable company analysis of
small capitalization Canadian publicly listed companies, which
trade at approximately 3.2x 2022E EBITDA, and approximately 1.0x
after-tax NPV10 of proven reserves. As of December 31, 2021,
TransGlobe Canada reported an after-tax NPV10 of P1 reserves of USD
87.7 million. Horizon estimates 2022 EBITDA of USD 35.0 to 38.0
million7 for TransGlobe Canada. |
|
e) |
As of June 30, 2022, TransGlobe’s
closing net cash balance was USD 55.7 million, comprised of USD
61.1 million in cash and USD 5.4 million in debt and leases. |
- Even cash
consideration with a value USD 231 million (being the value as of
September 12, 2022, of the Vaalco shares that TransGlobe
shareholders would receive in connection with the Proposed
Transaction) represents an unfair and poor deal for TransGlobe
shareholders, particularly given that on a standalone basis the
Company could monetize a higher amount in cash within the next 12
months, while continuing to hold its core Egyptian business, which
reported an after-tax NPV10 of P1 reserves of USD 226.9 million on
December 31, 2021 and is expected to have annual free cash flow in
2023 of USD 64.4 million, as per Capital IQ.
- Furthering the
unfairness of the Proposed Transaction for TransGlobe shareholders,
the consideration will be paid in Vaalco shares, a much inferior,
and speculative form of consideration than cash for the reasons
discussed below.
- If the Proposed
Transaction is approved at the Meeting, we believe that it would be
done at the peril of the TransGlobe shareholders.
Vaalco shares are a speculative and poor form of
consideration as their value is highly uncertain, given Vaalco’s
very limited certified reserves and short reserve life. Moreover,
the share exchange ratio of 54.5% (for Vaalco shareholders) to
45.5% (for TransGlobe shareholders) unfairly favours Vaalco
shareholders and is not in the best interests of TransGlobe
shareholders, as TransGlobe is a significantly more valuable
company than Vaalco, according to the relevant tangible comparable
metrics.
Metrics |
|
TransGlobe |
Vaalco |
TransGlobe / Vaalco |
|
|
|
|
|
SEC P1 Reservesas of December
31, 20218 |
MMboe |
21.2 |
11.2 |
1.9x |
SEC After Tax Net Present
Value P1 Reservesas of December 31, 20218 |
MM USD |
304.4 |
99.3 |
3.1x |
2P Reservesas of December 31,
20219 |
MMboe |
46.1 |
19.5 |
2.4x |
Free Cash Flowduring the First
Half of 2022 |
MM USD |
23.210 |
2.811 |
8.3x |
Total Net Cash Position |
MM USD |
123.3 |
48.0 |
2.6x |
as of June 30, 2022 |
MM USD |
55.810 |
48.011 |
1.2x |
Effective Date Adjustment |
MM USD |
67.5 |
|
|
- Vaalco’s current
market capitalization, of USD 280.6 million as of September 12,
2022, is not supported by the tangible value of certified reserves,
and instead depends on a more speculative expectation of future
exploration results, which may never materialize.
- SEC certified proven
reserves of Vaalco as of December 31, 2021, amount to just 11.2
million barrels, roughly half of TransGlobe’s 21.2 million
barrels.
- Worse still, the
reported NPV10 of Vaalco’s after-tax proven reserves as of December
31, 2021, at only USD 99.2 million, is less than one-third of
TransGlobe’s USD 304.4 million and does not support Vaalco’s market
capitalization of USD 280.6 million as of September 12, 2022.
- The picture is just
as bad when comparing Vaalco’s 2P reserves as of December 31, 2021,
at 19.5 million barrels to TransGlobe’s 46.1 million
barrels.12
- Vaalco’s reported
free cash flow for the first half of 2022 was only USD 2.8 million
as compared with TransGlobe’s USD 23.2 million.
- We calculate
Vaalco’s P1 reserve life index to be a meager 3.3 years, assuming
Vaalco’s midpoint guidance production of 9,250 boepd.13
- TransGlobe is a more valuable company
than Vaalco, according to the relevant tangible metrics:
|
a) |
As
of December 31, 2021, TransGlobe reported 1.89x the SEC P1 reserves
of Vaalco. |
|
b) |
As of December 31, 2021,
TransGlobe reported 2.36x the 2P reserves of Vaalco. |
|
c) |
During the first half of 2022,
TransGlobe reported 8.3x the free cash flow reported by Vaalco over
the same period. |
|
d) |
TransGlobe reported a higher net
cash balance on June 30, 2022, than Vaalco, not considering the
effective date adjustment of USD 67.5 million, and higher net
production than Vaalco over the first half of 2022. |
- Given this stark
contrast in value and performance, an exchange ratio in favor of
Vaalco shareholders is not fair to or in the best interests of the
Company or its shareholders.
- Those in favour of the Proposed Transaction may try to argue
that there is substantial potential value in the contingent
resources and prospective resources of Vaalco, however TransGlobe
shareholders should be cautious in taking unnecessary risks with
their investment in TransGlobe by placing their faith in such
potential value which is based on speculative expectations and, as
such, may never materialize.
Horizon believes that TransGlobe shareholders should
VOTE AGAINST the Proposed Transaction so that the
Company can instead pursue certain alternatives that we currently
anticipate would result in greater long-term value to all
shareholders of CAD 9.11 to CAD 9.73 per share as compared with the
CAD 4.10 per share shareholders will be forced to accept if the
Proposed Transaction is approved at the Meeting. These alternatives
include (i) securing the effective date adjustment payment from the
Egyptian government, valued in the Company’s balance sheet at USD
67.5 million, (ii) pursuing a sale of the Company’s Canadian
business, which Horizon estimates has a value of USD 85 million to
USD 120 million and rationalizing Canadian CAPEX to maximize free
cash flow; (iii) payment of a distribution to shareholders in an
amount equal to at least 75% of the sum of (a) the net proceeds
from the above alternatives (i) and (ii), and (b) the Company’s
2022 free cash flow which the Company estimates at USD 70 million,
(iv) continuing to operate and grow the Company’s Egyptian
business, which is expected to generate USD 64.4 million of free
cash flow in calendar year 2023, as per Capital IQ, and (v)
considering other potential transactions identified in the
future.
Consistent with such course of action, Horizon currently
estimates that the Company is in a position to generate
approximately CAD 5.09 to CAD 5.71 per share in cash within the
next 12 months, while maintaining its full stake in its core Egypt
assets, which Horizon estimates are worth at least 1.0x its
12/31/2021 reported after-tax NPV10 of P1 reserves of USD 226.9
million or an additional CAD 4.02 per share.
We believe that if shareholders of TransGlobe
VOTE AGAINST the Proposed Transaction, the
Company will be in a position to pursue this action plan which
could result in the monetization of value for shareholders of CAD
9.11 to CAD 9.73 per share as compared to CAD 4.10 per share they
will be forced to accept if the Proposed Transaction is approved at
the Meeting.
Based on the clear arguments made in this letter, we intend
to VOTE AGAINST the Proposed
Transaction, and we urge all TransGlobe shareholders
to VOTE AGAINST the Proposed Transaction
at the Meeting.
Information in Support of Public Broadcast
Solicitation:The following information is provided in
accordance with Canadian corporate and securities laws applicable
to public broadcast solicitations. Horizon is relying on the
exemption under section 9.2(4) of National Instrument 51-102 –
Continuous Disclosure Obligations ("NI 51-102") to
make this public broadcast solicitation. This solicitation is being
made by Horizon and not by or on behalf of the management of
TransGlobe. The registered office address of TransGlobe is 900, 444
- 5th Street SW., Calgary, Alberta T2P 2T8.Horizon has filed this
press release containing the information required by section
9.2(4)(c) of NI 51-102 on TransGlobe's company profile on SEDAR at
www.sedar.com.Horizon may solicit proxies in reliance upon the
public broadcast exemption to the solicitation requirements under
applicable Canadian corporate and securities laws, conveyed by way
of public broadcast, including through press releases, speeches or
publications, and by any other manner permitted under applicable
Canadian laws. All costs incurred for the solicitation will be
borne by Horizon.A TransGlobe shareholder who has given a proxy has
the power to revoke it. If a TransGlobe shareholder who has given a
proxy attends the Meeting at which the proxy is to be voted, such
TransGlobe shareholder, may revoke the proxy and vote at the
Meeting. In addition to revocation in any other manner permitted by
law, a proxy may be revoked by an instrument in writing signed by
the TransGlobe shareholder or his or her attorney authorized in
writing, or, if the TransGlobe shareholder is a corporation, under
its corporate seal and signed by a duly authorized officer or
attorney for the corporation, and deposited at the registered
office of TransGlobe at any time up to and including the last day
(other than Saturdays, Sundays and statutory holidays in the
Province of Alberta) preceding the day of the Meeting at which the
proxy is to be used, or any adjournments or postponements thereof.
If a TransGlobe shareholder uses a 12-digit control number to login
to the Meeting online and accepts the terms and conditions, by
doing so such TransGlobe shareholder will be revoking any and all
previously submitted proxies; however, in such a case, the
TransGlobe shareholder will be provided the opportunity to vote by
ballot on the matters put forth at the Meeting. If a TransGlobe
shareholder DOES NOT wish to revoke all previously submitted
proxies, the TransGlobe shareholder should not accept the terms and
conditions, in which case the TransGlobe shareholder can only
attend the Meeting as a guest.
Horizon Absolute Return Fund Limited, an affiliate of Horizon,
is a shareholder of TransGlobe. With the exception of the
foregoing, to the knowledge of Horizon, neither Horizon nor any
associates or affiliates of Horizon, has any material interest,
direct or indirect, by way of beneficial ownership of securities or
otherwise, in the Proposed Transaction or any other matter to be
acted upon at the Meeting.
FOR FURTHER INFORMATION PLEASE CONTACT:
Juan ArgentoHorizon PartnersCalle 53E, Urbanización Marbella,
MMG Tower, Piso 16, Panamá, República de PanamáTel: +1 347 759
6074E-mail: jpa@horizon-partners.com
Juan Pablo SchulmanHorizon PartnersCalle 53E, Urbanización
Marbella, MMG Tower, Piso 16, Panamá, República de PanamáTel: +54
911 6252 4736E-mail: jps@horizon-partners.com
Advisors:Goodmans LLP is acting as legal
counsel.
ABOUT HORIZON PARTNERS.
Horizon is a privately-owned business with advisory and
principal investment activities and with substantial focus on the
energy industry. Horizon Capital Management, Inc., part of Horizon,
manages Horizon Absolute Return Fund Limited, a British Virgin
Islands Approved Fund, that primarily invests in listed
international oil and gas companies and is a shareholder of
TransGlobe.
Cautionary Statement Regarding Forward Looking
Information All statements, other than statements
of historical fact, included in this news release constitute
"forward-looking information" as such term is defined in applicable
Canadian securities legislation. Forward-looking information
can generally be identified by the use of forward-looking language
such as "will", “would”, “could”, "expect", "intend", "plan",
"estimate", "anticipate", “may”, "believe" or "continue" (and
grammatical variations and the negatives thereof) and include
statements concerning Horizon's intentions and strategies regarding
the Company, Horizon’s views on potential alternatives to monetize
value for the Company and its shareholders instead of pursuing the
Proposed Transaction (and the potential timeframe for such
monetization) and the impact on the financial condition, operation,
business, strategies and competitive position of the Company and
its future management if the Proposed Transaction is not approved
by the shareholders. Such forward-looking information is
based on certain understandings, assumptions, beliefs, opinions and
expectations of Horizon, including, without limitation, the
Company's future growth potential, results of operations, future
cash flows, ability to monetize assets, the future performance and
business prospects and opportunities of the Company, the regulatory
environment and economic and market conditions that the Company
faces and those assumptions noted above in this news release.
Shareholders should not place undue reliance on such
forward-looking information, which is not a guarantee that any
particular outcome, event, result, performance or other achievement
will occur. Many risks, uncertainties and other factors could
cause the actual outcomes, events, results, performance or
achievements expressed or implied by such forward-looking
information to vary materially from those described herein should
any of those risks, uncertainties or other factors
materialize. Such risks, uncertainties and other factors
include, without limitation, the impact of legislative, regulatory,
competitive and technological changes; the state of the economy;
credit and equity markets; availability of credit and other
financing; the financial markets in general; the ability of the
Company to retain and hire key personnel and maintain relationships
with customers, suppliers or other business partners; and all other
risks and uncertainties detailed in the Company's filings with
applicable Canadian securities commissions, copies of which are
available on SEDAR
at www.sedar.com.
Accordingly, readers of this news release are cautioned not to
place undue reliance on any forward-looking information contained
in this news release. All forward-looking information
contained herein is expressly qualified in its entirety by this
cautionary statement. All forward-looking information
contained herein is made as of this news release and
Horizon undertakes no obligation to publicly update or revise any
such forward-looking information, except as required by
law.
SOURCE: Horizon Partners
1 TransGlobe shareholders will receive 0.6727 shares of Vaalco
per share of TransGlobe. The value of Vaalco shares as of September
12, 2022, is USD 4.69, which multiplied by 0.6727 is USD 3.155, and
assuming the CAD USD FX rate of 0.7704 as of the same date equals
CAD 4.095 per share. 2 As described in the Company’s
most recent financial statements: “Upon execution of the merged
concession, there was an effective date adjustment owed to the
Company for the difference between historic and merged concession
agreement commercial terms applied against Eastern Desert
production from the effective date of February 1, 2020. The quantum
of the effective date adjustment is currently being finalized with
EGPC and could result in a range of outcomes based on the final
price per barrel negotiated. TransGlobe has recognized a receivable
of $67.5 million at June 30, 2022, which represents the amount
expected to be received from EGPC based on historical realized
prices.”3 Assuming average Brent price for 2022 of USD 95.4 USD
226.9 million divided by 73.3 million shares outstanding, divided
by the CAD / USD FX rate as of September 12, 2022, of
0.7704. 5 Assumes 73.3 million shares of TransGlobe
outstanding, and a CAD / USD FX rate as of September 12, 2022, of
0.7704.6 Assumes CAD / USD FX rate as of September 12, 2022, of
0.7704.7 This estimated value is based on the natural gas liquids
and crude oil proportional netback guidance of USD 4g0 multiplied
by the production guidance range of 2,400 to 2,600 boepd provided
by TransGlobe management in their June 2022 corporate presentation
corresponding to a Brent crude oil average price of USD 95 for
2022.8 Vaalco Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934.9 TransGlobe and Vaalco independent
reserves evaluations for the year ended December 31, 2021, as
prepared by GLJ Ltd. and Netherland, Sewell & Associates, Inc.,
respectively. Reserves figures of TransGlobe and Vaalco are
prepared under different standards and may not be directly
comparable. Investor Presentation August 2022.10 TransGlobe press
release: Second Quarter 2022 Financial & Operating Results.11
Vaalco press release: Second Quarter 2022 Results.12 Vaalco does
not disclose the NPV10 of its 2P reserves, so a comparison with
TransGlobe is not possible.13 Vaalco does not provide a calculated
RLI.
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