by
Alen Golubovic | Sep 23, 2014
ASX-listed oil and gas company Antares Energy (ASX: AZZ) has reported mixed results for the six months to 30 June 2014. The company, which focuses on oil and gas exploration, production and development in the Permian Basin of Texas, reported revenue broadly in line with the previous corresponding period while EBITDA was higher.
The main surprise in the results was slightly negative net operating cashflows. From a credit perspective, the company’s reported tangible oil and gas assets continue to provide a reasonable buffer over net debt levels.
In our recent discussions with management, we have been told that the previously announced takeover and asset sale proposals remain active and the company is hopeful that a deal could be signed and settled in the short term. Discussions are continuing on several different fronts, ranging from partial asset sales to an outright takeover of the company.
It is worth noting that with the Macquarie term loan facility, which had $26.1m outstanding as at 30 June 2014, is due for rollover in December. Any delay in achieving a transaction is likely to put liquidity under pressure. However, the company still has an option to issue more convertible notes were this to be the case.
Given the company’s history in engineering similar transactions we have no reason to doubt that a positive outcome can be achieved for shareholders and noteholders alike.
As at 30 June 2014, the company’s Permian Basin assets were valued at $164m on a ‘held for sale’ basis. This represents a net debt / tangible asset ratio of 39%. Based on the US$300m asset valuation which has been previously announced to the market, the net debt / tangible asset ratio would be even lower at 21%. Based on these reported levels, the tangible asset value backing provides a reasonable buffer over net debt levels.
Corporate Activity
As previously reported and announced to the market, Antares has received indicative proposals in relation to a sale of its Permian Basin assets, as well as a takeover of the company. In our recent discussions with Antares’ management, they have indicated that each of the previously announced proposals remains active. The company is still evaluating these options as well as a potential sale of the Southern Star asset and a prospective joint venturing on the Northern Star and Big Star assets. The company remains hopeful that an outcome in relation to the corporate activity could happen in the short term.
In assessing the value of any transaction we can only rely on the company announcement of 7 July 2014 which indicated they had received a confidential, non-binding letter of intent valuing the Permian Basin assets at US$300m. Based on this valuation, Antares’ total asset base provides good coverage over the existing term loan and convertible notes outstanding, with the net debt / tangible asset ratio at around 21%.
Movements in AZZ and AZZG prices
The chart below compares the values of Antares share price (AZZ) and the convertible notes (AZZG) versus the S&P ASX 300 resources index:
Source: Bloomberg
Subsequent to the results announcement on 12 September there was little movement in the company’s share price until the 22 September when the price fell by about 6% in a day. Meanwhile, the value of AZZG convertible notes has remained largely unchanged since the results announcement.
Since the time of the Lone Star speculation, the AZZ share price has fallen about 22% from the highs of 65c to a price of 50c as at the market close of 22 September. The convertible notes have fallen by 7.2% from a high of $2.23 at the time of the Lone Star speculation to be priced at $2.07 (22 September market close).
During the last month however, the equity indices for the energy and resources sectors have also experienced falls:
- The ASX 300 Resources Index is down 7.3% from its peak level in August; and
- The ASX 300 Energy Index is down 5.0% from its peak level in September
So a proportion of the recent fall in the share price and the notes can be attributed to the ‘beta’ effects of the falls in resources and energy stocks, as well as the Lone Star speculation falling away.
Summary of 1H14 Results
Key points from the company’s first half results include:
- Revenue unchanged from 1H13 at $11.3m
- EBITDA up to $3.3m for 1H14 (from $170k in 1H13)
- Negative net operating cashflow of $0.535m (+$10.7m in 1H13), which includes payments to suppliers and employees of $14.0m in 1H14 ($6.1m in 1H13)
- Net debt up to $63.2m from $60.3m at FY13. Net debt is comprised of
- Cash: $20.3m, up from $4.7m at FY13
- Macquarie term loan facility: $26.1m, down from $36.4m at FY13
- Convertibles: $57.3m up from $28,6m at FY13
- Since FY13, Antares has built up its cash position by about $15m, which is comprised of the following:
- $4.7m cash at FY13
- $29.1m has been raised in convertible notes
- The Macquarie term loan facility has been paid down by $10.3m from $36.4m to $26.1m
- $3.5m has been spent on capex, down from $10.2m in 1H13
Antares increased its cash position from $4.7m at the end of December (FY13) to $20.3m at 30 June 2014, mainly due to the issue of convertible notes over the half-year period. The company’s Macquarie facility is due for rollover at the end of 2014, and allowing for cash its net position on the Macquarie facility is $5.8m as at 30 June 2014.
In terms of liquidity, the Macquarie term loan facility is due for rollover in December. With subdued net operating cashflows, Antares will most likely look to being able to rollover the Macquarie facility in the event that a transaction is delayed beyond December. Alternatively they may look to issue further convertible notes to pay out the Macquarie loan. However at this stage, based on our discussions with Antares management, we understand that they are hopeful of being able to complete a transaction before the end of the year.
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