(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long SDX.V)
Sea Dragon Energy and Madison PetroGas Look to Get Hitched
I woke up this morning to see news on the wire that is included in its entirety below. To sum it up, Sea Dragon (SDX on the TSX Venture) and Madison PetroGas (private) are looking to combine into a company (to be named SDX Energy) that would have exit production of 1,850 boepd (all in Egypt), 2P reserves of 5.1 mmboe, two high-impact exploration plays, and US$16.5 million of positive working capital pro forma. I almost invested in Madison on a private round years ago and was impressed by its management team and assets at the time, but I've fallen out of touch with the story since. I'm not sure if I'm happy about the idea of my leverage to South Disouq getting diluted, but when you're in the middle of a hurricane maybe playing a little bit of defence isn't such a bad idea. The combined company will no doubt be stronger and should be in a better position to weather the storm. Madison's most recently reported operating costs were a little over $8/boe… that's pretty impressive in any country and Egypt has a lot to offer in terms of its resource potential and operating/regulatory environment.
The most crude (if you'll excuse the pun) analysis that I can come up with is as follows:
- SDX shareholders will own 29% of the pro-forma combined entity
- At 1,800 boe/d and $15 netbacks (that's my guesstimate, but Madison's netbacks were $29/bbl in Q1 2015), the annualized cash flow would be around $10 million
- At 3x cash flow, the oil production should then be worth around $30 million. I think 3x is a low-to-fair multiple for a company with a good balance sheet and material exploration upside in this market
- US$16.5 million is worth about CDN$22 million
- So it's not unreasonable to assume that the combined entity might trade with a a $50 million valuation.
- 29% of $50 million is about $15 million.
- That's about $0.04/sh to an existing SDX holder like myself, which is 100% higher than where SDX is trading as I write this (C$0.02).
I have more work to do, but wanted to get some thoughts on paper in these early days.
JOINT NEWS RELEASE
Sea Dragon Energy Inc. and Madison PetroGas Ltd. Announce Strategic Business Combination and Creation of SDX Energy Inc.
LONDON, August 19, 2015 /CNW/ - Sea Dragon Energy Inc. ("Sea Dragon") (TSX VENTURE: SDX) and Madison PetroGas Ltd. (“Madison”), a private, arm’s length, Canadian company incorporated under the Business Corporations Act (Alberta) (“ABCA”) (Sea Dragon and Madison, together, the “Parties”), are pleased to announce that they have entered into an arrangement agreement dated August 18, 2015 (the “Arrangement Agreement”) pursuant to which Sea Dragon will, subject to certain conditions, acquire all of the issued and outstanding Madison common shares (“Madison Shares”) by way of a statutory plan of arrangement under the ABCA (the “Transaction”). The combined entity is to be renamed “SDX Energy Inc.”.
Strategic Rationale for the Business Combination
The Transaction would create a larger company with stronger balance sheet and a greater ability to achieve economies of scale through operational efficiencies. The company would be poised for strong growth in oil production and reserves from development in its onshore core Egypt basins and high impact exploration in both Egypt and Cameroon.
- Oil Production – Pro forma current oil production of 1,565 boe/d (company working interest) and 2P reserves base of 5.1 MMboe (company working interest) from operated and non- operated assets in Egypt, which includes 2.2 MMboe of reserves at Meseda (100% oil) and approximately 2.9 MMboe of reserves at North West Gemsa (2.481 MMboe of oil and natural gas liquids and 0.487 MMboe of natural gas).
- Near and Mid Term Production Growth – Average production target of 1,810 boe/d (company working interest) for 2015 with an estimate 2015 exit rate of 1,850 boe/d.
- Impactful Exploration Program – The company expects to shoot 300 km2 of 3D seismic at South Disouq, as well as continue to prepare for the first exploration well in the shallow water of Cameroon on the company’s West Bakassi block. The company holds a 55% working interest at South Disouq and reasonably expects to produce natural gas and natural gas liquids and a 35% working interest in the West Bakassi block, where it reasonably expects to produce oil and natural gas.
- Improved Financial Position – the combined company business plans are fully funded through 2016 with a pro forma working capital position of US$16.5 MM as of closing and a solid cash flow profile.
Paul M. Welch, CEO of Sea Dragon said:
“I am very excited about the combination of these two companies. We have complimentary assets and business objectives and by combining, we significantly increase our ability to achieve our goals. The challenging market we are currently in means new strategies need to be employed to create value. By
combining, we can build upon our individual strengths, using a more efficient organization, to capture opportunities that individually we could not attain. I am looking forward to working with the new team.”
David Mitchell, CEO of Madison said:
“The combined entity will offer enhanced growth potential and we are excited by the possibilities. Size matters in our business and particularly in the current business environment. With similar Egypt portfolios and strategies, a business combination will improve our ability to transact and grow shareholder value. A London, UK base will also improve our operational efficiencies and place us in the premier business and capital markets centre for the Middle East and Africa region.”
A joint presentation has been prepared and is available on Sea Dragon’s SEDAR profile at www.sedar.com.
Terms of the Proposed Transaction
Under the terms of the Arrangement Agreement, Sea Dragon will acquire all of the issued and outstanding Madison Shares on the basis of an exchange ratio of 16.7 Sea Dragon common shares (“Sea Dragon Shares”) for each Madison Share (on a pre-Sea Dragon Consolidation (as defined below) basis). Prior to the closing of the Transaction, Sea Dragon will affect a share consolidation (the “Sea Dragon Consolidation”) on the basis of one (1) post-consolidation Sea Dragon Share for thirty- five (35) pre-consolidation Sea Dragon Shares. Upon closing the Transaction, it is anticipated that the existing Madison Shareholders will hold approximately 71% of the combined entity, to be renamed “SDX Energy Inc.”, with the holders of Sea Dragon Shares (the “Sea Dragon Shareholders”) holding approximately 29% of the combined entity.
The Arrangement Agreement provides that upon closing of the Transaction, the board of directors of Sea Dragon will be comprised of four nominees of Madison (namely, Michael Doyle, David Mitchell, David Richards and Barrie Wright), two nominees of Sea Dragon (namely, Paul Welch, and Paul Moase) and one independent nominee jointly appointed by Sea Dragon and Madison. Paul Welch will remain as President and CEO and Olivier Serra will remain as CFO of the combined entity which will be based in London, UK.
The Transaction is subject to a number of conditions including, among other things:
- approval of the Transaction from at least two-thirds of the votes cast by the Madison Shareholders at a meeting expected to be held on September 28, 2015 (the “Madison Meeting”);
- approval of the Sea Dragon Consolidation from at least two-thirds of the votes cast by the Sea Dragon Shareholders at a meeting expected to be held on September 28, 2015 (the “Sea Dragon Meeting”);
- approval from the TSX Venture Exchange (“TSXV”) of the Transaction and the Sea Dragon Consolidation; and
- other customary closing conditions, including approval from the Court of Queen’s Bench of Alberta.
The Arrangement Agreement provides for non-solicitation covenants, subject to the fiduciary obligations of the board of directors of each Party and the right of each Party to match any Superior Proposal (as defined in the Arrangement Agreement). The Arrangement Agreement also provides for reciprocal non- completion fees and reciprocal expense reimbursement payments, each of which is payable in certain circumstances if the Transaction is not completed.
The complete details of the Transaction are set out in the Arrangement Agreement, which will be filed by Sea Dragon on SEDAR and will be available for viewing under its profile at www.sedar.com. Further information regarding the Transaction will be available in due course in the disclosure materials to be prepared and publicly filed by Sea Dragon and in the Madison management information circular that will be prepared and mailed by Madison to the Madison Shareholders in connection with the Madison Meeting.
Closing of the Transaction is expected to occur in early October.
Recommendations of the Board of Directors
Based upon, among other things, a fairness opinion of FirstEnergy Capital Corp. (“FirstEnergy”), the Madison board of directors has determined that the Transaction is in the best interests of Madison and is fair to Madison Shareholders, has approved the Transaction and the entering into of the Arrangement Agreement and has resolved to recommend that Madison Shareholders vote in favour of the Transaction. Each of the directors and executive officers of Madison, representing in aggregate approximately 27% of the issued and outstanding Madison Shares (on a non-diluted basis), have entered into lock-up agreements and agreed to vote their Madison Shares in favour of the Transaction.
Based upon, among other things, the fairness opinion of BDO LLP (“BDO”), the Sea Dragon board of directors has determined that the Transaction is in the best interests of Sea Dragon and is fair to Sea Dragon Shareholders and has approved the Transaction and the entering into of the Arrangement Agreement. Each of the directors and executive officers of Sea Dragon, representing in aggregate approximately 8% of the issued and outstanding Sea Dragon Shares (on a non-diluted basis), have entered into lock-up agreements and agreed to vote their Sea Dragon Shares in favour of the Sea Dragon Consolidation and name change.
For Madison, FirstEnergy is acting as exclusive financial advisor to Madison and has provided a fairness opinion to Madison board of directors. Osler, Hoskin & Harcourt LLP is the legal advisor.
For Sea Dragon, BDO has provided a fairness opinion to Sea Dragon’s board of directors. Blake, Cassels & Graydon LLP is the legal advisor.
About Sea Dragon
Sea Dragon is an international exploration and development oil company, headquartered in London, England, UK, with a focus on North Africa and the Middle East. Activities are currently concentrated in Egypt, with interest in three concessions: NW Gemsa, a producing asset in the Eastern desert; South Ramadan, a development asset in the Gulf of Suez; and South Disouq, an exploration asset in the Nile Delta.
Madison is an independent private Alberta company, headquartered in Calgary, Alberta, Canada, engaged in the exploration, acquisition and development of oil and gas reserves in Africa and the Middle East. Madison conducts its activities through subsidiaries located in Barbados and Egypt. Currently it has operations in Egypt and Cameroon. In Egypt, Madison has an interest in Block H in the onshore West Gharib area of the Gulf of Suez, where oil production commenced in late 2011, one year after entering into the block. In Cameroon, Madison has an interest in a Production Sharing Contract on the high potential West Bakassi exploration block in the prolific Niger Delta Basin. The first exploration well on the block is due to commence in the second quarter of 2016.
The determination of oil and natural gas reserves involves the preparation of estimates that have an inherent degree of associated uncertainty. Categories of proved, probable and possible reserves have been established to reflect the level of these uncertainties and to provide an indication of the probability of recovery. The estimation and classification of reserves requires the application of professional judgment combined with geological and engineering knowledge to assess whether or not specific reserves classification criteria have been satisfied. Knowledge of concepts including uncertainty and risk, probability and statistics, and deterministic and probabilistic estimation methods is required to properly use and apply reserves definitions.
The recovery and reserve estimates of oil reserves provided herein are estimates only. Actual reserves may be greater than or less than the estimates provided herein.
Terms related to reserves classifications referred to herein are based on definitions and guidelines in the Canadian Oil and Gas Evaluation Handbook ("COGE Handbook") and are in accordance with National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities.
“Proved reserves” are those reserves that can be estimated with a high degree of certainty to be recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated proved reserves.
“Probable reserves” are those additional reserves that are less certain to be recovered than proved reserves. It is equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved plus probable reserves.
The qualitative certainty levels referred to in the definitions above are applicable to “individual reserves entities”, which refers to the lowest level at which reserves calculations are performed, and to “reported reserves”, which refers to the highest level sum of individual entity estimates for which reserves estimates are presented. Reported reserves should target the following levels of certainty under a specific set of economic conditions:
- at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimated proved reserves. This category of reserves can also be denoted as 1P; and
- at least a 50 percent probability that the quantities actually recovered will equal or exceed the sum of the estimated proved plus probable reserves. This category of reserves can also be denoted as 2P.
Additional clarification of certainty levels associated with reserves estimates and the effect of aggregation is provided in the COGE Handbook. The estimates of reserves for individual properties may not reflect the same confidence level as estimates of reserves for all properties, due to the effects of aggregation.
Use of the term “boe” may be misleading, particularly if used in isolation. A “boe” conversion ratio of 6 Mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Certain volumes provided in this news release represent a pro forma arithmetic sum of multiple estimates of proved plus probable reserves, which statistical principles indicate may be misleading as to volumes that may actually be recovered. Readers should give attention to the estimates of individual classes of reserves and appreciate the differing probabilities of recovery associated with each class as explained in the annual oil and gas disclosure filings of Sea Dragon (available on www.sedar.com) and the effects of arithmetic aggregation. Factors that could affect the accuracy of the reported pro forma aggregated reserves estimates include company level differences in evaluation effective dates, reservoir characteristics and pricing assumptions.
Reserves information in this press release are based on the independent reserves evaluation of Ryder Scott Company Canada dated February 19, 2015 of the crude oil, natural gas liquids and natural gas reserves of Sea Dragon as at December 31, 2014 and the independent reserves evaluation of Sproule Associates Ltd. dated December 31, 2014 evaluating Madison’s crude oil, natural gas liquids and natural gas reserves between October 2014 and January 2015.
Certain statements contained in this press release constitute “forward-looking statements” as such term is used in applicable Canadian securities laws. Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or are not statements of historical fact should be viewed as forward-looking statements. In particular, statements concerning the Parties, the Transaction, the Sea Dragon Meeting and the Madison Meeting, the anticipated synergies that will result from the Transaction and the key characteristics of the combined entity and should be viewed as forward-looking statements.
The forward-looking statements contained in this document are based on certain assumptions and although management of the Parties consider these assumptions to be reasonable based on information currently available to them, undue reliance should not be placed on the forward-looking statements because the Parties can give no assurances that they may prove to be correct. This includes, but is not limited to, assumptions related to the Sea Dragon Meeting and the Madison Meeting, the ability of either Party to receive, in a timely manner, the necessary regulatory, court, securityholder, stock exchange and other third party approvals, the ability of the Parties to satisfy, in a timely manner, the other conditions to the closing of the Transaction and expectations and assumptions concerning, among other things: commodity prices and interest and foreign exchange rates; planned synergies, capital efficiencies and cost-savings; applicable tax laws; future production rates; the sufficiency of budgeted capital expenditures in carrying out planned activities; and the availability and cost of labour and services. The anticipated dates provided may change for a number of reasons, including unforeseen delays in preparing meeting materials, inability to secure necessary securityholder, regulatory, court, stock exchange or other third party approvals in the time assumed or the need for additional time to satisfy the other conditions to the completion of the Transaction.
By their very nature, forward-looking statements are subject to certain risks and uncertainties (both general and specific) that could cause actual events or outcomes to differ materially from those anticipated or implied by such forward-looking statements. Such risks and other factors include, but are not limited to the timing of the Transaction, requisite approvals of Sea Dragon Shareholders, Madison Shareholders and the TSXV, political, social and other risks inherent in daily operations for each of the Parties, risks associated with the industries in which the Parties operate in general, such as: operational risks; delays or changes in plans with respect to growth projects or capital expenditures; costs and expenses; health, safety and environmental risks; commodity price, interest rate and exchange rate fluctuations; environmental risks; competition; failure to realize the anticipated benefits of the Transaction and to successfully integrate the Parties; ability to access sufficient capital from internal and external sources; and changes in legislation, including but not limited to tax laws and environmental regulations. There is a risk that either of the Parties fail to satisfy the conditions to the Transaction which may result in the Transaction not being completed on the proposed terms, or at all. Readers are cautioned that the foregoing list of risk factors is not exhaustive and are advised to reference Sea Dragon’s Annual Information Form for the year ended December 31, 2014 for a description of additional risks and uncertainties associated with Sea Dragon’s business, including its exploration activities, which can be found on Sea Dragon’s SEDAR profile at www.sedar.com.
The forward-looking statements contained in this press release are made as of the date hereof and the Parties do not undertake any obligation to update publicly or to revise any of the included forward- looking statements, except as required by applicable law. The forward-looking statements contained herein are expressly qualified by this cautionary statement.
For further information, please contact:
Sea Dragon Energy Inc.
Paul Welch, President and Chief Executive Officer
Tel: +44 203 219 5640
Olivier Serra, Chief Financial Officer Tel: +44 203 219 5640
Madison PetroGas Ltd.
David Mitchell, President and Chief Executive Officer Tel: +1 403 781 5892
Neil G. Taylor, Chief Financial Officer Tel: +1 403 781 5888
THIS PRESS RELEASE SHOULD NOT BE CONSIDERED A COMPREHENSIVE SUMMARY OF THE TRANSACTION. ADDITIONAL INFORMATION WILL BE DISSEMINATED AT A FUTURE DATE. COMPLETION OF THE TRANSACTION IS SUBJECT TO A NUMBER OF CONDITIONS INCLUDING, BUT NOT LIMITED TO, SHAREHOLDER AND TSXV APPROVAL. THERE CAN BE NO ASSURANCE THAT THE TRANSACTION WILL BE COMPLETED AS PROPOSED OR AT ALL.
INVESTORS ARE CAUTIONED THAT, EXCEPT AS DISCLOSED IN DOCUMENTS THAT MAY BE FILED BY SEA DRAGON AND THE MADISON INFORMATION CIRCULAR TO BE PREPARED IN CONNECTION WITH THE TRANSACTION, ANY INFORMATION RELEASED OR RECEIVED WITH RESPECT TO THE TRANSACTION MAY NOT BE ACCURATE OR COMPLETE AND SHOULD NOT BE RELIED UPON.
NEITHER THE TSX VENTURE EXCHANGE NOR ITS REGULATION SERVICES PROVIDER (AS THAT TERM IS DEFINED IN THE POLICIES OF THE TSX VENTURE EXCHANGE) ACCEPTS RESPONSIBILITY FOR THE ADEQUACY OR ACCURACY OF THE RELEASE.