In this briefing:
- Corporate Governance in Global Emerging Markets: 70 Energy Companies – Korean Co Gets Lowest Score
- Kazakhstan: Nazarbayev Surrendering Title, Not Power
- Weekly Oil Views: Another Crude Rally Fails to Stick as Technicals Signal a Pivot Point
- Kosmos Energy: The Standout Internationally-Focused E&P Company
- Medco’s Bump For Ophir Won’t Sway Petrus
1. Corporate Governance in Global Emerging Markets: 70 Energy Companies – Korean Co Gets Lowest Score
- Our proprietary corporate governance scoring system now covers over 1,800 stocks including 70 Electricity, Alternative Energy, Distribution, Water and Utilities companies in Emerging Markets.
- This report includes the Energy and Utilities names currently under coverage.
The lowest score in this group is Korea Gas (44/100). - We have found that scores below 50/100 indicate poor corporate governance and higher risk of fraud.
- Korean companies often have lower scores as a result of a lack of board independence and convoluted corporate structure.
- Of the groupings presented here Alternative Energy has the highest average score at 64/100.
We welcome requests from clients of names they want to see added to the universe.
2. Kazakhstan: Nazarbayev Surrendering Title, Not Power
By transferring his presidential powers to the Senate Speaker, President Nursultan Nazarbayev has not retired from politics. He has remained an official “Leader of the Nation” and retained a tight grip of Kazakhstan’s foreign and domestic policy. His recent announcements have signalled a tilt towards increased social spending. The reshuffle at the helm of the NBK signals that the regulator is far from achieving full independence. Furthermore, there are signs of increasing pressure on the central bank to provide long-term funding to the economy, which we find worrying.
3. Weekly Oil Views: Another Crude Rally Fails to Stick as Technicals Signal a Pivot Point
Oil remains in a tug-of-war between fundamentals and a fickle sentiment in the global financial markets.
Brent and WTI futures settled at fresh four-month-highs of $68.50/barrel and $59.98/barrel mid-week, but had erased all the gains — and some more — by Friday’s close. However, technicals point to a pivot point in crude futures, with the 50-day moving average crossing over the 100 DMA last week. That’s typically a buy signal, but a sustained rally from the current levels is hard to see in the near-term.
Meanwhile, there were some interesting and unexpected outcomes from a high-profile OPEC/non-OPEC monitoring committee meeting in Baku on March 18. Among them were signs of a divergence in the views of Saudi Arabia and Russia, de facto leaders of the 24-producer alliance curbing supply to rebalance the market.
What explains Saudi Energy Minister Khalid al-Falih’s new hawkish stance and is the OPEC and non-OPEC partnership under some strain? Our short answer: No. We lay out our perspective of the evolving dynamics in the producers’ alliance, which is important to understanding the likely path of their collaboration.
4. Kosmos Energy: The Standout Internationally-Focused E&P Company
We think that Kosmos Energy (KOS US) offers everything that is required from an internationally focused E&P company. It has a highly rated management team, strong balance sheet and free cash flow generation from its existing producing assets, low risk / high value near field exploration potential, selective high risk / reward frontier exploration in which it has a proven track record, it has done recent value accretive acquisitions with room for more, it has demonstrated the ability to farm-down its assets on multiple occasions and is currently in the process of a major asset sell down, which could surprise the market to the upside. Despite this the stock trades on a significant discount to risked NAV, making it a potential acquisition target and has plenty of catalysts coming up this year to close the valuation gap.
5. Medco’s Bump For Ophir Won’t Sway Petrus
The boards of Medco Energi Internasional T (MEDC IJ) and Ophir Energy (OPHR LN) have agreed to increase the Offer price to £0.575 from £0.55, representing a 73.2% premium to the undisturbed price.
All other details of the scheme remain unchanged. The court meeting is to take place on the 25 March, while the long stop is the 20 June – unless both companies agree to an extension.
On Petrus
Petrus has yet to respond to the Offer increase; however, it would be surprising if its stance against the takeover has altered.
In its prior letter to Ophir on the 14 January, Petrus recommended selling the South-East Asian (SEA) assets to Medco – excluding the Tanzanian and Mexican investments – with a low-end fair value, before synergies, of £0.64/share, through to £1.42/share on a blue sky basis.
Shortly before the increase, Petrus was quoted (paywalled) it would vote its 3.95% against the takeover, while adding “Our satisfaction with the value our board deems as satisfactory has decreased further“, with reference to the release of Ophir’s full-year results on the 12 March.
On Sand Grove/Coro
Subsequent to the bump, Coro Energy PLC (CORO LN), which had previously submitted a non-binding cash/scrip reverse takeover offer on the 8 March, declared it has no intention to bid.
Sand Grove has also announced it has given an irrevocable undertaking to vote its 18.73% in favour of the scheme. Coro held discussions with Sand Grove before abandoning its bid.
Trading Tight – Upside Less Assured
Medco’s Offer is conditional on 75%+ approval from Ophir’s shareholders, which appears less tenuous following the 4.5% bump and Sand Grove’s irrevocable undertaking. While I consider the offer for Ophir sub-optimal – and shares have closed above terms on 30% of the trading days since Medco’s initial offer – Petrus alone cannot disrupt the vote. Of note, the next three largest shareholders behind Sand Grove have reduced their holdings since end-December 2018.
The gross/annualised spread is tight at 0.7%/2.6%, assuming early-July payment. The risk/reward in punting at or just below terms is now less attractive following this Offer Price increase and the irrevocable undertaking.
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