Brief Energy: Medco’s “Okay” Offer For Ophir After Fortuna Setback and more

In this briefing:

1. Medco’s “Okay” Offer For Ophir After Fortuna Setback
2. Yellow Cake (YCA) – Great Idea, Wrong Time!
3. Oil Majors Results: The Main Take-Aways. We Are Positive on Hess, Valero and Chevron

1. Medco’s “Okay” Offer For Ophir After Fortuna Setback

On 30th January 2019, Indonesian oil and gas company Medco Energi Internasional T (MEDC IJ) announced an agreement to acquire Ophir Energy (OPHR LN) in a £390mn cash deal (at an offer price of £0.55/share).  

Medco initially made an unsolicited approach for Ophir at £0.58/share on 22nd October 2018, and indicated a “willingness to consider offering Ophir’s shareholders additional potential consideration via contingent value rights in relation to the Fortuna LNG asset in Equatorial Guinea (which at the time was awaiting an extension approval) subject to further analysis and due diligence“. Given uncertainty that persevered on Fortuna’s license extension, Medco revised its bid to £0.538/share on 20th December 2018.

On 7th January 2019, Ophir announced that it was recording a $300mn non-cash impairment following the denial of the license extension for the Fortuna project by the Equatorial Guinea Ministry of Mines and Hydrocarbons. Ophir had previously written down $310mn back in September. Subsequently, Medco revised its bid further down to £0.485 on 11th January 2019 but this offer was rejected by Ophir’s board.

Medco’s latest offer of £0.55/share is a 66% premium to the closing price of £0.33 on 28 December 2018.  Ophir’s board has unanimously recommended the latest offer stating that the deal offered “upfront cash value” to its shareholders and that the offer price “reflects the future prospects of Ophir’s high-quality assets“.

The deal is conditional on receiving 75% shareholder approval, receiving of clearances from the relevant authorities in Tanzania and Ophir not losing all or substantially all of its Bualuang interests in Thailand. It is expected that the Scheme will become effective in the first half of 2019.

Medco’s offer does provide long-suffering Ophir shareholders with an okay exit in a less-than-ideal situation. Ophir’s shares have been trading at or close to terms. Given Medco’s numerous proposals in short succession – four in three months – a bump cannot be dismissed. And the recent disclosure of a new shareholder may warrant such an outcome. But I’d be disinclined to chase through terms.

2. Yellow Cake (YCA) – Great Idea, Wrong Time!

• Yellow Cake PLC (YCA LN) is a pure play on the uranium price
• Spot Price $28.90/lb U₃O₈ & L.T. Price remains $32/lb U₃O₈
• Share price trading at ~2% discount to NPV
• Despite recent production cuts, primary & secondary supplies cover world demand
• Est. surplus ~500ktU, representing six years of global primary production
• Global nuclear generation peaked in 2006
• Forecast world uranium demand to decline between 25% and 40% by 2050
• 1-year Target Price £1.98-2.02 ps NPV_4% assuming $24/lb U₃O₈
• 3-year Target Price £1.57-1.77 ps NPV_4% assuming $21/lb U₃O

3. Oil Majors Results: The Main Take-Aways. We Are Positive on Hess, Valero and Chevron

A number of the largest oil companies in the U.S. and Europe reported results last week including Exxon Mobil (XOM US) , Chevron Corp (CVX US) and Royal Dutch Shell (RDSA LN), all showing strong share price performance on the back of their results and outlook statements.

We look at the main topics of interest that came out of the results so far and what this means for the oil and gas sector. The areas in focus were the strong cash flow generation and capex plans, reserve replacement, new LNG projects, IMO impact for the refining sector and digitalisation. The upstream areas that got the most focus were the US onshore (specifically the Permian), US Gulf of Mexico, Guyana, Brazil and Venezuela. This follows on from our note 2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables.