Brief Energy: Petrus Doubles Down On Ophir Energy and more

In this briefing:

1. Petrus Doubles Down On Ophir Energy
2. Petrochina Breakout and Laggard Play
3. Weekly Oil Views: Crude Rallies on US-China Deal Optimism, Tightening Supply

1. Petrus Doubles Down On Ophir Energy

Petrus Advisors (3.5% shareholder) has dialled up the pressure on its opposition to Medco Energi Internasional T (MEDC IJ)‘s £0.55/share offer for Ophir Energy (OPHR LN), specifically calling into question Bill Schrader (Ophir’s Chairman) “unprofessionalism”.

Petrus (again) highlighted the premature termination of the Fortuna licence. Ophir announced a $300mn non-cash impairment in early January following the denial of the license extension for the Fortuna project in Equatorial Guinea (EG), having previously written down $310mn back in September. Ophir had invested ~US$700mn in the licence. Petrus accused Schrader of dropping the ball after the departure of CEO Nick Cooper in April 2018, who held key businesses relationships in EQ.

In its prior letter to Ophir on the 14 January, Petrus recommended selling the South-East Asian (SEA) assets to Medco, with a low-end fair value, before synergies, of £0.64/share, through to £1.42/share on a blue sky basis.

Furthermore, Petrus reckons no marketing effort has been for the Mexican license and the 20% ownership in Blocks 1 & 2 in Tanzania, which together have low-end value of $60mn (£0.065/share).  Petrus added that Schrader had not actively solicited and considered alternative offers from other buyers; together with stonewalling demands for Ophir to return capital to shareholders.

Petrus signed off its latest salvo with a cordial “This is your final reminder to preserve and build value. We reserve all our legal rights in this situation“.

Further stirring the pot is alternative hedge fund Sand Grove, who has increased its exposure, via cash-settled derivatives, to 17.28% (as at13 February), up from 6.79% on the 1st February. I have heard, but yet to confirm, there are other shareholders seeking to disrupt this Offer.  Ian Hannam, who advised Ophir’s board on its 2013 right issue, is understood to have also written to Ophir’s interim CEO Alan Booth and the board saying Medco’s offer is too low.

Trading marginally through terms. Medco’s Offer is conditional on 75%+ approval from Ophir’s shareholders, which appears tenuous.

Medco has the option to switch into a Takeover Offer, which in theory could be conditional on a 50% acceptance level, if Medco was in any way inclined to maintain Ophir’s listing. And a switch to a Tender Offer with a reduced shareholder condition, may further flesh out an alternative bidder to come over the top.

Ophir appears a worthwhile punt up at or just below terms. The next key event is the expected issuance of the Scheme booklet on the 28 February.

2. Petrochina Breakout and Laggard Play

Petrochina Co Ltd H (857 HK) has remains suppressed but with oil perking up there is a laggard upside play taking shape as we begin to see distribution in HK upside leaders. On weakness we like positioning on the long side and can be used as a pair with an index short or one of the steel counters.

Given stock leaders are showing deteriorating upside momentum, we expect laggards to attract more attention.

RSI and MACD breakout patterns outlined as well as the price breakout at 5.10.

A bigger descending wedge also shows promise as a secondary breakout trigger.

MACD pattern resistance will help define the trending capability post breakout.

3. Weekly Oil Views: Crude Rallies on US-China Deal Optimism, Tightening Supply

There was no deal out of Beijing on Friday, but the markets appeared overjoyed at the news that the US and China had decided to continue their talks this week, in Washington.

Clearly, the “structural” issues that the US has with China are proving hard to work through (government subsidies for Chinese state-owned enterprises was reportedly one of the major stumbling blocks in last week’s talks). But the markets took the continuation of talks as a positive sign that the two sides are determined to find a resolution.

Could crude, which has been moving in lockstep with the global equity markets since October, be starting to reconnect with its fundamentals and pricing in the supply restraints and risks that have piled up over the recent months? There were signs pointing in that direction last week, as the rally in Brent and WTI to a three-month high at Friday’s settle surpassed the bounce in the stock markets.

We have also created a ready reference sheet of the various crude supply chokeholds across the world that have stacked up over the past few months, while the oil market remained fixated on the demand question. These supply restraints and risks are waiting in the wings as a potential bullish snowball, if and when oil demand worries are firmly pushed aside.