ZAR.DB.A - Zargon Oil & Gas Convertible 8% Dec 2019

[SafetyinNumbers]

I own the debs and am inclined to take the deal as I think the option value is pretty high if the company has no debt and differentials tighten meaningfully.

 

I think it would be a better proposal if they added all of the interest expected to be received by Dec 19 in shares as well.

 

Also with the debs out of the way, a corporate sale is more likely and there is some capital to invest in the business.

 

What I don’t understand is why anyone is buying the common for more than the deb value under this proposal?

[Cardboard]

Because you want to help the company succeed to allow for a recovery to par asap and possibly more vs trying to squeeze every last penny.

 

You could get a bit more than 93.28% of proforma by waiting but, keep in mind that the exchange is done at the worst possible time for Canadian energy and WCS or translating into an already collapsed price for the common of $0.10. Now that the intention is to convert no matter what, might as well get this over with quickly. Is 96% really going to change much?

 

This will eliminate uncertainty and allow the company to move forward with no more interest (I would have to read the indenture to see if March interest has to be paid in cash or shares ok), no chance of default, etc. Also much simpler if some take-over was to be contemplated.

 

At $0.10/share (or debs at par: 2.5 times upside from here), we are looking at a producer with $22,500 per flowing or among lowest in Canada right now at height of pessimism and funds flow goes up 43% to $11.08 M from Q3 annualized of $7.72 million by stopping paying interest on the debs or EV/FFO of 4.2 times, also cheap. I know, there is no way that it is anywhere near that at the moment but, sanity should return eventually.

 

The result is a player with operational results highly levered to WCS with essentially zero net debt (current working capital + cash received on new loan minus new loan).

 

With some flexibility, they can easily grow production by 25% and take advantage of low hanging fruits which would make this even cheaper. This could also allow for a proper sale of North Dakota assets at reasonable prices now that they are not under duress.

 

Cardboard

[bizaro86]

I'll likely vote in favor here. Too bad they didn't do this before they took the N. Dakota loan. I think with the debs out of the way they could have gotten a bank line in Canada at more reasonable rates.

 

 

[bizaro86]

Yep, definitely voting in favor. If you take the effective price of shares you pay from buying the debentures right now (@ $40 deb price) the company is trading for <$10k CAD per flowing bbl, which is low even now for a liquids producer. This will give the way more flexibility to get something done here on the strategic front, and I think there's a reasonable chance they'll be able to sell entity at a price that equates to par or better within the next two years. Very oil price dependent, obviously.

[grym02]

Not sure why this deal saves 15 months interest if the transaction happens in Jan? Shouldn't accrued (3-4 months) be paid in cash?

 

But if that's true, converts are giving up 0.10c in interest on a 0.38c bond price. That's pretty material. Rough estimate, creating the company at almost 40% more by giving up that interest. Can they really increase production by enough to offset that higher price? I get that it gives more flexibility and makes a sale easier, but early 2019 prob isn't going to be the best time to sell either.

[bizaro86]

Not sure why this deal saves 15 months interest if the transaction happens in Jan? Shouldn't accrued (3-4 months) be paid in cash?

 

But if that's true, converts are giving up 0.10c in interest on a 0.38c bond price. That's pretty material. Rough estimate, creating the company at almost 40% more by giving up that interest. Can they really increase production by enough to offset that higher price? I get that it gives more flexibility and makes a sale easier, but early 2019 prob isn't going to be the best time to sell either.

 

You're effectively getting 94% of that interest back (as equity) as the converts will own ~94% of the equity. I think there will be a multiplier effect as well, because if they didn't do this the other capital options they have are very expensive right now. They're almost certainly going to need to convert these into equity in 2019, and converting now will prevent them from burning a bunch of money on new expensive debt in the meantime.

[Philbert77]

I am a debenture holder. I think the debbie holders need to accept this offer and not try to scramble for pennies. At this stage with the current oil environment we need to keep as much cash in the till as we can. I'd rather see the company survive this downturn and get a quicker return on my investment than drag it out.

[Philbert77]

Well it's official now:

 

"The Exchange Transaction significantly enhances the prospects and flexibility of the Company to pursue strategic, value-enhancing transactions which may include a corporate merger, sale, recapitalization or reorganization. Following Closing, the Company will have reduced its overall debt by $41.94 million and its annual interest burden by $3.36 million, resulting in a simplified capital structure with only US$3.5 million of term debt remaining outstanding (see Nov 2, 2018 press release).

 

As a result, Zargon’s Board of Directors has renewed its strategic alternatives process to seek outcomes that will maximize value for the Company and its stakeholders. Zargon’s long-life, low-decline oil exploitation assets have significant upside potential in a period of prolonged higher oil prices. In addition, Zargon brings a TSX listing and more than $155 million of non-capital losses that could have significant value in a more favourable Canadian energy investment climate. Zargon also previously commenced marketing its North Dakota assets in December 2018, assisted by Energy Advisors Group (formerly PLS)."

 

http://zargon.ca/news/?path=/press-releases/zargon-announces-voting-results-extraordinary-meeting-debentureholders-and-provides

 

I wonder what the odds are now of them being bought out? Too bad the oil & gas environment is so poor currently in Canada...