Calvalley M&A case
I know that there has been talk on and off that Calvalley would be an acquisition target. In reality it should be given that the company is small enough to be possible to buy for several buyers and they have constantly under invested in their Yemen block which creates and opportunity for a potential buyer. And it helps that the company only really has one asset. However, we all know the problem with the M&A thesis, Ed Shimoon. His price expectation is far above the current share price at a level where the premium would be so big that it would be difficult for the buyer to justify the premium even thou the deal may still be accretive. The situation may now change with the new insider trading allegation against Ed. If he was forced to step down it is difficult to see which option he would have apart from selling the company unless he wants to destroy more shareholder value.
I think the most obvious buyer of Calvalley is the Norwegian listed E&P company DNO. They have operation in Yemen, Kurdistan, UAE and Oman. The company has been in Yemen for more than 10 years and unlike a lot of other operators in the country they have been very good at maintaining operation / development / exploration even when the turmoil has hit the country. For example DNO will be drilling 8 wells in Yemen in 2012 and they have already completed the first one, spudded the second and the third well will be spudded within weeks. They are working with a Chinese rig operator which tends to stay in the country even thou the turbulence goes on.
DNO may even be an even more likely buyer of Calvalley since DNO merged with RAK Petroleum in the end of 2011 and the new chairman, Bijan Mossavar-Rahmani, took over. The reason why they may even be more likely buyer is because Mossavar-Rahmani strong connection to the Middle East and Yemen. Mossavar-Rahmani has said that Yemen is one of the most attractive places to expanding in currently, due to the turmoil in the country. Yemen offers the highest netback / bbl in DNO portfolio and they think that they have an advantage in operating in Yemen compared to many of the other international E&P active in Yemen. DNO executive has said that they have add initial discussion with Canadian E&P active in Yemen and in this group you only have three companies to choose from, Calvalley, TransGlobe and Nexen. TransGlobe has said that they are looking to sell their Yemen operation but that would be a small deal for DNO and it seems like TransGlobe price expectation per 2P bbl is high. Nexen may also be a seller after losing the main asset but DNO has said that Nexen Yemen strong link to the former president may be damaging. In my mind its clear that DNO has had talks with Calvalley but Ed Shimoon has most likely been unwilling to take these talks seriously because of Calvalley low share price. If the insider trading allegation becomes a real problem for Ed Shimoon he may be forced to sell the company and DNO could in this case be a taker. DNO is now in the process of doing a dual listing in London to be able to attract more investors. After the listing is done within a few months I think it’s likely that DNO will try to speed up their M&A strategy.
On page 8 in DNO presentation you can see their Yemen drilling schedule:
https://hugin.info/36/R/1613428/513772.pdf