TD action notes Bankers Petroleum Ltd.
(BNK-T, BNK-L) C$1.11
Bankers Agrees to be Acquired at C$2.20 per Share
Event
Yesterday, Bankers Petroleum announced that it has entered into a definitive
agreement with two affiliates of Geo-Jade Petroleum Corporation (Geo-Jade)
to be acquired at a cash price of C$2.20 per share. Geo-Jade is listed on the
Shanghai Stock Exchange (SH: 600759).
Impact: POSITIVE
· The price is at a significant premium to the last closing price of C$1.11
(98%) and 30-trading day VWAP price of C$1.05 (109%). This is also at
a 16% upside to our previous target price of C$1.90.
· The price is at 83% of our Base NAVPS estimate of C$2.66/share using a
discount rate of 10% but at a premium of 4% to our Base NAVPS
estimate of C$2.12/share using a 12.5% discount rate.
· Moreover, our Base NAVPS estimates are based on an assumed price
deck that is substantially above a current Brent strip (March 18). On this
strip, our Base NAVPS estimates are negative.
· Therefore, we view the offer price as fair and reasonable.
· Our main cautionary consideration is in relation to the acquirer’s
financing risk. We understand Geo-Jade is looking to raise funds through
a private share placement as part of this deal and two other acquisitions
they are executing concurrently. At this stage, based on the available
information, we are unable to assess this risk. However, we rely on
management’s judgment as we do not expect they would have preceded
this far without strong confidence in Geo-Jade’s ability to close the deal.
TD Investment Conclusion
Although the company is opportunity rich with a substantial resource base
in Albania and an excellent team, its growth prospects are limited by the
lower oil prices and funding constraints. Bankers Petroleum has faced a
difficult period over the last few months with a significant drop in world
oil prices and an escalation of the tax dispute with the Albanian
authorities that is yet to be resolved.
Geo-Jade offer presents an attractive exit opportunity for the investors and
we view the closing risks to be acceptable. Furthermore, we do not expect
competing offers that are significantly superior to this deal. Therefore, we
are increasing our target price to C$2.20 and changing our rating to
TENDER from Speculative Buy.
Highlights:
· The transaction price represents a premium of 98% over Bankers’ closing share price on the TSX of
C$1.11 on March 18, 2016, and 109% over the 30-trading day VWAP of C$1.05.
· The arrangement values Bankers at approximately C$575 million before the assumption of the
outstanding indebtedness of Bankers.
· The arrangement has received the unanimous approval of the board of directors of Bankers and carries
the full support of Bankers’ management team.
· Mutual non-completion fee of US$20 million (~5% of purchase price), including payment in favour of
Bankers if the purchaser is unable to complete the funding of its obligation to acquire Bankers’ shares.
· Completion is subject to shareholder (2/3 majority) and regulatory approvals such as those required
under the Investment Canada Act and approvals required by the People’s Republic of China.
· Special shareholder meeting is anticipated to be held before the end of May. If approved, the
arrangement is expected to take place by the end of June.
· Geo-Jade Petroleum:
o Listed on the Shanghai Stock Exchange (SH: 600759)
o Website — https://www.geojade.com/tools/list.php?tid=60
o Bloomberg reported yesterday on a filing by Geo-Jade with the Shanghai Stock Exchange.
Geo-Jade is also planning to buy a 51% stake in Yargeo and 100% stake in an investment
management company in Shanghai.
o Geo-Jade is planning a private share sale to raise up to 7 billion yuan to replenish working
capital and pay back loans for Yargeo.
o Filing link (in Chinese) — https://2015.sse.com.cn/disclosure/listedinfo/announcement/c/2016-03-
21/600759_20160321_3.pdf
Outlook
The closing of the deal is subject to regulatory approvals such as those required under the Investment Canada
Act, approvals required by the People’s Republic of China and the Albanian Government. We do not view
these as major obstacles to the deal closing. However, we understand that Geo-Jade is looking to raise funds
through a private share placement for this and two other acquisitions. We will be seeking further information
on Geo-Jade’s plans in order to better understand and assess its financing risk. But in the meantime we rely on
Bankers management’s judgment on this issue. We expect management would have carefully considered Geo-
Jade’s plans and they have become comfortable that it is likely for the financing and the deal to close.
Based on our views of the offer price (as detailed below) and the ongoing issues the company is facing in
Albania with regards to the ongoing tax dispute and possible changes to the terms of Petroleum Agreement, we
believe that the possibility of a substantially superior offer above Geo-Jade’s price is not likely.
Valuation
Exhibit 1 presents our Base NAVPS and Fully risked NAVPS estimates for the TD price deck, a recent Brent
Strip (March 18) and a range of flat price decks. These are based on a 10% discount rate. In Exhibit 2, we have
presented our Base NAVPS sensitivity to a range of discount rates as well Brent price shifts below and above
our price deck. Exhibit 3 compares our assumed Brent price deck with the recent strip.
Based on these discount rates and Brent price sensitivities, as well as the premiums to the last closing price and
30-trading day VWAP, we view the deal price of C$2.20 to be fair and reasonable.
Justification of Target Price
Our new target price of C$2.20 (previously $1.90) is based on the proposed cash acquisition price by Geo-Jade
Petroleum Corporation and on our view that a competing higher offer is unlikely at this stage.
Key Risks to Target Price
Key risks associated with our target price include business risks of the company and industry, including, but
not limited to loss of key employees; drilling success; volatile commodity prices; operating costs; capital cost
overruns; product supply and demand; financing/access to capital; government regulations; legislation;
unexpected changes in contract/fiscal terms; asset expropriation; royalties; taxes; exchange rates; interest rates;
and environment and weather concerns.
The key near-term risks specific to Bankers are the following:
· Deal completion risk. We do not view the risk of regulatory objections to be a material risk. However,
we understand that the acquirer is planning to raise additional funds and highlight the financing risk to
the deal closing.