Some analysis on the deal from a long time follower of the company and former analyst Malcom Shaw.
The merged company will generayr 60 cents in free cash flow over the next 12 months, have 90 cents per share in cash upon merging and will trade at 1x debt adjusted cash flow. There is cheap, stupidly cheap and whatever this company is.
On the news front, my favourite little oil company that could, Tenaz Energy (TNZ.TO, last at $2.65) announced that it is acquiring UK-listed SDX Energy for about 15 million shares of TNZ stock. The deal appears to be highly accretive and I would expect nothing less from Tony Marino and his team. Elephant-minded investors might remember SDX used to be known as Sea Dragon Energy and was listed in Canada, with assets in Egypt and Morocco. Some might worry about food insecurity catching up with Egypt and Morocco later on this year, but I figure that I’ll just worry about the things I can control, and accept the things I can’t. I don’t have a crystal ball, but at this valuation I like my chances. Saudi Arabia recently pledged $15B in food aid for Egypt this year. Here’s hoping they can get grain moving through the Black Sea via Odessa this fall.
The deal, which requires a shareholder vote on both sides, would see little TNZ step its production up to around 4,700 boepd as it tacks on development assets in Morocco (gas) and Egypt (gas and oil), both of which also have exploration upside. TNZ highlights that the business combination would take TNZ’s reserves up to 17 million boe, is accretive 141% to production per share, and would be 212% accretive to operating income per share. I have a big bet on TNZ and this is the kind of deal that I was hoping for… At current prices TNZ trades at just a little over 1x EV/DACF (not a typo) on a pro forma basis, and will boast nearly $0.90/share in cash when the deal closes. I saw a note today that suggested the cash pile could grow to around $1.50 per share in just a year’s time. This is on a stock that closed at $2.50 today, meaning that I think TNZ is dirt, dirt, cheap at these levels. In light of its low share count, TNZ shareholders have a lot of leverage to value creation here; a $1 move in the stock (~40%) would equate to about a 1x cash-flow multiple expansion. Cue the Guns n’ Roses song “Patience”… there’s a lot of story to be written here.