In this day and age, there is no space for a small cap oil company, according to TransGlobe Energy CEO and president Randy Neely, making the case for a tie up with Vaalco Energy.
The two companies set out the case for a tie up in mid-July and the key shareholder vote is due on September 29. For the deal to go through, 66.6% of shareholders must back the plan – and there have been some strenuous objections.
Privately owned Horizon Partners, a shareholder in TransGlobe, has said the deal is misguided. Gabon-focused Vaalco and Egypt and Canada-focused TransGlobe are a poor fit, Horizon has said. Rather, TransGlobe should sell off its Canadian business and return the proceeds to shareholders, the investor said.
“The age of small caps is behind us. Companies need to consolidate and more efficient, to pay dividends and attract institutional investors,” Neely told Energy Voice. The move into Canada in late 2016 reduced TransGlobe’s reliance on Egypt, which had suffered from a rollercoaster ride of revolutions and challenges in paying bills.
Timing is all
The company continued looking examining its options on expansion, including running the slide rule over Vaalco in 2019.
At that point, TransGlobe was still “trying to fix our own house”, Neely said. The company was working on a process of overhauling its Egyptian licences to bring them up to date and provide incentives for new work.
When Vaalco approached TransGlobe in spring this year, the previous work provided a good grounding to drive progress forward.
“We found they were very good at forecasting and predicting their outcomes,” Neely said, unlike some other companies. “With Vaalco they were conservative with their approach, methodical in developing assets and good at predictions. From this, we were able to grow confident in the asset.”
TransGlobe’s new licences in Egypt, and regular cashflow from Canada, combined with Vaalco’s Gabon operations creates a business that “has much lower risk and much higher potential for dividends”.
Separately the two companies have “reasonable liquidity”, Neely said. “The combination of the two would increase the liquidity”, which would serve to attract additional support from fund managers, he predicted.
Auctus’ Foucaud said the merger would create one of the largest UK listed E&Ps and “one of the very few not encumbered with large debt”.
One criticism of the proposed merger has been that of the differences between the three regions of operations. Neely defended this diversity as a strength.
“Canada is very advanced in terms of fracking. We’re applying that technology to Egypt this year and Vaalco is getting into fracking their wells as well. That Canada knowledge can be applied in all areas and bring those talents together,” Neely said.
The merger plan has won support from equity analyst Stephane Foucaud at Auctus Advisors. The combined company would have a “diversified and complementary portfolio of assets”, he wrote. Foucaud singled out the application of fracking in Gabon’s Dentale reservoir as one area of potential benefit.
Vaalco, meanwhile, has proved an efficient operator in risking wells in Gabon with real time checks and insights.
Neely declined to be led on where post-merger company might go. “Activity can be lumpy for a small company. The more projects you have, and the more choices to deploy capital, would create a platform for additional growth.”
One opportunity he raised was a move offshore Egypt. “Vaalco has that skillset. We could look at exploiting opportunities in the Gulf of Suez, for instance.”
For shareholders, the executive dangled the carrot of more distributions.
TransGlobe is not emotionally attached to its Canada business, he continued. The company believes the point where it would secure the best advantage would be when the Albertan asset was producing in the 5,000 barrel of oil equivalent per day range.
“We see the potential for this asset being greater down the road.” If TransGlobe sells down this asset too early, he said, “we just get smaller. That makes us more susceptible. Canada has regular cash flow, while Egypt is lumpy.”
After merging with Vaalco, there might be an opportunity to sell off the Canada assets. “As a larger company, with Gabon and Equatorial Guinea, then Canada would be less material.”
Neely expressed the hope that the merger plan would secure the required approval from shareholders.
Vaalco’s share price has fallen by around 13% since announcing the deal. As a result, the value of the offer – which swaps Vaalco shares for TransGlobe’s – has also fallen.
Proxy advisor ISS noted that while the premium had eroded, it was unclear whether rejecting the deal would benefit TransGlobe’s share price, given that oil prices have declined.
ISS went on to say that the deal had “sound strategic rationale, synergies, cost savings, and the combined company’s growth potential appears to represent a more favourable outcome for shareholders to remaining standalone”.
Had the companies set out the plan in March or April, shareholders would have been more positive on the merger, Neely said.
“On a relative business, the company will be better and the stock will be better jointly, rather than separately.” The company remains receptive to input from shareholders but “we still think it is better to put the companies together, for a whole host of reasons”.