Shares in Kazakhstan-focused oil and gas producer Tethys Petroleum (LSE: TPL) rose by 27% to 9.9p this morning.The gains were triggered by news that Nostrum Oil & Gas (LSE: NOG) has proposed a possible cash and share offer of 11p per share for Tethys, valuing the firms stock at 37m.
Tethys shares hit a 52-week low of 2.8p in April, when the company was forced to announce that it was out of cash and unable to meet its obligations. The shares have since risen by more than 150%, thanks to a refinancing deal with AGR Energy.
Details of a comprehensive refinancing package were confirmed at the start of July, with AGR agreeing to subscribe for new shares worth US$47.7m at a price of C$0.19 per share. However, this placing will increase the number of Tethys shares in circulation by 94% if it goes ahead. According to Tethys, AGR would be expected to hold up to 51% of the enlarged share capital of the firm following the placing, effectively giving AGR control of Tethys.
The Nostrum offer could prove to be more attractive for private shareholders. The offer price of C$0.2185 (about 11p) per share is 15% higher than the C$0.19 AGR was willing to pay for its new shares, and is 45% higher than last Fridays closing price of about 8p.
Is there a downside?
Nostrum has a market capitalisation of 1.1bn and reported sales of $781m in 2014. The firms operations are centred around its oil and gas fields in Kazakhstan and its a credible buyer for Tethys, in my view.However, as I write, Tethys shares are trading at about 9.5p. Thats still 14% below the 11p per share value of Nostrums proposed offer, and reflects the potential downside of a Nostrum deal.
Firstly, Tethys shareholders will be denied the potential upside that could come from a rise in production and a recovery in the price of oil. Only a year ago, Tethys shares were trading at 20p.
At the end of 2014, Tethys had estimated unrisked mean recoverable oil resources of more than 400m barrels and proven and probable reserves of 27m barrels of oil equivalent. The Nostrum offer values Tethys share capital at 37m, or just $2.10 per barrel of reserves. Thats pretty cheap, compared to industry norms.
Secondly, while it is credible, Nostrums offer looks like an opportunistic attempt to grab some decent assets at a distressed price. The board of Tethys, which now has a refinancing deal with AGR in the bag, might reject the Nostrum offer.
Buy or sell?
In my opinion, the pros and cons of holding Tethys shares are quite evenly balanced.Although Tethys should, in theory, be able to generate superior returns for shareholders by remaining an independent business, the firm has a history of under-performance.
Whats more, if AGR becomes a majority shareholder as expected, future fundraising could be on less generous terms. Private investors could find themselves repeatedly diluted. The board of Tethys has not yet commented on the Nostrum approach. When they do, the share price could rise or fall sharply.
Tethys shares remain a speculative hold, in my view, but are very risky.
I’d prefer to invest my cash in small cap opportunities backed by a proven, profitable business model.One such company is the UK firm discussed in “1 Top Small-Cap Stock From The Motley Fool“.
This company has a strong track record of profit growth. The firm’s share price rose by 180% in 2014, but the Motley Fool’s small-cap experts believe it remains undervalued.
A new project with a multi-billion dollar potential market could transform the outlook.If you’d like to learn more before it’s too late, download ourFREE report today.
To receive your copy immediately, simply click here now.
Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.