Shares in struggling oil and gas producer Tethys Petroleum (LSE: TPL) rose by as much as 20% this morning on news of a 10.7p per share possible takeover offer from FTSE 250-listed Nostrum Oil & Gas (LSE: NOG).
The possible offer of C$0.2185 (approx. 10.7p) per share represents a 56% premium to the closing value of Tethys shares on Friday and would value the company at about 36m.
Tethys also said this morning that a previously agreed $47.7m refinancing deal with AGR Energy and Pope Asset Management would no longer be going ahead. As a result, while todays offer may be a far cry from two years ago, when Tethys shares traded at more than 40p, it could prove to be a lifeline for Tethys shareholders.
As part of this deal, AGR had provided a $5m short-term loan to Tethys, which will no longer be available. To replace this, Nostrum has agreed to provide a similar $5m facility while it carries out due diligence on Tethys.
Its probably fair to say that if the Nostrum offer is not successful, Tethys could be forced into administration, or face a heavily-dilutive fundraising that would leave very little value for existing shareholders.
Nostrum has until 9am on 24 August to complete its due diligence checks on Tethys, after which it will have two business days to decide whether to make a formal offer.
Nostrum may be a good buyer
The board of Tethys has already agreed to recommend Nostrums offer unanimously to shareholders if it is confirmed.
Interestingly, Tethys says that shareholders would be able to choose whether to receive payment in cash or Nostrum shares. While cash might seem to be the obvious choice, Ive been wondering whether Nostrum shares could be a more profitable choice.
Nostrum is a 1bn business with substantial operations in Kazakhstan, where Tethys main production assets are also located. In 2014, Nostrum reported turnover of 781m and a profit of 146m.
The firms share price has proved more resilient than many other oil and gas firms over the last year, falling by just 33%, compared to 68% for Tullow Oil and 62% for Premier Oil, two similar-sized firms.
One reason for this may be that Nostrum appears to have been able to finance the majority of its capital expenditure from its own operating cash flow in recent years. The firm has even been able to pay a reasonable dividend, which is expected to offer a yield of around 2.6% this year.
Nostrums current valuation indicates that its proven and probable (2P) reserves are currently valued at around $4 per barrel. That doesnt seem expensive.
Most Tethys shareholders are likely to be sitting on a big loss. Accepting Nostrum shares instead of cash could be one way of clawing back some losses on Tethys.
This isnt the first time that Nostrum has looked at Tethys with a view to buying the smaller firm. In my view, this latest offer is very likely to succeed. If I was a Tethys shareholder, I would choose Nostrum shares instead of cash, and hold on for the chance of a longer-term profit.
However, investing in oil and gas stocks is not simple at the moment. Big profits and further losses seem equally likely.
If you want to get a second opinion on the attractions of Nostrum Oil & Gas, then I’d suggest checking out the simple, 7-step guide described in “7 Simple Steps To Seeking Serious Wealth“
This Motley Fool guide contains details of a unique investment strategy that could help your portfolio reach the million-pound mark in as little as 20 minutes per month!
This report is free and carries no obligation.
To receive your copy today, 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.