With the forthcoming Reset Date approaching, the following note provides an update to Antares Energy Convertible Note holders
Execution of purchase and sale agreements announced
Antares Energy (‘Antares’) has announced that it has executed two separate purchase and sale agreements for its remaining Northern Star and Big Star assets for a combined amount of US$253.8m. We understand that the transactions proposed are both all-cash. The two separate agreements have been executed with the same private equity provider, who will be named if either of the two deals successfully closes. The closing date for the both transactions is on or before 30th November 2015 and is subject to the ‘usual commercial closing conditions and adjustments’. We understand that the transactions may not necessarily close at the same time (ie: one transaction may precede the other). The gross pre-tax proceeds of the proposed transaction ‘will be subject to customary closing adjustments, taxation and frictional costs’.
View the full announcement
on the ASX.
The transactions, if both are completed, would see Antares have pre-tax cash of over A$370m (@.6925c spot plus existing cash). The company also still own 4.3m Breitburn Energy common units that had a market value of A$16.7m as at 7/09/2015. After allowing for the principal value of the outstanding convertible notes ($47.5m), the transaction proceeds could potentially deliver a pre-tax value of up to A$1.42 per ordinary share, equating to a post-tax value of A$0.90 per share or higher (depending on the final tax treatment).
Estimated pre-tax valuation
| Antares estimates post transaction close | |
| Pre-tax cash estimate post asset sale | $366.6m |
| Estimated cash position | $5m |
| BBEP Share value as at 7/9/2015 @$2.69 | $16.7m |
| Gross asset position estimate | $388.3m |
| Cost to redeem Convertible Notes | $47.5m |
| Net asset position at close | $340.8m |
| Shares on issue | 240m |
| Estimated pre-tax per share value on completion | A$1.42c |
| Estimated post-tax per share value on completion** | A$0.90c or higher |
Figure 1
*Currency converted at spot of 0.6925c
**Final tax liability unknown – 35% tax rate adopted to determine lower end of post-tax value
Source: FIIG Securities Estimates
We note that neither of the announced transactions has closed and there remains execution risk in closing each of them given current volatile market conditions. On the morning of the announcement the AZZ shares traded up to ~30c per share from a prior day closing price of 9c. Given the potential post sale value of Antares’ equity (at least ~$0.90 per share post-tax) the market is currently placing a relatively high uncertainty factor on the transaction successfully closing. The market doubt is likely a function of the current volatile equity and commodity market environment, as well as previous asset sales / takeover processes being announced by the company and subsequently cancelled. However, mitigating the market’s view is 1) the company’s track record in successfully executing asset sales in the past which have delivered healthy profits on sale and 2) a successful transaction occurring on 1 September on land adjacent to Antares’. If either of the transactions successfully closes in line with the announced values then we expect the listed share and note prices to further increase.
Most recently on 1 September 2015, Ajax Resources and Kelso & Company announced a US$376m transaction to acquire 25,800 net acres of neighbouring producing land from W&T Offshore Inc., equating to a transaction value of ~US14,600 per acre.
The announced transactions would place Northern Star at a value of US$11,445 per net acre (based on 13,000 acres) and Big Star at a value of US$13,133 per net acre (based on 8,000 net acres). Recent transactions on producing Permian Basin assets point to larger acreage multiples (with recent Permian Basin transactions closed US$14,600 – US$35,000 per net acre), however we note that Northern Star and Big Star are not currently producing assets and further development expenditure would be required to ‘prove up’ the assets.
Reset Date Provisions
Under the Terms of the Antares Energy Convertible Notes, the next ‘Reset Date’ occurs on the 31 October 2015. The following provisions apply in relation to the Reset Date:
Actions by the company
- Up to 30 business days prior to Reset Date (ie: around 18th September): The company has until around the 18th September 2015 (30 business days prior to the Reset Date) to provide a notice of a change in the Convertible Note Terms (ie: coupon rate, next Reset Date or conversion terms)
- Up to 30 days prior to the next Reset Date (ie: end September): Antares also has the option to redeem some or all of the Convertible Notes at $2.00 per Convertible Note at the Reset Date. The company has up until 30 days prior to the next Reset Date (ie: end September) to provide an Early Redemption Notice
Actions by Noteholders
- Up to 10 business days prior to next Reset Date (ie: mid-October): A Noteholder has the option to redeem all or some of their note holdings if they provide a notice (Redemption Notice) to Antares on or before the day that is 10 Business Days prior to the next Reset Date. Where a Noteholder redeems only part of its holding of Notes, the noteholder must redeem at least 500 Notes and in integral multiples of 500 Notes. On the Reset Date, Antares must redeem the Notes (if a Redemption Notice has been provided in accordance with the above) and pay to the noteholder an amount equal to the Early Redemption Amount (equal to principal plus accrued interest) in respect of each Note redeemed.
Key considerations
- Antares have repurchased Convertible Notes since the last note issue, leaving 23.75m Notes in total with an outstanding face value of $47.5m.
- Based on a face value of $2.00 per Convertible Note, and a 1:3 conversion ratio, the Notes effectively include an implied call option at a strike price of $0.67. Based on the current Antares Energy share price (~30c) the Notes are ‘out of the money’ (ie: it would not be economic at present to convert the notes into AZZ Shares at the current AZZ share price). However, should the purchase and sale agreement ultimately lead to the asset sale the note would potentially be in the money, and thus could deliver further profit to Note holders
- Antares’ current assets primarily relate to:
- Its holding of 4.3m Breitburn Energy Common Units. Based on a current closing unit price of US$2.69 and an exchange rate of US$0.6925, the units are valued at A$16.7m; and
- Cash at bank which was valued at $6.998m at 30 June 2015, estimated to be $5m by completion.
- In terms of other potential sources of liquidity, Antares previously announced that it has a US$200m term debt facility in place provided by Macquarie Bank; however the availability of the facility is at the absolute discretion of Macquarie. We understand that no drawings have been made under this Macquarie facility to date.
- If all Note holders were to redeem at the Reset Date, then Antares would have an obligation to pay out $47.5m in principal on the 31st October. In this scenario, there may be a potential funding shortfall between 31 October (when the Note principal is due and payable) and 30 November when the transaction is expected to close given the Note principal obligation exceeds Antares’ cash and Breitburn unit holdings. However, we believe this one month funding gap could be bridged by a financier (e.g.: drawing on the Macquarie facility) on the expectation that the transaction will close at the end of November. A failure of both transactions closing in line with the announcement represents a key risk to funding Note redemptions if a significant proportion of Note holders redeem. Mitigating this, we note the company has a track record of successfully acquiring and selling assets in the past at a profit, including its most recent sale of the Southern Star asset and prior to that a US$200m sale of its Eagle Ford Basin shale interests in November 2010. We also note the recent transaction on nearby producing land which was executed at ~US$14,600 per net acre providing some validation on the value of Antares’ Permian Basin assets
- The Notes are tradeable on the Australian Securities Exchange (ASX) under the code (AZZG). The Notes currently trade below par value on the ASX, with the last traded price being $1.85 or a 7.5% discount to par value. The Notes pay interest quarterly with the next coupon due on 31 October, so the AZZG price will include up to 5c of accrued interest as the Reset Date approaches. While the asset sale should in principle deliver a total value (~A$380m before tax and costs) well in excess of the Notes outstanding ($47.5m), the discounted valuation on the Notes reflects a degree of uncertainty around the likelihood of a successful asset sale as well as the potential risk of a funding shortfall should a substantial proportion of Note holders seek to redeem their notes at the Reset Date. We highlight that the Notes rallied by 25c from a low of $1.60 on the day of the announcement (7/9/15)
- Antares is due to report its full year financial results around mid-September 2015
Options for convertible note holders
Investors have time before they need to make a decision regarding their Convertible Notes. Note holders have a number of options available to them:
- Redeem the Notes under the Early Redemption provisions. For investors seeking to redeem some/all their convertible Note holdings, please complete the “Schedule 2 – Redemption Notice” and return to Antares no later than 10 business days prior to the 31 October Reset Date which would be around mid-October.
- Sell the AZZG Notes on the ASX – currently the most immediate form of liquidity for investors seeking to exit their positions. Following the asset sale announcement, the secondary market value of the AZZG Notes increased from $1.60 to $1.85. Given the size of the potential asset sale and the expected ~$1 per share value post closing of the transaction, the value to the AZZG Notes is likely to increase as certainty around the proposed transaction increases and further details are provided. With increased trading activity linked to the announcement, the increase in secondary market liquidity represents an alternative opportunity for investors to exit their position, but it would only seem logical to do so if the capital price of the notes (excluding accrued interest) exceeds $2.00 per Note.
- Hold on the Notes and await feedback from the company on the reset provisions – note that under the Reset provisions, the company may roll over the Notes, amend the Terms of the Notes or redeem the Notes at par at the Reset Date. If one or both transactions successfully closes, it may be more optimal to convert the Notes into Antares Ordinary Shares than redeem – note this would only be economic for investors if the AZZ equity price was above $0.67 and the value of the AZZ equity holding post conversion was greater than the listed value of the AZZG Notes. Given the total announced value of the potential transaction equates to a $1.42 pre-tax per share valuation, it is likely that the Notes will be ‘in the money’ if the transaction successfully closes and conversion would deliver an unrealised capital gain.
Conclusion
The purchase and sale agreement announcement is positive for the company and the valuation provides a data point on the Northern Star and Big Star assets which is well in excess of the $47.5m Convertible Notes outstanding.
However, we reiterate that at this stage the announcement represents the execution of a purchase and sale agreement which represents progress towards an asset sale but still carries material execution risk between now and the closing date (on or before 30 November) particularly given current volatile market conditions and oil prices. Given this, the following considerations are applicable to Antares Note holders:
- For investors who are uncertain about the likelihood of success of the transaction closing and/or are seeking to exit their position at par, the upcoming Reset Date provides an opportunity to redeem some or all of their Convertible Notes through the early redemption provisions. We note that this option effectively removes the potential for any ‘upside’ if the asset sale transaction does complete but also to some extent mitigates against the ‘downside’ risk of a failure post Reset Date in either of the transactions going ahead. We note that investors have to notify the company at least 10 business days prior to the 31 October reset date (ie. mid October) to submit an Early Redemption notice to the company, and must do so in accordance with the notes issue terms and conditions (linked below).
- For investors who are confident in the likelihood of the transaction occurring as per the announcement, then holding onto the Notes may be a more valuable outcome, given the total potential value of both transactions could lead to an share price of at least A$0.90 per share which would bring the Notes ‘into the money’. We note that Note holders can exit their position through a secondary market sale on the ASX. The last traded price of the Notes of $1.85 is below the nominal principal amount of $2.00 per Note; however this value of the AZZG Notes is expected to increase further if either transaction successfully closes. The company has had a successful track record in selling assets in the past at a profit to the company, which mitigates against the risk of a transaction failure
The 10 business day deadline for the Note holder Early Redemption notices occurs around mid-October, so there is time for investors to make a decision on their Note holdings however there is also nothing stopping investors sending their Early Redemption notice earlier than the 10 business day deadline if they are clear on wanting to redeem their Note holding. Over the next month further information may become available in relation to the proposed transaction which could either increase or decrease the listed ASX value of the AZZG Notes. In addition, the company could either announce a change to the Convertible Note terms or itself put forward an Early Redemption Notice which it would be required to do prior to the end of this month to be effective.
For investors seeking to redeem some/all their Convertible Note holdings, please complete the “Schedule 2 – Redemption Notice” and return directly to Antares Energy on or before 10 business days prior to the upcoming 31 October Reset Date. You can download the form of Redemption Notice.
Completed Redemption Notice forms should be returned directly to Antares at the following mailing address:
Antares Energy Limited
PO Box 690
WEST PERTH WA 6872
Further information on Antares, including equity analyst reports are available on the company website.