NEW YORK,
June 18, 2014 /PRNewswire/
-- Lone Star Value Investors, LP (together with its
affiliates, "Lone Star Value" or "we"), a significant shareholder
of Antares Energy Limited (ASX: AZZ) (OTC: AZZEF) ("Antares" or the
"Company"), today delivered an open letter to Antares Chairman and
CEO, James Cruickshank. The
full text of the letter follows.
June 18,
2014
Mr. James
Cruickshank
CEO/Chairman of the Board of
Directors
Antares Energy Ltd. ("AZZ")
3837 Greenbrier Drive
Dallas, Texas 75225 USA
To James Cruickshank,
CEO/Chairman:
Despite your apparent opposition to our offer to help
Antares Energy Ltd ("Antares") with our expertise, I thought it
useful to highlight several points that we believe constructively
build upon our recommendations for Antares' prudent funding and
development of its assets. As we've stated
before, we believe you have a ready playbook to follow in the
example of Callon Petroleum (NYSE: CPE) ("Callon"), a management
and Board we successfully engaged with tremendous results – and
more importantly a Permian E&P operator with acreage not that
far from Antares' own Southern Star footprint.
I noticed your recent rebuttal to our claims that Antares
has underperformed its peer group in your remarks within Antares'
Notice of Meeting – stating that since July
1, 2008 until June 5, 2014
Antares share price has appreciated 635%, from $0.068 to $0.50. I would ask that if: 1)
you recognize our involvement in promoting the intrinsic value of
Antares assets which has brought the share price from around
$0.40 at the beginning of May to its
present $0.50 and 2) if you feel that
you're entitled to do whatever you want with Antares' assets and
shareholder funds as long as the share price remains above
$0.068?
We also appreciate that Antares' recent quarterly report
highlights the successes of Athlon Energy, which holds acreage
close to Antares. Perhaps it would help to
realize that five of Athlon's six board members are
independent and that this has added value to its
development capability.
You also asked for some constructive assessments from Lone
Star Value and despite our Five Point Plan being quite clear, we'll
summarize a few highlights as to how we believe Antares can improve
its value for all its current shareholders regardless of
their cost basis.
First, we would like to introduce you to Callon (one of
your successful neighbours in the Permian Basin), and in particular
their most recent press release from 12 June announcing an
expansion of their financing ability:
_____________________________________________________________________________
Callon Petroleum Company Announces 63% Increase in
Borrowing Base to $155
Million1
June 12, 2014 - Callon Petroleum
Company (NYSE: CPE) ("Callon" or the "Company") today announced an
increase in the borrowing base amount previously established in
March 2014 under its Senior Secured
Revolving Credit Facility ("Credit Facility"). A borrowing base
redetermination was recently completed for the Credit Facility
based upon a May 1, 2014 reserve
report, and the Company's borrowing base was subsequently increased
from $95 million to $155 million, effective June 11, 2014.
Fred Callon, Chairman and
CEO commented, "The latest increase in our borrowing capacity
demonstrates the continued success of our horizontal development
program and its impact on our proved reserve base. We appreciate
the support of our recently expanded bank lending group and the
resulting flexibility it provides for the execution of our future
growth plans in the Permian Basin."
Callon is an independent energy company focused on the
acquisition, development, exploration and operation of oil and gas
properties in the Permian Basin in West
Texas.
_____________________________________________________________________________
As of the first quarter of 2014 Callon paid a weighted
average interest rate of 2.41% on its credit facility (LIBOR +1.75%
to 2.75%, depending on utilization). We would
point out that in the 2nd quarter of 2013 Callon had a
market capitalisation of nearly Antares' current size which has
since more than tripled while pursuing a more prudent funding and
expansion program. We would compare this
incremental cost of funding with the dilutive and expensive 10%
coupon convertibles we've noticed Antares issuing sporadically and
without prior strategic reasoning.
We would also like to highlight to you that your Permian
E&P neighbour, Callon, has increased its net production 20%
year-over-year in the first quarter of 2014
already.2
This of course compares to your stewardship of Southern Star which
is marked by a decrease in production from 786 BOE/day upon
purchase in April, 2011 to a current 785 BOE/day as at last account
in Antares' quarterly report to
shareholders.3
We'd note that perhaps a more experienced senior operator could be
of some help to getting Antares' production higher as the rest of
the Permian Basin has been quite successful since 2011 in
extracting ever higher quantities of
oil4:
Photo -
http://photos.prnewswire.com/prnh/20140618/119323
Note that while Southern Star has lost 1 BOE/day of
production since 2011, the Permian Basin's oil production has risen
from ~1000 thousand/barrels per day to a current ~1.6 million
(+60%). We believe this is evidence that your current development
strategy isn't failing but rather it has decidedly
failed and that Antares is in clear need of help from a more
senior operator to develop its assets.
You stated in the Notice of Meeting that the "move
towards horizontal wells is a 'game changer' for values in the
Permian Basin." We couldn't agree more and
would like to highlight that your competition for horizontal well
drilling expertise is growing only more heated as the onshore rig
count increases:
US Onshore Rig
Count5:
Photo - http://photos.prnewswire.com/prnh/20140618/119324
Notice above that the U.S. onshore oil rig count has gone
from a low of less than 200 to its current near 1,500 since
2009. We would argue that you should perhaps
consider that your competitors for drilling resources and expertise
are better qualified and capitalised than Antares currently is, and
that there are willing partners to prudently develop Antares'
valuable acreage. Your current strategy of
issuing irregular quantities of 10% coupon convertible notes and
then being subject to a $10 million
incremental drawdown limitation on your revolving credit line
simply is not a viable strategy and has clearly not delivered
results. The facts are that horizontal wells
cost $8 to $10 million each and you
are risking using mediocre talent and a lack of proper resources to
develop Antares assets and doing so with the need for a
near-guarantee of success. As you may know,
this puts Antares in a position where one or two misplaced
wells can eliminate the availability of further debt financing
and force Antares to dilute its shareholders further to continue
development.
On this subject, we'd like to point your attention to
another recent development regarding the availability of capital
and expertise in the Permian Basin:
_____________________________________________________________________________
American Energy to Buy Permian Assets for $2.5
Billion6
June 9, 2014,
Aubrey McClendon's firm
American Energy Partners LLP on Monday said it plans to buy shale
oil and gas assets for $4.25 billion,
the former Chesapeake Energy Corp CEO's biggest deal
package yet in an aggressive bid to build a new
company.
McClendon, who co-founded Chesapeake in 1989 and built it into the
second largest U.S. producer of natural gas, was pushed out of the
company in April last year after he clashed with the board over
spending and a governance crisis.
Since then, his Oklahoma City,
Oklahoma-based American Energy Partners has secured
commitments for $10 billion in
financing and its biggest equity investor is Energy & Minerals
Group, a Houston based private
equity firm run by John Raymond, the
son of former Exxon Mobil Corp CEO Lee
Raymond.
American Energy, which according to a regulatory filing
has about 200 employees including many that worked at Chesapeake, has so far been most active in the
Utica shale in Ohio where it plans to drill thousands of
wells, it said.
American Energy will enter Texas's Permian Basin by acquiring about
63,000 net acres (25,500 hectares) of production leases from
Enduring Resources LLC for $2.5
billion.
_____________________________________________________________________________
I'd like to note that the above transaction recently
occurred for nearly $40k per net
acre, which contrasts to Antares' current enterprise value per acre
of close to $5k.
Clearly, there is appetite for exploration and the attraction of
capital to the Permian Basin right now. I would
ask what strategic plan you have to develop Antares assets
now and whether you have approached any knowledgeable
partners in the region. We believe the recent
American Energy Partners' purchase contrasts poorly with your own
year-over-year lack of progress to increase production on Antares'
acreage:
Antares' May 1st Presentation Capital
Spending Scheme:
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
2015
|
2016
|
2017
|
Total
|
|
|
|
Capital
Expenditure
|
$ 291
|
$ 466
|
$ 148
|
$ 74
|
$ 979
|
|
|
|
% of Antares
Market Capitalisation
|
228.2%
|
365.5%
|
116.1%
|
58.0%
|
767.8%
|
|
Source: Antares 1/5/2014 Investor Presentation;
market capitalisation as of 13/6/2014.
|
The above recently disclosed capital expenditure scheme is
being executed on a scale at which a well-by-well funding program
cannot prudently fund and should not fund without
a partnership or careful evaluation of partnering on asset
development. We see a capital program with
aggressive "go-it-alone" intentions to develop valuable acreage but
a disconnect with the risk involved in funding on a well-by-well
basis primarily relying upon the Macquarie lending facility up for
renewal in December
2014. Any delays or potential missteps
could cause investors to suffer massive dilution if Antares finds
itself pressed to "buy" its way out of a problem or "dry hole,"
with either a share issuance or further high coupon convertible
debt.
Finally, a third recent development of interest to Antares
and its shareholders is the recent IPO this week (June 18th) of Viper Energy, LP
(NASDAQ: VNOM) ("Viper"), a $1.4
billion market capitalisation Permian Basin-based
royalty-only vehicle created by Diamondback Energy. Notice that
Diamondback is monetising assets it had acquired just under a year
ago in September
2013:
_____________________________________________________________________________
Diamondback Energy strikes with MLP
spin-off7
June 10, 2014 - Diamondback
Energy is looking to realise value for its landholdings in the
Permian Basin through the forthcoming IPO of Viper Energy Partners
on June 18th.
The vehicle, which is structured as a master limited
partnership, promises a near-full distribution of royalties on
underlying properties.
Viper Energy Partners projects a full annual distribution
at US$1.10 per unit, or a 4.4%-4.8%
yield at the US$23–$25 marketing range on the proposed public sale
of 5 million units. However, while a full distribution of cashflows
is targeted there is some discretion to retain cashflows to
fund acquisitions or pay interest expenses.
The structure is an obvious attempt to gain value that is
not recognized in the parent.
Diamondback Energy, which itself only went public in
October 2012, acquired the underlying
assets for US$440 million in
September 2013. It funded the
purchase with US$440 million of debt
that will be converted into equity on closing of the Viper Energy
IPO, giving the parent 93% stake.
The underlying properties comprise 14,804 gross acres in
the Permian, with the public vehicle entitled to a 21.4% royalty
interest from production, currently 2,197 barrels of oil equivalent
per day.
_____________________________________________________________________________
The Viper IPO brings to market a capital expenditure-free
structure in which owners of Viper units receive a 21.4% working
interest in the underlying acreage operated by Diamondback and RSP
Permian. This vehicle represents just one of
many strategic alternatives that your larger and more experienced
E&P peers are using to develop their acreage at a prudent
pace and with a lower cost of capital. I
note this because like Callon's debt expansion and American
Energy's acreage purchase mentioned above, there are meaningful
and dynamic production means in the Permian Basin today which we
believe Antares is missing out on. Further,
we see no evidence that these strategic alternatives or even the
awareness of what your peers are accomplishing are being discussed
by the Antares Board which we find significantly lacking in
insight, experience and independence.
Reconsider your Intractable Stance and
Obstructionist Tactics
We believe Antares is significantly undervalued and there
are meaningful opportunities to enhance shareholder value by
actions within the control of Antares'
leadership. Your management plan is at a
crossroads developmentally and decisive vision and expertise are
necessary to protect and enhance shareholder value through
prudent expansion of production rather than
"go-for-broke", as-yet-unfunded broad
strokes. Lone Star Value has a proven track
record of positive engagement with its portfolio companies,
including similar E&P operators in the Permian
Basin. It is puzzling to us that you appear so
opposed to our input, given your failure to expand production and
clear need for help on Antares' Board. We want
to bring our expertise to Antares to drive shareholder
value. I am confident that our detailed Five
Point Plan can achieve just that if overseen by a strengthened and
improved Board. We ask that you cease your
current obstructionist methods of attempting to thwart our holding
of a general meeting, and the proper conduct of such, and read our
presentation available at
www.antaresvalue.com.au.
I look forward to a meaningful dialogue and your
constructive conduct as we head towards the upcoming General
Meeting.
Sincerely,
Jeffrey E.
Eberwein
Lone Star Value Management,
LLC
Lone Star Value contact:
Jeffrey E. Eberwein
Lone Star
Value Investors, LP
+1.203.542.0235
Media enquiries please
contact:
John
Hurst
Cannings Corporate
Communications
+61 418 708 663
1
Callon Petroleum press release:
http://www.nasdaq.com/press-release/callon-petroleum-company-announces-63-increase-in-borrowing-base-to-155-million-20140612-00373
2
Callon Petroleum (NYSE: CPE) SEC 10-Q filing:
http://www.sec.gov/Archives/edgar/data/928022/000092802214000064/cpe-20140331x10q.htm#Borrowings.
3
Antares Energy purchased its original Wolfberry assets
on 27/4/2011 – 24 wells producing 786
BOEP/D on 3,109 net acres. 1st
quarter production from Antares Energy Quarterly Activity Report,
30/4/2014.
4
US EIA Monthly Drilling Report:
http://www.eia.gov/petroleum/drilling/pdf/permian.pdf
5
Baker Hughes Rig Count: http://www.bakerhughes.com/rig-count,
Johnson & Rice research
6
Reuters:
http://www.reuters.com/article/2014/06/09/us-americanenergypartners-assets-idUSKBN0EK0WN20140609.
7
Excerpted and updated from International Finance Review,
10/6/2014:
http://www.ifre.com/equities-diamondback-energy-strikes-with-mlp-spin-off/21150181.article.
SOURCE Lone Star Value Management, LLC