Although the bid price has been increased, the takeover offer for New Zealand Oil & Gas (NZOG) by O.G. Oil & Gas (Singapore) (OGOG) raises serious questions about our takeover laws, particularly the quality and recommendations of independent adviser reports.
The NZOG process demonstrates that our procedures make it relatively easy for offshore entities to fully acquire our listed companies, particularly if share prices are depressed and target company directors take a submissive attitude towards offers.
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Ironically, this is contrary to the objectives of the current Government, which is making it more difficult for foreign interests to purchase residential property, sensitive land and certain business assets.
The NZOG bid also shows that Northington Partners, the independent adviser, seems to believe that equity investors are risk adverse and would prefer to accept a cash offer rather than being exposed to oil exploration risks.
This is a bizarre point of view because investors own shares in exploration companies because they specifically want to be exposed to the sector's risks and potential positive outcomes.
To recap, in August 2017 Zeta Energy, which was controlled by Duncan Saville, made a partial bid to acquire just over 50 per cent of NZOG at 72c a share. This was quickly followed by a partial offer from OGOG to acquire up to 67.55 per cent of NZOG at 78c a share.
Directors recommended the latter offer after Northington Partners valued the target company at between 78c and 93c a share.
NZOG directors endorsed the 78c a share partial offer because the Singaporean company had global exploration expertise that would benefit the NZX-listed company.
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The Zeta offer, and the counter-offer from Singapore interests, were made under a conventional takeover structure.
On July 10, 2019, NZOG announced that it had entered into a Scheme of Arrangement with OGOG, which now owns 69.9 per cent of the NZX-listed company, to acquire all the outstanding NZOG shares at 62c each.
A Scheme of Arrangement is a process whereby the bidder convinces the target company directors to give their tacit approval to an offer with the latter agreeing to put a Scheme resolution to shareholders. The key conditions of the NZOG's shareholders' meeting are as follows:
• The requirement to receive a simple majority of the votes cast, with all shareholders able to vote
• A majority of at least 75 per cent of the total votes cast by shareholders, excluding OGOG.
The first resolution will be passed because OGOG is eligible to vote and owns nearly 70 per cent of the shares on issue.
The second vote means that it is easier to acquire a company under a Scheme, rather than a conventional offer. This is because under a Scheme, only 75 per cent of the votes cast are required, while under a conventional takeover offer 90 per cent of the outstanding shares on issue must accept before a bid is fully successful.
Schemes have become increasingly popular in New Zealand because directors are far too willing to acquiesce to these approaches, even though the price under a Scheme is generally lower than under a conventional takeover offer.
In addition, the accompanying independent adviser reports often take a lowball view of value as is demonstrated by Northington Partners' NZOG analysis.
The Northington analysis highlights the fact that NZOG has the following activities:
• A 4 per cent interest in the Kupe gas and light oil/condensate production field in offshore Taranaki. This generated gross revenue of $43.3m for NZOG in the June 2019 year, with Northington valuing this asset between $24m and $30m (see accompanying table)
• A 50 per cent interest in the Clipper oil and gas exploration field in the Canterbury basin and a 100 per interest in the Toroa field in the Great South Basin. Signs of hydrocarbons were discovered in both areas in earlier drillings, but NZOG will need to find substantive partners to develop these prospects. Northington values Clipper and Toroa between zero and $5.9m
• NZOG has effectively exited all its Indonesian interests, which have been given a zero value, although it has some exposure to these interests under certain conditions
• Interests in two permits in the Carnavon Basin in northwestern Australia, a 15 per cent interest in Ironbark-1 and an option for a 5.36 per cent interest in another Ironbark permit. Ironbark-1 is planned to begin drilling in late 2020 with BP as the operator. The recently released Cue annual report notes, "With its very large prospective gas volume, Ironbark has the potential to dramatically change the value of Cue if successful". Northington has taken a conservative view of Ironbark even though Cue's sharemarket value has increased from A$66.3m to A$86.8m in the past two months, partly because of Ironbark
• A 50.04 interest in ASX-listed Cue Energy. Cue has a 5 per cent interest in the Maari and Manaia production fields in the Taranaki basin, as well as two production fields in East Java, Indonesia. It also has a 21.5 per cent interest in Ironbark-1 and A$26.2m of cash and cash equivalents at the end of June
• NZOG had cash of $105.6m at the end of June including the Cue cash holding, which has been consolidated in NZOG's accounts.
On October 8, OGOG raised its offer from 62c a share, which valued NZOG at $101.9m, to 74c and a value of $121.7m. This latest $121.7m value is almost exactly the same as NZOG's combined cash resources of $74.3m, excluding Cue's cash, and the current NZ$47m value of NZOG's 50 per cent Cue stake.
Thus, OGOG's latest offer gives almost no value to NZOG's Kupe holding, its Clipper and Toroa permits and 15 per cent interest in Ironbark-1, yet the independent directors have enthusiastically recommended the offer once again.
In this columnist's view, the Northington report can be criticised for several reasons including:
• It was wrong when it stated: "In the absence of a competing offer, it is unlikely that OGOG could be compelled to increase the Scheme price"
• It stated that "the value of NZOG's exploration interests could ultimately be significantly greater that the current estimates of value", yet it still believed that the original lowball 62c offer was reasonable
• It stated that if the Scheme offer is successful, "shareholders willing to retain an equity investment in the oil and gas production sector [could reinvest the proceeds] on international stock exchanges (including Cue and Beach Energy, each listed on the ASX)". It is quite extraordinary that Northington is suggesting proceeds from the NZOG offer could be reinvested in Cue and Beach, both involved in Ironbark-1
• Northington also noted: "NZOG could decide to delist from the NZX which would further reduce shareholders' ability to trade their shares". Unfortunately, this threat has become increasingly common in recent years.
Independent adviser reports seem to be written on the basis that shareholders have only one investment, this investment is too risky, and they need to reduce their risks by accepting takeover offers and Schemes of Arrangement.
However, the domestic investment world has changed substantially with the establishment of KiwiSaver, which mainly comprises widely diversified funds with low- to high-risk investments.
KiwiSaver managers can manage risks within their portfolios and the takeover of another high-risk NZX company would reduce their potential investment opportunities in the domestic market.
Northington Partners seems to be suggesting that a successful takeover of NZOG will reduce the risks to New Zealand investors, yet most successful active portfolio managers cherish these risks as they offer them greater added-value opportunities.
The shareholders' meeting to approve the OGOG Scheme will now be held on November 14 in Wellington.
- Brian Gaynor is a director of Milford Asset Management.