Monday 19 February 2018

We are closing on the endgame in Petroceltic spat

A bitter row over the future of the Irish oil and gas exploration company has raged for over a year - and now it looks like management is set to lose out, writes Gavin McLoughlin

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Click to view full size graphic
Gavin McLoughlin

Gavin McLoughlin

In the end, it all happened fairly quickly. Petroceltic's largest shareholder looks to have prevailed in the battle for control of the Irish oil and gas explorer after a bitter dispute.

Last Thursday, Worldview Capital Management told the market that one of its vehicles had bought nearly 70pc of the debt left outstanding on the company's senior bank facility. It said the debt had been purchased at a discount to its face value - meaning the previous lenders had taken a financial hit to get out of dodge.

That announcement came days after Michael McAteer of Grant Thornton had been appointed as an interim examiner to Petroceltic by the High Court.

The examinership process is designed to give a company 100 days of protection from creditors. If a rescue deal - which has to be approved by one class of creditors - is approved by the judge, the company might be saved. As the major debt holder, Worldview will have a big, big say. And now it wants to work with McAteer and the company on a deal that could put it very firmly in the driving seat.

"Worldview intends to approach Petroceltic and the interim examiner with a proposal to restructure the senior bank facility, as part of a wider restructuring of Petroceltic's capital structure - either pursuant to an examinership scheme of arrangement or as a standalone restructuring - which, amongst other consequences, could lead to the potential conversion of a significant proportion of the outstanding debt into new ordinary shares in the capital of Petroceltic," a Worldview statement said.

It's all a far cry from 2014. That was the year that Dragon Oil approached Petroceltic with a possible offer, valuing the Irish company at nearly £500m. It was going to offer 230p sterling in cash per share. Now, those shares could be worth nothing at all.

Dragon walked away from the deal without making an offer, citing turbulent market conditions. It now looks like a prescient move.

Since December 2014, Petroceltic's shares have plummeted from 113.5p each to 7.5p. It was in that month that Worldview launched an assault on Petroceltic's management, saying a review of the business had not been carried out.

Petroceltic responded with fighting talk - labelling the proceedings "totally without merit and misconceived".

The fighting talk continued for most of 2015. Early that year, Worldview requisitioned an EGM, seeking to have Petroceltic chief executive Brian O'Cathain removed from his post and to appoint Worldview founder Angelo Moskov to the board.

Here's what Petroceltic thought of that: "Worldview has proposed the Worldview Resolutions principally as a means by which it can obtain control of the board without paying shareholders a fair price for obtaining control of the company.

"Approval of the Worldview Resolutions would have a negative impact on the board's effectiveness, by increasing Worldview's representation on the board and reducing the proportion of independent directors.

"The removal of Brian O'Cathain as a director could materially prejudice the business and operations of the group. Mr O'Cathain has a deep knowledge of the group's operations and past corporate history and has long-standing relationships of high quality with a range of important stakeholders. Worldview has put forward no credible reason as to why Mr O'Cathain should be removed as a director."

Ultimately, O'Cathain won that battle, though not by a comfortable margin. Just under 61pc of the votes were cast in his favour.

A geologist and petroleum engineer. O'Cathain has been Petroceltic's boss since 2009, having previously been chief executive of oil company Afren from the middle of 2005 to early 2007.

Having started in the oil industry in 1984, the 56-year-old worked with Shell International, Enterprise Oil and later became managing director and general manager of Tullow Oil's international business.

At Enterprise Oil, he was managing director of the company's Irish subsidiary and was in charge of developing and appraising the Corrib field.

He was hoping to replicate that success at Petroceltic with the Ain Tsila field in Algeria - the company's prize asset. The development plan for the field envisaged producing 2.1 trillion cubic feet of sales gas, 67 million barrels of condensate gas, and 108 million barrels of liquefied petroleum gas. In September, Petroceltic said drilling at the field was shortly to commence.

After O'Cathain kept his seat on the board, a new frontier arrived. The company announced it was contemplating a $175m bond issue, with the proceeds to be used for refinancing as much as $50m of its debt, to finance development capital expenditure across its portfolio of assets and for general corporate purposes.

Worldview didn't like the plan.

"Petroceltic appears to have now run out of money. As a result, it is proposing to pledge the company's crown jewel - namely, its participation in the Ain Tsila asset - as a security for a contemplated $175m bond issuance. In our view, this will result in squandering shareholder value," it said.

Petroceltic came back with more fighting talk. "Since 2013, Petroceltic has been consistent in disclosing its intention to consider such a bond issue or equivalent financing as part of its plan to part-finance development of the Ain Tsila asset in Algeria.

"Petroceltic confirmed at its 2015 capital markets day that its objective was 'to effect a partial or first stage of refinancing during 2015'. This financing strategy has been discussed extensively with shareholders, including Worldview."

Worldview sought another EGM to vote on that proposal, but this was blocked by the High Court after Petroceltic initiated legal action.

All the while, Petroceltic's share price was plummeting - as was the price of oil. The firm became embroiled in a row over defamatory allegations made towards the company on an anonymous blog, managing to secure a High Court order to have the blog taken down.

But despite these victories, the company did in the end run out of money.

In an explosive statement released days before Christmas, the company announced that it was living at the grace and favour of its lenders. It was exploring a sale of some or all of the business.

"A combination of adjustments to reserves... the drop in oil prices and a reduction in capital investment programmes in relation to the group's assets in Egypt and Bulgaria had impacted on availability under the group's senior bank facility during 2015.

"These circumstances led to the requirement to make material repayments, which the group has not to date been in a position to satisfy, and other breaches to the covenants of the senior bank facility, which is secured over substantially all the assets of the group.

"Options being considered by the board include, but are not limited to, a farm-out or sale of one or more of the company's existing assets, a corporate transaction, such as a merger with a third party, the sale of the entire issued and, to be issued, share capital of the company and the raising of capital in the form of debt and/or a subscription for new ordinary shares in the company by one or more third parties."

Egyptian exploration assets were sold off to a joint venture partner and the company received a series of rolling waivers from its lenders, right up until Worldview's examinership application foiled another.

As to what happens now, analysts at SP Angel put it best on Friday.

"Unless the shareholders outside of Worldview are going to support management, or engage with Worldview, it would appear as if Worldview will now be successful in asserting control over the company.

"So now, it is down to shareholders as to whether they want to see the value of the Algerian asset fully reflected in the share price, or whether they just give up."

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