| Encore - The AGM Presentation

18th Sep '09 by doverbeach

11 comments 3386 reads

I have already posted on two of the most important issues covered at yesterday's AGM: the share buyback program and gas storage possibilities.

AB gave a presentation - it's here and it's a good one, containing a useful mixture of overview / frankness / detail.

The slides are pretty self explanatory, but to add a bit of colour:

slide 3 - share price

Hopefully buying back shares at below cash per share level (that's 14.9p at present) will put a floor on the share price, but it's not going to increase it until the market starts giving some value to Encore's assets. So this presentation was aimed at looking where that value was most likely to come in the next 6 -9 months. AB refused to put any estimates on what the range of values could be.

slide 5 - overview of assets

helpfully divided into "unloved", "immaterial" etc :) The key thing here is the first three: Cladhan, Catcher and Gas Storage, because these are the three that will be progressed over the next few months.

slide 6 - Cladhan (15%)

An appraisal well will be drilled in H1 next year, probably Mar/Apr. From my notes at last year's AGM

recent well cost £12m. A new appraisal well would not be needed, they could re-enter and drill two horizontal wells, one 1100 m downdip to find extent and one 400 ms updip to find oil/water contact (nb I may have got the up and down sizes the wrong way round).

This is by far the largest tiem of expenditure that will be undertaken. AB stressed that thre is oil there but the range of sizes is large - from the non commercial to the very significant.

slide 7 - Catcher 15%

Encore have taken back the operatorship from Oilieco, now in administration. However they are still free carried on the next well, hence minimal cost. It's a quick well and rig rates have been dropping - AB expects this one too to be drilled in about Mar/Apr.

If the well suceeds, they may decide to drill a sidetrack over into the East Catcher prospect.

slide 8 - Gas storage

see other thread. Again minimal cost to get to next stage.

slide 9 Ceres 10%

First gas expected Q4. Income will be very modest. Encore would normally…

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marben100

20th Sep '09

Here's my (belated!) AGM write-up

I found attending Encore’s AGM to be most useful (some information not just affecting Encore) and felt that I gained a fair bit of insight into “where we are now” and “where we are going”. Nice to see some familiar faces, including Doverbeach/Manzanilla & moniclub – but considerably fewer than in past years. I’ll divide my writeup into 4 parts:

- Outcome of pre-meeting chat I had with Paul Young (Geoscience manager)

- Formal meeting

- Alan’s presentation

- Post meeting and conclusions

Pre Meeting

I had the opportunity to have a word with Paul Young before the meeting. I learnt that executing farmouts in the North Sea remains very difficult. Whereas last year Encore and its partners had seen as many as 15 enquiries for one farm-out opportunity last year, they have seen 4 enquiries for 4 opportunities recently. I asked about the reasons for this (though they’re pretty obvious): there are fewer players in the game now (e.g. Oilexco demise) and, with credit being tight, those remaining are being very cautious about deployment of cash. I take this as an indicator of the difficulties Brian Hall over at Aminex will face too (Aminex’s farmouts being at the forefront of my mind).

I also asked about rig rates in the North Sea. Jack-up rates have come down very substantially and are now 75% down on last year’s rates. However semi-sub rates are only down by about 25%. Catcher can be drilled with a jackup but Cladhan will require a semi-sub (AIUI).

Formal Business

All directors were present. Mike Lynch did the introductions and handed over to Eugene Whyms (FD) to go through the resolutions and voting.

There was little debate about most resolutions, except resolution 8 regarding buybacks. EW confirmed that it was the Board’s current intention to only buy back below the value of cash/share, currently ~14.7p. This figure was queried but EW explained that much of the Breagh cash had been received in sterling, so that dollar falls have not impacted the sterling figure. The buyback will be conducted by Encore’s broker, strictly on-market. Encore understands that some large shareholders wish to realise their holdings and this mechanism will allow them to do so without severely impacting the SP. A tender offer would be both costly and could create potential tax difficulties. EW intends to use the buyback as an opportunity to realise some of his personal holding.

Presentation

Details as in the thread header. I made a nuisance of myself during the presentation and asked rather a lot of questions. :0) Here is what I gleaned:

AB stressed that Encore’s strategy was to realise value from its assets and return cash to shareholders ASAP. This could be achieved either by piecemeal sales or an outright sale of the company. He stated that an offer in the 25-30p range for the company would be looked at seriously by the Board. He and other Board members did not view Encore as a cash-cow and had no desire to remain on the Board any longer than necessary.

In the light of this, IMO investors should view Encore as a (non-distressed) liquidation situation, with possible upside from the opportunities mentioned previously on this thread.

The company does not intend to get involved with, for example, African exploration, as it does not have particular expertise/contacts in that region. I take this mean that for the remaining of its, likely limited life, it will remain North Sea focussed.
The Esmond licence is valid until 2012 and does not have any specific work commitment attached.
I enquired whether the P&L that would be booked on the Breagh realisation would be the sale figure ($68.8m) less the book value of the “assets held for sale” (note 16 to the accounts in the annual report, £17.8m). EW confirmed that this would be approximately correct. No tax liability is crystallised because the sale was effected by the disposal of an Encore subsidiary.
As mentioned previously on the thread, the prospective size of Cladhan is impossible to assess at this stage. Further drilling is anticipated in 2Q10.
Regarding Esmond gas storage:
- The lower reservoir, which has repressurised, represents 75-80% of the total reservoir size of 100-130bcf
- Encore’s technical proposal for developing the reservoir for gas storage purposes is being peer reviewed. This process should be completed by the end of the year.
- Assuming the peer review confirms the technical approach Encore will seek to market the project in early 2010.
Cashflow from Ceres is limited because in order to exploit the field using existing infrastructure, other gas wells will have to be shut in. This necessitates “back out” payments to the infrastructure owners to compensate.
Cobra is expensive/high risk for Encore. Probably better appraised by an operator with more “tight gas” expertise.

Post-Meeting and Conclusions

I spoke to AB after the meeting and asked what his thoughts were on what he wanted to do post-Encore, given that the stated objective was to wrap-up Encore ASAP. He told me that he really wasn’t thinking post-Encore currently and was fully focused on the company. He will “cross that bridge when he comes to it.” I find this reassuring and generally felt that the tone was very straightforward and transparent.

My conclusions FWTW, are that Encore is a pretty safe home for spare cash, at the current SP. It is likely to be liquidated within the next 3 years, at worst, and downside over that timeframe is pretty limited. I trust the directors and don’t think Encore’s cash will dwindle by much (bar the £2-3m mentioned in the presentation = < 1p/share). The buyback programme should prevent the SP sinking too far below net cash value over the coming year – though if it did that might present a low-risk buying opportunity.

Over the next year, I would expect there to be some minor asset disposals and possibly major ones, which may exceed “cash burn” when combined with some income from Ceres. This is subject to no further deterioration in the hydrocarbon markets. Success in any of Cladhan, Catcher or gas storage could add meaningfully to the NAV/share and ultimate liquidation value.

Regards,

Mark

p3dr036

18th Sep '09

Thank you for posting your comments doverbeach. Made interesting reading. As someone who is only a possible investor, the presentation didn't make we want to invest immediately. I understand that the present market value is virtually all cash with nothing in it for assets right now. As asset "development" through drilling is some months away, it seems to me that Encore is one to be put to one side, monitored and re-examined nearer to the time of the first drilling.

doverbeach

In reply to p3dr036 (post #1)

That is one strategy. It is taking a risk that the market will move on the announcements of rigs for Catcher / Cladhan so you will end up paying something for the explo, whereas now you get it for free. And the Reservoir Simulation model for gas storage is supposed to be finished by the end of the year. But good luck with timing your entry!

It's also balancing the various other options that are available AND finding the cast with which to invest.

I'm currently sitting on holdings in AAU & EMED which are nice profit positions but which are also trending somewhat sideways [pending further announcements of progress. The timing of when to release funds from one holding to invest in another is always a bit problematical!!

23rd Sep '09

ok, I clearly misread the runes on slide 11 - Encore have today announced that they are selling their onshore English & French interest to Egdon. Encore to get Egdon shares [nb I first wrote Encore shareholdrers to get Egdon shares which is wrong] - terms not yet set but it looks as though the Encore assets will be valued at not more than £4m

Encore RNS: http://www.investegate.co.uk/Article.aspx?id=200909230700154928Z

Commenting on the negotiations, Alan Booth, EnCore's Chief Executive Officer said:

'We have long felt that our onshore asset portfolio failed to generate significant interest amongst many of our shareholders, principally on the grounds of materiality. We believe that by combining these assets with those of Egdon, we would expose our shareholders to more easily recognisable value in a more material portfolio of similar onshore assets. Egdon, as a committed and well established onshore player would be better placed to develop and add significant value to the enlarged asset base.

'We are firmly of the view that it is possible to build a meaningful onshore E&P business, however this will need both scale and management focus. It is our view that this transaction would enable Egdon to accelerate its transition into a significant onshore E&P player.'

So this is a step towards simplification and therefore I guess towards winding the company up rather than transforming it into an onshore focussed comapny.

I have started a thread on Egdon here so comments on the enlarged company would be better placed over there please.

Re #5

Hi db,

I see you've already corrected the point about disposition of the prospective Egdon shares! At least once Encore has them, they will form a tangible asset with a daily "mark to market" value, which can be added to Encore's cash. Ultimately, when Encore is wound up or sold, they might be distributed to Encore s/hs as a "dividend in specie".

Sounds like a sensible deal, moving Encore a step closer to the end-game.

Best regards,

haiderali

2nd Oct '09

IIRC in the AGM presentation, AB seemed to say that bidder interest in GS may depend on what the UK gas situation is like over the winter. If it is tough, it may concentrate minds. (Anyone else catch that impression?).

In that context I thought this may help:

Half of the gas used in British homes this winter will be imported from overseas - the highest proportion on record.

National Grid, the operator of the country's gas and electricity network, says UK production from the North Sea will be 6% lower this year than in 2008-2009.

That will leave Britain having to import 50% of its gas supplies from countries such as Norway, Trinidad and Qatar.

http://uk.biz.yahoo.com/091002/140/irhds.html

repobear

UK gas production is declining rapidly from the peak and it is only a matter of time before lower output, lack of storage, a cold winter and the Russians playing hardball combine to cause a major problem in keeping the UK warm. I don't think it'll be this winter but the likes of Centrica will take a view on this situation and will be more able to place a value on Esmond once the technical issues are better defined and the spreadsheets of the economics of it are recalculated. If by this time there are 200-250m EO. shares outstanding it won't take a very big number to achieve what will be significant value per share compared to the current share price. £20-25m is 8-10p a share are this scenario and that is not a big price to pay to have even the option of developing the GS in the future.

REO100

19th Nov '09

From Premier Oil's IMS Catcher to be sold:

Premier has reached an agreement with Velo Energy Inc for the sale of Block 16/26b, 21/23a, 28/9 and 28/10c containing the Caledonia field, the Sheryl discovery and the Catcher prospect, for a consideration of $12 million in cash and future contingent payments of $8 million and $5 million. The sale is subject to financing and to partner and regulatory approvals in Canada and the UK.

I assume this should not have an impact on scheduled activity Mar/Apr 10.