Encore: The End Game

23rd Sep '09 by marben100

14 comments 5147 reads

For around a year, since the disappointment over the Esmond well and the Credit Crunch, it has been clear that Encore's directors are moving the company into an "end game" phase, intended to result in a return of value to shareholders for Encore's assets. This intention was re-affirmed at Encore's recent AGM, when Alan Booth stated that the directors did not intend to run the company any longer than was necessary to achieve the return of value.

The purpose of this thread is to a) discuss the form and timing that this return of value is likely to take; b) pull together details discussed on other threads to take a view on what that ultimate value is likely to be. Taking a view on these matters could be used to help formulate a trading strategy for Encore shares, offering a good risk/return. ;0)

The Value

AFAICS, the elements of Encore's value are as follows (I think it is more helpful to look at absolute figures rather than per share amounts, because the number of shares in issue is expected to change on a frequent basis as Encore's buyback programme proceeds and will be subject to dilution when options are exercised. Investors are advised to do their own per share calculations.):

Cash. The ~14.8p/share figure quoted at the AGM translates back into £45.5m by my reckoning. This should be confirmed in the interims. It will reduce to cover admin expenses (running at around £2m/annum) and the planned CAPEX of around £3m; this reduction will be compensated for to some extent - maybe ~£1m pa - by interest income on the cash. It will also reduce as shares are bought back. Today's announcement suggests that EnCore will not receive income from it stake in the Ceres field, such income accruing to Egdon instead.
Egdon shares. We await news of the precise number of shares that will be issued to Encore and final details of the assets being swapped for them (is it all of Encore's interest in Ceres?).
Cladhan. Value currently unknown but "risked" value put at US$27m, US$232m unrisked, net to Encore, by Tristone last November. Put another way, the range of possible outcomes could lie anywhere between $0 and $250m FWTW. I guess there could be some excitement when the appraisal well spuds (or is close to spudding)... and we find out just where the…

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tom200000

23rd Sep '09

All of which makes sense but who is going to mame a stab and the 'end game' share price target?

Obviously that should have read make a stab!!!

marben100

A thought that occurs to me is that prospective buyers for Encore's gas storage asset (i.e. gas utilities) will probably not be the same as those for Cladhan and/or Catcher. Consequently, it seems less likely to me that the company will be sold as a whole, as it currently stands.

Maybe it would make most sense to split off the GS into a separate entity, which is marketed on a stand alone basis (if technically and commercially viable). Depending on whether or not C and/or C yield commercial quatities of recoverable oil, the rest of the company could then be sold as a whole to a buyer primarily interested in oil assets, for cash. This is obviously net of Encore's own cash from the buyer's perspective. E.g., leaving the gas storage aside, a buyer offering, say, £60m for the rest of Encore actually only has to find £15m, as they would be gaining £45m of Encore's cash. [Apologies for stating the obvious!] Unless the buyer wants to pay for the Egdon shares, these could be returned to current Encore shareholders as a dividend-in-specie, in addition to the cash offered by the buyer.

Regards,

Mark

I don't think much of an exit target can be estimated until results of C & C drilling are known and the G.S. study. All we do know is that it's not likely to be much less than the current price (if everything fails!) and that if someone offered 25-30p/share right now, the Board would look at it seriously (they said this at the AGM). You can do your own math on the result if the upside figures I've proposed were actually achieved!... but that's ludicrously optimistic (I fear!).

Cheers,

oilretire

Ref item 6 of 'The Value' (sorry, having problems with copy & paste from the thread OP).

Not so sure I'd place Ireland in the "too early" category, given that the Ireland partners, IOG, are actively trying to sell their stake, we surely must be in on those talks too?

Therefore I think this may be the next piece of the jigsaw - and should hopefully add another 15 to 20% to the current cash pile if it's a straight forward cash deal.

nigelpm

Personally I'm not fussed about having a "target". I know the downside is copper bottomed (barring fraud on the part of the directors which I assess as quite unlikely) and sits at the current SP so anyone buying here have themselves an almost risk-free investment with the chance of a very nice return.

The odds are massively in our favour and I will be adding on any weakness.

djpreston

24th Sep '09

Grumpy Gus comment:

Yes, theres a goodly pile of cash and some assets with potential big value add (C&C) but they are some way off in terms of having an impact on the SP and of course some of the cash is tied up for almost a year in escrow - dont forget that there could (unlikely but its still a possibility) be problems with Breagh that could necessitate the loss of some of that cash.

In this market, I just dont see the need to buy into a pile of cash and tie up money for several months. The only thing that is possibly short term is, IMO, the Irish assets, whatever they may be worth. Given the involvement of IOG Im not going to put any value on that since my opinion of their CEO is just above my opinion of TK.

In short EO just looks dead money to me. Money in the hand is far more valuable at this point in time, for me at least.

Having said that, I will continue to watch and if we saw some significant weakness for whatever reason then I may buy again. What coudl those reasons be?:

Lower POO - irrational to have an impact on EO but then who said the market is ever rational
General Market decline with people just selling up for hard cash

Grumpy signing off

D - up since 3am after the bleeping fox tried to get at my birds and set the siren (aka my peacock) off.

All good points darron.

But, where else can you find very little downside with the chance of a very good return

True.

Just being a gloomy gus as I say. From my pov, EO just doesnt excite at the moment. Then again, I cant see much at all that appeals to me hence my own cash levels rising signficantly.

D1G3Y

Hi All

As stated by marben I think (if commercially viable) EO will move the GS into a separate entity as was done with Breagh so as to avoid tax liabilities.

I don’t have a lot of EO and my average buy price is quite a bit higher than where we are at the moment so I should either cut my losses and sell or look to average down.

I think I am going to try a third option of doing nothing... then if AEX gets the 2 farm downs, as hoped, I will look to bring down my average.

25th Sep '09

Re #5

Hi Oilretire,

AB has put Ireland into the "unloved" box, not the "too early" one. Of course, this doens't mean that it doesn't have any value. ;0)

I'm with nigelpm on this one: there isn't much downside to this, even in the worst case, and there is potentially upside, which may be significant. I actually intend to trade the stock, adding when it goes below cash, reducing when it rises above cash... With this week's announcement, that strategy modifies a bit, to buy below cash+ Egdon, sell above

It worked very nicely this week and enables me to purchase a beer or six.:0) I was rather lucky to be able to get buy orders filled at 14.25 and 14.00 in the early part of the week and sells filled above 15 later. Obviously, I was lucky that the Egdon announcement came out and the market reacted positively but had I not been, buying below 14.5 looked like offering a pretty safe 20% (and maybe a lot more) on a two year timeframe, with little risk. As Darron points out, there is always some risk but I found it hard to imagine that Encore would get NOTHING for the rest of its assets AND have to forfeit escrow money. Also, had the shares remained below cash value, the buyback programme should steadily increase the NAV/share.

I shall continue to watch the stock for buying opportunities and hang on to a modest core holding (unless the price gets significantly above cash+Egdon value in the near future, when I'd reduce that too).

If you can play the SETS order book this has to be the best stock around for doing that right now.

Hold a position and trade the movement for some extra cash - win win!

loglorry

26th Sep '09

Hi Mark

What do you calculate cash per share (excluding Egdon) is now? Has the company actually confirmed this?

Log

27th Sep '09

As per the AGM thread, Eugene Whyms stated that cash/share was around 14.7p - 14.9p (doverbeach & I noted slightly different figures). Most of the receipt from the Breagh transaction was in sterling. AFAICS the Egdon transaction won't affect cash/share.

Encore: The End Game

The Value

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Marben100

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