Lone Star Value Delivers Open Letter To Antares Chairman And CEO
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 Million(1)
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 2(nd) 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 oil(4):
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 Count(5):
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 Billion(6)
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 18(th)) 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-off(7)
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 18(th).
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.
Jeffrey E. Eberwein
Lone Star Value Management, LLC
Lone Star Value contact:
Jeffrey E. Eberwein
Lone Star Value Investors, LP
Media enquiries please contact:
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. 1(st) 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
(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