It's a Fund, Stupid

So here we are, a week away from knowing the fate of NGE at the EGM.  How shareholders determine that fate should come down to a simple choice.

Some have expressed the sentiment here and elsewhere: “F**k the current Board, because my stock is in the toilet and I want revenge” – but so are all junior O&G companies.  Others have expressed the sentiment:   “F**k Kentgrove, because I hate raiders who won’t pay me a premium for control” – but why wouldn’t they try.

When the fog of emotion, spin and half-truths that has emerged in this takeover battle is cleared away, there appears a simple choice for the clear head to make:
Back the Kentgrove raid for [the near certainty of] a modest and finite gain in the short term, or
Back the current board for [the less certain promise of] a substantially higher gain in the longer term

The rationale for this view of a fairly binary outcome for investment performance follows.

If the Kentgrove raid is successful, expect to see the stock price to peak at between 2.5c and 3c in the next 6-12 months on the back of the sale of NGE’s assets, a special dividend of most cash reserves, and the eventual sale of the shell.  This outcome is based on the following:
Voting for the Resolutions gives Kentgrove absolute Board control of NGE
Kentgrove have no intention of running an O&G company in PNG – it’s an Australian fund, stupid!  Their investment mandate is to buy and sell undervalued stock listed on the ASX
They are certainly not going to let past CEO Grant Worner run the company again, as he was on watch as CEO when most “value destruction” occurred as the share price fell 89% from June 2011 to April 2014
And Sir Michael Bromley – better known as “Mr PNG” and the star of the whole show – has gone on record as saying he’s not going to hang around if the Kentgrove raid is successful
After the veneer of their “strategic review”, they will liquidate NGE’s assets including the 50% share of the drilling assets and the remaining PPLs over the coming 12 months
But in a depressed O&G market, they might realise only another $5-10m in cash
That will boost NGE’s cash reserves to somewhere near $25m
And NGE – like every other junior O&G company on the ASX – is only valued at cash backing.  Which suggests NGE’s stock price will peak at between 2.5 and 3c ... unless Kentgrove has some fairy dust
The Board will then declare a special dividend of the vast majority of this cash reserve, providing the Kentgrove Fund a 12 month return – based on their purchase price of 1.6c – of between 56% and 88%.  And that’s mission accomplished and bragging rights on Collins Street


If the Kentgrove raid is unsuccessful, expect the NGE stock price to move only sideways in the shorter term, and grow substantially only if the O&G market rebounds in the longer term.  This outcome is based on the following:
Voting against the Resolutions gives Kentgrove one Board seat that might influence NGE's stated strategy, but is unlikely to derail it from being an explorer and opportunistic O&G and Resources investor in PNG and the near region
Kentgrove will not launch a full takeover, as they neither want to nor have the funds to do so
To appease Kentgrove’s agitating minority position, a small special dividend might occur
Sir Michael Bromley – “Mr PNG” – will remain with the company as the critical success factor in operating in PNG
Michael Arnett – under whose tenures as CEO (before and after Grant Worner) has seen the NGE share price increase over 30% in both periods – will remain to build shareholder value again
By design or good fortune, the current Board has placed NGE in a position of strength with a strong cash position and no debt, ensuring survivability during the bottom of the cycle.  Many other juniors will not survive
NGE’s cash position – and therefore stock price – will be maintained in the short to medium term because the outgoings of opportunistic investments will likely be matched by the income from the drilling business
NGE’s cash position will also be preserved because the accounts clearly show that it is run on the smell of an oily rag
When the O&G market inevitably returns, NGE will benefit from a reduced number of junior explorers for investors
And when the market does return, the opportunistic investments NGE intends to make in the short to medium term have the potential to outperform the market in the longer term


NGE belongs to all shareholders.  The choice is yours.  Make it a rationale one.