Rights Offer

This is my first post so apologies for any unintentional gaffs.  I wrote this a few weeks back shortly after the Nido rights offer was first announced.  I apologise for its length, necessary I believe to outline some of my concerns with the offer and the possible reasons behind it.  To the moderators - I don't think the posting is libellous but I do clearly state my thoughts on the issue. Please bear with it - I would appreciate feedback from any fellow Nido shareholders.

Thank you.


By now it should be clear to all minority shareholders in Nido that we reached the end-game stage in the Bangchak Petroleum (BP) / Nido takeover saga. From the takeover attempt in 2014, to the funding and buyout of Otto Energy’s interest in Galoc, to the share consolidation - supposedly to increase investor and trader interest in the stock - to the current rights offer, almost every decision taken by management has done nothing positive for the share price or the minority shareholders.

The May 2015 share consolidation reduced the volume of shares available for trading to a level that trading volume in Nido, and hence interest in trading it, dropped off to the point that it was virtually untradeable. This is what happened and we’ve all seen the end result - decimation of the share price. From a post-consolidation price of about $1.16 on 26/05/15 to a pre-rights offer price of $0.075, almost a 94% fall in share value. During the same time the price of Brent crude fell from approximately US$65.50 to US$51.68 a barrel, a 21% fall. The US$/A$ is virtually unchanged - approximately US$0.7800 then and US$0.7722 now. Why the big difference?? I don’t know but maybe management has an answer. By way of comparison the average share price of the peer group of companies (about 15 in total) that Nido uses for their employee share incentive plans dropped by about 35% over the same period.

The rights offer was carefully drafted so that it ticked all the boxes as far as the Corporations Act (the "Act") and associated regulations concerning rights offers, compulsory acquisitions and fairness was concerned. However appearances can be deceptive and careful consideration of the offer structure and the most likely result that it would have on the level of minority shareholder participation would, I believe, only lead to one end; namely, the compulsory acquisition of the company by BP. This would have the double benefit of avoiding the issues associated with a takeover (which could possibly fail given the previous attempt) and/or the 3% creep exceptions (which would take too long allowing for the possibility of an increase in the oil price) provided for under the Act. It is difficult to believe that Nido’s directors with all their combined years of business experience would not have known this as it is mentioned numerous times in the offer documents. That however does not absolve them of their responsibility to the minority shareholders and knowing in advance what the most likely outcome was going to be, the offer should have been made conditional on a vote by the minority shareholders approving it.

Drilling of the mid-Galoc area has been on the agenda for some time. Recall that Nido’s quarterly reports leading up to the buyout of Otto Energy’s 33% share in the Galoc oil field stated that the decision to proceed with the drilling of the Galoc mid-field area was imminent and expected to be taken by the end of 2014 or early in the first quarter of 2015, given that all the required studies had pretty well been completed. Otto Energy, who was operator then, basically stated the same in their market releases. Given the change in circumstances at the time it was probably understandable that a slight delay in proceeding was to be expected.

On 14 July 2015 an updated contingent resource estimate for the mid- Galoc area was released that stated, among other things, that; “The Operator, GPC, has recently completed an extensive technical review of the existing geological and production data from the Galoc field incorporating the mid-Galoc area ….”, and “GCA has estimated a ‘chance of development’ for the mid-Galoc development project, based on consideration of the key contingencies relating to this project …….. Based on an assessment of these factors, and GPC management’s stated intentions, GCA considers that there is a high chance that the development of the mid-Galoc Area will progress as expected”. Oil production was assumed to start on 1st January, 2018. The share price was approximately 40 cents at the time. Brent crude was about US$58.00 a barrel.

Note: I have highlighted a few points above that outline the situation and management’s thinking mid 2015. Technical reviews had been completed (although it was stated that the development plan was still being optimised) and management’s stated intentions were that the development would proceed with first oil assumed January 2018. Another minor but telling detail is Nido’s frequent reference to the mid-Galoc area as being a development project. You may recall that in the rights offer booklet Nido stated that, with regard to alternative funding sources for the wells, that debt was not considered an appropriate source of funds for an “appraisal” well. One day it’s a development project, the next it’s an appraisal well. One day a peacock, the next day a feather duster. Funny how management’s intentions change to suit the situation when the Board is controlled by the largest shareholder’s directors.

The questions to ask here are: Why, almost as soon as Nido took over as operator, did the whole process revert back to the Joint Venture “continuing to evaluate further exploration, appraisal and incremental development opportunities at the Galoc oil field” when the decision had already been made to proceed in mid 2015? Why the delay in commencing the project between July 2015 and November 2016 when they announced the rights offer? Were they asleep at the wheel and forgot all about it? What do they know now that they didn’t know back then? What had changed in the interim that they didn’t start the process then as was their stated intention? If you can think of a reason that makes business sense from a whole-of-company perspective please let me know because I can’t. I cannot understand why they waited until Nido’s share price was at all time lows, when minority shareholder’s market value was so low that they would have to invest almost an additional $10 for every $1 of share value they held pre-offer just to maintain their percentage holding in the company. I have asked Nido this but I have not received any reply.

In my opinion the answer is very clear because it is the only one that makes sense. The end result is about allowing BP to proceed to compulsory acquisition without having to pay a fair market price to the minority shareholders for their shares. An independent expert’s report, required in the event of compulsory acquisition, would certainly refer to the recent past on-market price of and volume of trading in Nido shares compared to the price that BP would offer in a compulsory acquisition situation. The rationale in the report for what would most likely be a very low price would be along the lines of “while it may not be fair it is reasonable considering the virtual non-market in Nido shares and the recent share-price history”.

Also bear in mind that with BP taking up their full rights, as opposed to the minority shareholders taking up very few if any of theirs, that BP’s shareholding will increase to around 95% plus, which means that when the value of the company is broken down on a value per share basis they will get almost all of it. And the best part of it from their side is that they will get the extra 14% plus for next to nothing. Remember that the $25 million they put in for their share of the offer will still be sitting in the company’s bank account. Most of it will go directly back to them. In any case, notwithstanding that legally BP and their share holding subsidiary are separate entities, they are essentially one and the same. They are essentially lending themselves money, as they did with the purchase of Otto Energy’s Galoc oil field share, moving it from one of their bank accounts to another of their bank accounts. They still have ultimate control over it, and what happens to it. And remember that Nido is basically already a subsidiary of BP given that they have 81% plus of the shares and their directors control the Board and company direction, no matter what the independent directors may say to the contrary. Come to think of it, that’s a good reason as to why the decision to proceed with the mid-Galoc development was delayed so long.

I don’t blame anyone except myself for the situation I now find myself in. I didn’t accept the 2014 takeover offer because I thought it undervalued the company and management just rolled over without a fight - I still do. I got it wrong but that’s the risk you take investing in the share market. What I don’t accept is a situation that I believe has been engineered to achieve a certain result for the benefit of one shareholder to the exclusion of all others. In my opinion the rights offer has been structured to almost guarantee that minority shareholders will not participate, thereby allowing BP to proceed to compulsory acquisition without the hassle of having to buy the shares on the open market. This is the way big business operates and unfortunately the system is set up this way to dis-enfranchise the retail / minority share holder. Don’t expect any help from the authorities who are supposed to ensure a level playing field and protect the rights of the small player, you’re on your own.

Let me know what you think, be heard. Frankly I’m surprised no one has broached this subject sooner given the situation we find ourselves in. Your feedback and thoughts would be appreciated.

Regards,
OldSoul