Ann: EGM Presentation - 31 August 2012 , page-22

rbs release


In Krista's absence I went along to the Texon EGM. The Resolutions were all passed. In particular the resolution related to extending the Wandoo agreement. It now continues to 2017. This gives Texon access to prospects generated from a few hundred million dollars worth of seismic - both 3D and 2D. and it's over a larger area - with a lot more of it oily, rather than gas-prone.

Chairman John Armstrong gave a presentation updating the situation which is released to the ASX.

Perhaps most significantly for the short term investor, the expiry of the options to Directors - expected to issue with a lift in value from monetising the Eagle Ford Shale - was extended from 1 September 2012 to 1 January 2013. I take this time frame as significant. The Chairman commented that since the proposal to monetise the EFS was initially mooted in November 2011 they have had to resolve unexpected operational issues, and other issues relating to non-pooling clauses in their lease agreements. The operational issues are now either resolved, and the non-pooling issues resolved or extremely close to resolution, with terms agreed but perhaps not fully signed off. My view is that these issues were probably not deal-breakers, but resulted in a discount to what Texon believed to be an acceptable minimum valuation.

John Armstrong also commented that potential buyers had discounted the strong flow rates that Texon has achieved in 4 of the 5 EFS wells completed for production, on the basis that the Swift wells in the immediately adjoining leases didn't perform as well. In other words, the average production and flow rates applied to the acreage by potential buyers was at a discount to what Texon believed it had demonstrated in its leases with the 5 (initially 4) wells.

Texon now has a revolving credit facility for the EFS development, which should enable it to drill up to another 7 EFS wells over the next 6-9 months. It will put Texon in a stronger position selling the asset if it isn't under financial pressure to meet its drilling commitments, and respond to other operators drilling close to its lease boundaries.

Success in these wells at the rates demonstrated so far should see the production rate and ultimately recoverable reserves - Texon expects this to be established above 400,000boe - attributed to the acreage in line with their results, rather than those of Swift. It will also generate more Proven Producing (PP) locations , more Proven UnDeveloped (PUD) locations and more Probable Undeveloped locations. It appears that buyers effectively ignore Possible Undeveloped locations, so by moving the categories up a notch it will add value. In simple terms, Texon will continue to develop the EFS acreage - good business practice anyway. This should prove to be a good steady production asset - it's simply that Texon wants to monetise it and put the funds into exploration where it reckons can add more value.

Texon is also structuring its business into two - the EFS production and development, and its other exploration business, and is evaluating de-merging into two companies. In terms of disposing of the EFS this should provide an efficient structure. Outright purchase of the assets from Texon would have created a tax liability for Texon, so an acquisition of Texon, rather than the purchase of an asset from Texon would be tax effective for Texon shareholders. Split into two entities, an acquirer would purchase the company, not the asset. While a potential EFS buyer could have acquired Texon, and then floated out the other assets, it would have taken some time. With two listed companies, and one of these holding the EFS assets and related credit facility, the acquisition would be simple and clean. Whether or not the de-merger runs to completion, moves towards a separation will add value.

So, in summary, things are still advancing. There may be a disposal before 1 January 2013, or there may not. If there isn't investors will end up with shares in two companies. One developing the EFS, and the other what Texon set out as 5 years ago, an exploration company with access to a massive seismic data base and exerienced professionals evaluating it - but with more cash on hand. Neither company will need to raise capital at the de-merger. The credit facility for the EFS producer is for 4 years, and that should enable it to systematically develop the asset. But it may depend on how many holes it needs to drill to offset holes drilled immediately adjacent to its leases. But with 12 wells in production it should have a flow rate of 3,000boepd - a cashflow of US$7m per month, before interest.