The following was just sent out from one of the RBS brokers....

The following was just sent out from one of the RBS brokers. Unedited by me

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SEA Valuation
The pre Texon transaction price target average across 3 brokers for SEA is $1.10

Based on yesterday's reading and analysis most of these brokers are happy with a minimum 55c accretive value with the inclusion of TXN's Eagle Ford Shale.

That means the average price target across 3 brokers is likely to move to $1.65 on average.
SEA Price Target $1.65 - We do not have formal coverage of SEA but are likely to intiate coverage soon.

The main point of this merger is that we swap extremely undervalued unfunded shares (TXN) for extremely undervalued but well funded shares (SEA) with better diversification of assets and increased operational scale. With lower risk (more cash, better funding, materially financially competent company, and increased operational scale) we have a better chance of reaching the price target we want.


I sat in on an analyst call of Texon and Sundance yesterday so here are the key catalysts likely to re-rate SEA to its price target. This will provide the roadmap for taking SEA from 78c today to a price target that we were unable to achieve with TXN.

Eagle Ford Shale
• Easily the asset with the most potential in the SEA stable
• 5 wells drilled with another 2 drilling now
• New wells being drilled with a 25 stage frac (used to be 18) so we expect really positive results - good news flow
• No 8 well will begin in January
• By mid 2013 SEA expect to have a dedicated drill rig for 6 - 10 wells - might even be allocated 2 full time drill rigs
• SEA also stated they are looking for more EFS acreage in the local area - larger acreage, greater scale, greater value
• Consistent with SEA's 5 other successful transactions in the US I expect the EFS will be sold within 6 to 12 months after the merger
• 7,400 net acres and likely to grow
Let's also look at at SEA's strategy here. Companies do not acquire acreage with a plan of making 10% or 20% - they plan to make a multiple of 100% and will do so by acquiring cheaply (unfortunate for us), developing quickly with plenty of financial capacity and scale (something TXN wasn't financially capable of) and delivering a sale on a much more developed and de-risked asset (where we will derive a great benefit as SEA shareholders).

Bakken Shale/Three Forks
• Operated by Energy giants EOG and Hess
• Low risk production, cash flow and reserves growth
• 2 rigs drilling constantly
• 4,800 net acres

Wattenberg/Niobrara Project
• 20 wells currently being drilled (good newsflow)
• 11,500 net acres

Mississippian/Woodford Project
• Continuous 1 rig drilling program - 3 producing wells and 1 awaiting fracture stimulation
• 30,000 net acres
All these properties have good reserves - total reserves across all 4 properties are 47.8M BOE - 1P 7.1M - 2P 8.8M - 3P 32M - these figures respectively are 5x - 2x - 5x Texon's individual figures

These drilling programs will increase production, reserves and value to shareholders. The 5 transaction track record of management each earned over 75% profit for SEA shareholders. This is a good vehicle to be a part of.

Texon's EFS acreage had 10 commitment wells to be funded in 2013 - as the sale process dragged on - and the well commitments drew closer - and the funding requirements beyond Texon's capacity to fund became obvious to the other potential buyers - we suffered a share price fall from lack of financial capacity to develop the acreage and were seen as desparate sellers harming the perceived value of the asset. I would say that in the absence of further offers (other offers are quite possible now that a funded deal is on the table) merging this valuable asset with a vehicle that can fund it should result in a good share price re-rating over time. The commercial reality here changed markedly from the original time of decision of sale (March 2012) through falling nervous markets (May, June) and decreasing ability for companies to obtain bank debt (may until present) and a falling oil price (US $110 - March & US $87 - now).

Share market wise I don't expect any positive leads from the US as politicians negotiate the fiscal cliff and US shareholders take profits before the Capital Gains Tax on US shares increases next year. 2013 should see some stabilisation on this point just when this merger should hit its straps and the positive news flow starts to lift the SEA share price.

In the absence of another offer (still a strong possibility) then this merger lowers the risk of being able to achieve a share price we want.
The market still refuses to place any value in Talon Petroleum but that won't be the case in March next year. It will have some value in cash and assets. Before then we should also have a defined robust strategy on how they plan to deliver value to shareholders.

I have more research to do and will keep you informed. There is no action TXN shareholders need to take at this point in time.

General Advice: Both TXN and SEA looked extremely undervalued based on fundamentals and both will have Specualtive Buy recommendations as we negotiate our way through a volatile few months and into next year. We should have formal research on SEA soon.