Value Recognition Drives Texon Petroleum To Split Out Eagle Ford Shale Assets
"The decision to split a company in two would threaten many a CEO’s empire building efforts, but such drastic action is sometimes the only way of getting the market to recognise the individual value of each asset within a company, while allowing existing shareholders to retain an interest in the original components.
This situation appears likely at ASX listed Texon Petroleum which has found its more recent pure exploration assets having been all but ignored by a market seemingly only interested in the production potential of the Eagle Ford Shale (EFS). The continued downward spiral of its share price, despite continued drilling success, prompted the company to seek more extreme measures to deliver shareholder value.
The divestment of its Eagle Ford Shale (EFS) assets was flagged back in February, but has since evolved into what now looks like being the creation of Texon Mark II to hold the non-EFS assets. These assets include the low risk Mosman-Rockingham (MR) project covering 1,200 acres (net to Texon’s 95-100 per cent working interest) and the four East Texas (ET 1, 2, 3, 4) oil plays covering 4,475 acres (net to Texon’s 50-100 percent WI).
The first well (Wheeler #1) drilled by Texon on Mosman-Rockingham completed in June and flowed oil and gas at 220 boepd (87 per cent oil) from the Olmos. The company has assembled 3D seismic indicating 1,200 acres of reservoir, and from this identified thirty ‘40 acre’ well locations. MR’s Olmos appears to exhibit similar characteristics to that in the Leighton field and has the potential to host in the region of 3 mmboe. Texon plans to refrac the Hoskins #1 well in the south of the licence later this year, and follow up with the drilling of two more MR wells by the middle of next year.
In East Texas, Texon is in the process of agreeing additional leasing acreage on ET 1, 2, and 3, while terms have now been agreed on ET 4. 1,200 of 20,000 targeted acres are currently leased on wholly owned ET 1-3, and could contribute up to 38 mmboe to the company’s reserves. A proof of concept well is planned for the second quarter of 2013, after drilling of the first well on ET 4. Texon has agreed a 50 per cent working interest in the 6.550 acre ET 4 licence, which is surrounded by producing wells. The licence has the potential to yield 250-300,000 barrels of oil per well on 160 acre spacing, thus making total recoverable oil in the region of 11 mmbbls a realistic target.
In addition to its MR and ET projects, Texon (II) has access to an extensive database by way of the Wandoo Prospect Generation Agreement (PGA), which was included in the company’s 2007 prospectus, and recently extended to 2019. The PGA gives Texon (II) first right of refusal on 212,000 square kilometres of prospective ground in Eastern Texas over which private US prospect generating company Wandoo has 180 3D Seismic Surveys totalling 24,600 square kilometres and 30,000 kilometres of 2D Seismic. Texon’s 80 per cent drilling success rate on its first 26 wells provided a compelling case for extension to the agreement.
The success at EFS is well documented with 5 successful wells in production and 11.25 mmboe of reserves. Total net resource potential is up to 59 mmboe based on Texon’s working interests, and this is set to be tested in the next 6 months with up to 7 wells drilled (EFS 6 – 12). Funding for this work will come from existing cash (A$25.8 million at June 30), revenue (c. US$1.3 million per month) and a senior secured revolving credit facility that the company hopes to have in place very shortly.
The Texon demerger is expected to occur in the next few months, and when the split occurs, shareholders will hold the same number of current Texon shares in each of the demerged companies. KPMG is advising Texon on the finer details which would likely see Texon (II) listed in Australia or North America with the current management / board transferred across. EFS would likely be monetised, with the proceeds enjoyed by shareholders. If the company’s hunch about all the value being attributed to the EFS assets, shareholders should gain from the corporate action, while still retaining exposure to most of the exploration current upside.
Texon in its current form has a packed drilling schedule on both sides of the demerger divide, with ample opportunities for market interest to pique, and Texon to claw back lost shareholder value. Failing this, the proposed corporate action appears a sound strategy for compelling value recognition, but markets can be mysterious creatures and there remain many hazards yet to navigate"
TXN Price at posting:
38.2¢ Sentiment: None Disclosure: Not Held
