i3 Energy: The Gran Tierra Takeover
A feature of the London stock market especially since the pandemic, has been foreign companies taking over UK listed companies on the basis of the value they represent. It has been a complaint of companies both great and small listing on the LSE, that they do not command the rating that their peers have, especially in the US, and North America. This leads to the type of news we have been treated to at i3 Energy (I3E), an oil and gas production company focused on the UK and Canada.
CEO Majid Shafiq
This is a company which arguably made its name during the dark days of the pandemic, when oil briefly traded below $0 a barrel, and many in the hydrocarbon space were distressed. The company led by CEO Majid Shafiq scooped up distressed assets, something which the market valued very highly just a couple of years ago, with the shares peaking at 32p in the aftermath of the Ukraine invasion.
Q2 Update
However, for much of the recent past, with oil and gas prices falling after the Ukraine war induced spike, i3 has traded around a third of its peak. This was and is actually a decent rating. Indeed, just before the Gran Tierra offer for the company, i3 could boast being effectively debt free, with strong free cash flow for Q2 at $28.5m. Therefore, by this in terms of the fundamentals, including the consolidation of the portfolio, one could say that i3 scored a 10/10 given the lay of the land. The only issue was whether with a £115m market cap just before the takeover news i3 was fairly valued?
The answer perhaps comes with the performance of the stock over the past month, with the shares holding the bulk of the premium offered by Gran Tierra. The market cap is now close to £150m.
Interview
Further insight into the valuation conundrum comes from the latest interview given by Majid Shafiq. Here he reveals that the company received unsolicited approaches from multiple companies. The highest bidder, and one that raised its offer no less than three times, was Gran Tierra (GTE). Therefore, it is clear that i3 was regarded as hot property in the market.
The fact that GTE’s offer represented a near 50% premium to the prevailing i3 share price shows that Shafiq certainly extracted value for shareholders. He was also clearly thinking strategically: the move from being a small cap to a mid tier producer is not an easy one. To get over the small cap clouds requires the kind of backing, both financial and strategic, that is difficult to build up alone. In addition, GTE is already listed on the LSE, NYSE and TSE. Part of the deal involves i3 shareholders receiving shares in GTE, something which underlines the upgrade that the takeover of i3 represents.
Simonette Montney
While there is an outside chance that the GTE deal could be beaten at the eleventh hour, leaving price aside, the synergies between the two groups make what is on the table very difficult to beat. The larger group can also focus on driving revenue edit and becoming the scalable oil and gas play that i3 always promised to be. For instance, the prize will be developing Simonette Montney in Canada.
Positive Offer Aftermath
But perhaps the most important aspect has happened since the GTE offer a month ago. Crude Oil is down some 10% and gas equally week. If there had been no offer for I3E, the shares could have been down to 7p, versus the 12p they are now. The company is now with the help of GTE valued at four times EBITDA, while its peers mostly languish in the 2-3 EBITDA zone. The deal appears timely, and gives shareholders a rather better offer than the present environment suggests.
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