Mississippi Lime focused AusTex Oil Limited (ATXDY and ASX:AOK) announced last Friday, May 2 that famed investment manager Michael Stone has been appointed Chairman, replacing Richard Adrey who will continue as an executive director (note all prices represent ASX listing and not ATXDY ADR which is equal to 50 ASX:AOK shares). Mr. Stone is Managing Member of Freestyle Investors which is an affiliate of Los Angeles-based Ptolemy Capital, the largest shareholder of ATXDY. He is also founder of investment manager J.H. Whitney, perhaps most famous for its 2002 acquisition of Herbalife (NYSE:HLF) which it took public again in 2004. According to a Forbes Article quote of Tim Ramey "the whole adventure was so profitable, JH Whitney tried to repeat it twice." This begs the question, is ATXDY a "personal account" equivalent of HLF for Mr. Stone?
Mr. Stone's appointment to ATXDY board was expected and comes as part of a previously announced overhaul of the board that saw ATXDY co-founder Daniel Lanskey step down as Managing Director and independent director Luis Vierma retire from the board. These changes are reflective of ATXDY transition from startup exploration company to an Oil and Gas Producing Entity as classified by the ASX.
During Mr. Adrey and Mr. Lanskey's tenure the company grew production to over 1,000 boepd, putting the company on solid financial footing for the next stage of growth. This is an impressive feat given the company IPO'd right before the financial crises of 2008 which put nanocap equities out of favor with investors. In 2011 and 2012 they attracted energy-focused institutions including Iroquois Capital, K2 & Associates, and Young Capital which provided the core funding for this growth story and most recently they were joined by Mr. Stone's Ptolemy Capital which has invested an estimated $25 million in equity and preferred shares since 2013.
Ptolemy's most recent investment included the purchase of ~$15 million preferred shares in December 2013. This investment included the right to appoint three members to the board of directors and in November 2013 Nick Stone, a partner at Freestyle/Ptolemy, joined the board as an independent director. With Michael Stone's addition it remains to be seen who will be selected as the third appointee. Once they name that appointee they will control three of the current seven board seats.
Given Michael Stone's successful history in taking companies private investors should certainly consider the possibility that he is planning to do the same with ATXDY. According to a report published by PWC, Ptolemy could potentially control nearly 33% of the company. In my opinion it's unlikely (but not inconceivable) that Mr. Stone would take ATXDY private a la HLF.
From a valuation perspective he would likely have to pay a significant premium to the current price for shareholders to accept. According to a recent reserve report the company has a 2P valuation of $260 million which would imply an equity valuation of ~A$0.50, about 3 times the current value. In an earlier analysis I forecasted a price of A$0.25 and I feel that is probably on the low end of any potential takeout.
According to the most recent production update the company is currently producing 1,033 boepd from 28 wells. However the company has fallen behind on infrastructure buildout and they currently have an additional 8 wells in various stages of completion and another 4 wells drilled in April. This implies another 12 wells are likely to come online shortly. According to company previous company estimates on the production profile of Snake River project wells, this represents 500-600 boepd of additional production. At 1,500 boepd that would imply a valuation of ~$50,000 per flowing boe at the current price of A$0.18. This is significantly lower than any recent oil weighted transaction in the market.
There is a significant regulatory hurdle to consider too. ASX:AOK is an Australian-listed company with US assets and additional equity listings in the US (OTCQX:ATXDY) and Canada (TSXV:ATO). This potentially means that securities laws of three different countries are in play which creates significant legal complexities. It's unlikely that Mr. Stone would be interested in that kind of undertaking for an investment in his family office.
My best guess is that he is in the stock for the long run. He is in the fortunate position of owning preferred shares that pay an 11.75% dividend and convert at a fixed price of A$0.15. This means he is generating significant income (~$1.75 million annually) while he waits for the share price to appreciate. In just six months since he made the investment the share price is trading 20% above his conversion price.
My expectation is that Michael Stone will take his role as a fiduciary seriously and act for the benefit of all shareholders. The company is currently going through a significant transition, particularly with regards to its balance sheet, and it's essential that shareholders are represented by experienced financial professionals to guide the company through this process. Messrs Michael and Nick Stone certainly fit that description.
This summer the company will secure a reserve-based lending facility which will likely bring in ~$20 million in non-dilutive capital. Their ADR listing has proven somewhat successful and has made it easier for US retail and institutional investors to gain a position in the stock. AusTex currently qualifies for an NYSE or NASDAQ listing and I hope they pursue that path. A full US listing would create significant value for all shareholders as it would enable a North American banks to publish research and further expand US institutional ownership. It would also offer the company broader access to US capital markets.
Welcome aboard Mr. Stone - we look forward to a bright future with you at the helm.
Disclosure: I am long ATXDY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I formerly worked as an investment professional at Iroquois Capital, a significant shareholder of AusTex. These views are strictly my own and should not in any way be construed to be those of my former employer Iroquois Capital.
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