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Panoro Energy: A Low-Risk Case Of Untrapping Mismanaged Value

Panoro Energy ASA (PEN:NO, PENO.OL), an Oslo-listed micro-cap E&P player, that for the better part of one year has been undergoing a strategic evaluation process (which loosely translates into "we need to please our dammed shareholders somehow"), has in a matter of a short month announced the sale of two assets at a total consideration of $190million.

The company traces its roots back to a 2010 combined merger between Pan Petroleum and Norse Energy Corp's spun-off Brazilian division, which today comprise the company's asset base of West-African and Brazilian oil licenses and development projects. This move was said to combine complementary assets, yield synergies and "enable superior performance". The development that ensued however, in both project execution and stock price performance, was far from superior.

Since the company's inception three years ago, investors have injected $343 million in equity through several private placements. This same equity is at time being valued at a meager $121mn, implying a loss of 65% for investors that partook in the equity issues. A few operational delays and minor mishaps, drove the stock down to a bottom of 2,35 NOK, pegging the implied loss at 73%. This dismal stock performance has undoubtedly created a breeding ground for dissatisfaction and a sentiment of discontent among short and long-term equity holders. This is the backdrop and instigator for the divestment process that we now finally are seeing the results of.

Sector Asset Management, a beleaguered Norwegian stock fund managing group, and its affiliated funds and persons has been the backer of both the predecessors of Panoro and the present company. There are several conspiracies surrounding the fund manager involvement in the company and the lackluster stock price development, but Sector rightfully gained an increasing level of mistrust when shamelessly promoting the stock in the media right before selling down their stake.

Now however, the power balance has shifted and Sector's influence has been marginalized. This was demonstrated during last week's annual general meeting, when a coalition of minority shareholders voted down the board's remuneration package and in essence gave the (Sector-affiliated) chairman the boot. This power demonstration was the reckoning of a petition calling for shareholder value maximizing, comprising a shareholder grouping with about 14% of the voting rights. Of course, this would not be possible if it was not for the fractured ownership structure consisting of unconscious and apathetic fund managers.

Assuming the sales are finalized and closed in accordance to the agreed terms, the company will become a lean ten-person organization with a debt-free balance sheet. Remaining assets are 20% stake in the Mengo-Kundji-Bindi (MKB) fields in Congo-Brazzaville, 33% in the Dussafu Marin block outside of Gabon and the BS-3 project in Brazil, a series of gas finds in the Santos Basin. Additionally, there is a $128mn. deferred tax benefit applicable in the Norwegian jurisdiction.

The next item on the sales list is MKB, and despite repeated sale assurances followed by breaches, the management seem convincingly confident in a shortly divestment. MKB is a world-class asset, with an estimated billion barrels of light, waxy oil in the ground, it is said to be the largest onshore field in Sub-Saharan Africa. Nevertheless, tough permeability conditions and declining oil price led French oil major Elf to abandon the project in 1992. With today's widespread use of hydraulic fracturing, horizontal drilling and water injection, the field is in the process of being revitalized. Even with a strenuous and inept NOC as operator, the asset may fetch a fair sum from the appropriate buyer. Geopetrol, a private Franco-Swiss oil junior, has been rumored to be the prominent party in past/ongoing negotiations. The price expectancy and outcome potential is highly uncertain, with analysts expecting anything from $20 to $100 million. My weighted expected price outcome with negatively skewed probabilities ($25mn./50%; $45mn./40%; $65mn./20%), pegs the expected value at $39mn. Anything north of this amount will likely be very positively received in the market.

Considering today's cash position (~ $68.5mn.) with the addition of the sales proceeds (~ $194.5mn. incl. positive working capital consideration), adjusted for the sold subsidiary's deposits ($17.5mn.), subtracting the redemption of the outstanding bond debt ($126mn), incl. additional settlement costs ($16.4mn), net cash per share comes out to 2.67 NOK. Accounting for the $20 million earn-out component of the Manati consideration, which roughly should equal ~ $5.4mn. per year for four years, yields a net present value of $15.2mn. attributable to 0.39 NOK/share. Proceeding by netting out accounts payable against receivables, leaves one with a net-net cash figure at 2.80 NOK/share.

The tax benefit position may be utilized directly by an acquiring company and could be worth up to $18mn. (assuming 28% corporate tax rate and 50% derisk discount). Endorsing said assumptions leaves us at 3.26 NOK/share, whereby MKB, BS-3 and Dussafu essentially are thrown in for free. The latter is likely to be given a firm benchmark price within short time, as the operator is seeking to complete a farm-down on the license by September.

Dussafu is a high-potential, shallow water find that - according to the operator - could be fast-track developed with an FPSO and subsea tie-backs and start producing by next year already. Gabon is a country with a favorable petroleum regime and fiscal terms, additionally there are several oil majors - Shell, Total, Sinopec, Marathon - operating in the vicinity of the license. In a fresh presentation, HNR estimated total mean value of the license to be $1,479mn. (based on an assumption that all leads and prospects contain recoverable resources in line with risked estimations), which would be equivalent to a whooping ~ 19 NOK/share net to Panoro. If HNR could fetch just a fraction of this, it would be great news for shareholders in PEN.

Irrespective of sales outcome, the company has the authorization to acquire its own shares and may do so when its bonds are redeemed. Depending on the market's reception of the sale progress and its willingness to price in assets, this may prove to be the ideal usage of company funds as buying assets below fair value is accretive to shareholder equity and as such offers a higher return than other investments.

Risk/reward is looking very attractive at these stock price levels (+/- 2.90 NOK), and the upcoming news-flow and continued focus on asset unlocking should push the stock closer to its intrinsic value as management trust is reestablished and normalized valuation mechanisms are triggered. If one are inclined to believe that the company's Congolese and Gabonese assets are worth half of what analysts are saying, anything below 4,- NOK per share appear unrighteously cheap.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long PEN (PEN:NO, PENO.OL).