Horizon Capital calls upon all Americas Petrogas shareholders to vote against the proposed transaction with Tecpetrol

Jul 06, 2015, 08:00 ET from Horizon Capital Management Inc.

PANAMA CITY, Republic of Panama, July 6, 2015 /CNW/ - Horizon Capital Management Inc. ("Horizon") issued today a public statement calling upon all shareholders of Americas Petrogas Inc. ("Americas Petrogas" or the "Company") (TSXV: BOE) to VOTE AGAINST the special resolution (the "Transaction Resolution") at the annual and special meeting of the Company currently scheduled to take place on July 29, 2015 (the "Meeting"), that would approve the sale by the Company of all of the outstanding common shares of Americas Petrogas Argentina S.A. ("APASA") to Tecpetrol International S.A. and its affiliates ("Tecpetrol") and related transactions (the "Proposed Transaction"). 

Juan Argento, Senior Advisor of Horizon, said, "Horizon believes that the Proposed Transaction undervalues the Company, is opportunistic given current market conditions, inappropriately incentivizes management and insiders of the Company at the expense of the minority shareholders and is not in the best interests of the Company or its shareholders.  The Company is selling its principal assets at the worst possible time, keeping the cash consideration instead of distributing it to shareholders and disclosing no details of how it intends to use such funds." 

In its public statement Horizon is demanding that the Company's Board of Directors (the "Board") postpone the Meeting so that it takes immediate action to address these issues including by (i) renegotiating the deal with Tecpetrol or finding another partner, (ii) maintaining at least some of the upside in the assets that are the object of the Proposed Transaction, (iii) avoiding selling the only producing assets of the Company, and (iv) presenting a clear plan to the Company's shareholders that includes significantly reducing selling, general and administrative ("SG&A") expenses.

Founded in 2004, Horizon is a merchant banking firm with advisory and principal investment activities and with substantial focus on the oil and gas industry in Latin America.  

The text of the public statement to Americas Petrogas shareholders is as follows:

Dear Fellow Americas Petrogas Shareholders:

We are a significant shareholder in Americas Petrogas.  We are extremely disappointed with the terms of the Proposed Transaction with Tecpetrol for the following reasons: 

The Proposed Transaction completely changes the nature of the business of the Company. 

  • Shareholders invested in a company with valuable oil and gas assets that had tremendous upside potential. If it proceeds, the Proposed Transaction will result in the Company disposing of (i) all of its principal oil and gas assets including all producing assets and (ii) all of its oil reserves and most of its gas reserves. The Company will be left with only those oil and gas assets that are less attractive to investors and an early-stage mining operation in Peru with uncertain future value (i.e., the Bayovar property).
  • According to the latest drilling results released by the Company on May 13, 2015, the Bayovar property contains mostly inferred resources (that are highly uncertain) and a very low level of indicated resources. Based on the valuations of other publicly-listed companies at a similar stage of development and with a similar level of resources we attribute a value of less than USD 5 million today to this property.
  • In sum, if the Proposed Transaction proceeds, shareholders will be left with a Company that has no production or revenues, and assets that are very early stage, less attractive and of little value.

The valuation of the Proposed Transaction is unattractive. 

  • The Company is selling approximately 121,000 net acres of oil properties that include (i) the conventional fields that provided all current production and revenues, (ii) all of its oil reserves and most of its gas reserves, and (iii) the most valuable unconventional acreage (Los Toldos area), in exchange for total consideration of USD 63 million, or USD 520 per acre.
  • Furthermore, assuming a value of USD 30 million for the conventional assets (based on public comparable companies), the Company is selling the unconventional assets for USD 33 million or a mere USD 346 per acre.
  • It is difficult to reconcile this valuation with historical comparable transactions. In 2013, the Company's Chief Executive Officer, Barclay Hambrook, was on record saying that the valuation of comparable transactions in Argentina had averaged more than USD 10,000 per acre.
  • In fact, Chevron and Dow Chemical farmed into Yacimientos Petroliferos Fiscales ("YPF") properties in 2013 at an implied value of USD 10,000 and 10,900 per acre, respectively.
  • More recently, on August 28, 2014, after oil prices began to drop, Petronas farmed into a YPF property at an implied value of USD 10,280 per acre.
  • In North America, comparable transactions in Bakken, which has very similar characteristics to Vaca Muerta, reached values of up to USD 50,000 per acre before the drop in oil prices. More recent transactions in May 2015 have been completed at approximately USD 14,000 per acre.
  • While we are aware that the fall in oil prices has temporarily affected valuations, Vaca Muerta continues to be considered the most attractive unconventional shale opportunity outside of North America. Besides YPF, companies such as Exxon, Shell and Total continue to enthusiastically invest in Vaca Muerta despite the current price environment.
  • If the Proposed Transaction is approved it will be done at the Company's peril and that of its shareholders.

It is a terrible time to sell. 

  • The Proposed Transaction has been entered into at a historical low-point in the valuation of the Company. The shares of the Company traded as high as CAD 4.38 in February 2012, and more recently, at CAD 1.57 in April 2014, before oil prices started declining. That is, respectively, approximately 19 times and seven times the June 16, 2015 closing price of CAD 0.23.
  • Most analysts expect oil prices to progressively recover in 2016, 2017 and beyond.
  • Importantly, Presidential elections in Argentina in October of this year will result in a new government that many expect will be significantly more business-friendly. This change will likely facilitate attracting fresh capital for the oil and gas industry and will likely have a significant positive impact on asset valuations.
  • We understand it is a tough time for small E&P companies in Latin America. But peer companies are not selling assets at this time. They have instead cut capital expenditures, slashed SG&A expenses and postponed drilling commitments in order to adapt to the current price environment and effectively capitalize on the future recovery of the sector.
  • The Proposed Transaction is an irresponsible short term fix and the Board knows or ought to know that there are better ways for the Company to address its current issues that will be in the best interests of the Company and its shareholders over the long term.

The Board is misleading shareholders with statements in the management information circular that suggest there are no alternative transactions or sources of capital available to the Company. 

  • Despite the difficult market conditions, there is alternative financing available to the Company. Many comparable companies in Argentina and elsewhere in Latin America have secured financing during this difficult period. Throughout 2015, many of the Company's closest peers (i.e., junior Canadian companies with oil and gas assets in Argentina) including Crown Point Energy, Andes Energia and Madalena Energy, were able to raise capital in order to continue investing in each of their respective businesses in Argentina. Other Canadian junior companies with assets in Latin America including Canacol, Parex and Pacific Rubiales, also secured equity and debt financings in 2015.
  • Horizon has been and continues to be very active in advising multiple Latin American oil and gas companies in their capital raising and M&A efforts.
  • We expect that the Company must have received a number of alternative offers that would allow its shareholders to participate in the upside (even if these offers were to contain a lower cash consideration component payable to the Company). Horizon would have considered such offers considerably more accretive to long term value.
  • Horizon has had conversations with different parties that have expressed interest in (i) farming into the assets of the Company and / or (ii) providing financing to the Company.
  • Like most of its peers, the Company should reduce SG&A, cut capital expenditures and push out drilling commitments while securing enough financing to continue its operations until the conditions in Argentina and the global oil and gas market improve, which could be as soon as Q1 2016.
  • The Board and management seem to have put their short term interests above the long term interests of shareholders by maximizing cash proceeds to the Company now to continue to fund their outsized compensation and excessive spending instead of maximizing the prospects of long term value creation for all shareholders.

The Company is unnecessarily giving away most of its upside. 

  • Instead of selling the assets, the Company could have partially farmed out the assets to a new partner, reducing its capital requirements while keeping a substantial part of the upside.
  • In fact, it would have been possible for the Company to negotiate to be "freely carried" by a new partner, meaning the new partner would have been responsible for 100% of the capital expenditures on the assets while earning less than 100% working interest on the assets.
  • This transaction structure is typical for assets at this stage of development and was used by the Company when it farmed out the Los Toldos blocks to Exxon in 2011. In that instance, Exxon agreed to fund up to USD 76.3 million to earn a 45% working interest in the Company's Los Toldos blocks. This arrangement was a much more attractive transaction for shareholders and was completed at a time when the assets were significantly more risky. Since then, three exploration wells were drilled in Los Toldos with positive results, which has significantly de-risked the assets and therefore enhanced their attractiveness to new investors.
  • As a result, we simply do not believe the Company is unable to find a partner that is willing to fund additional investments in Los Toldos and its other assets. This approach would allow the Company and its shareholders to benefit from the tremendous upside potential that is inherent in these assets.

The Proposed Transaction is not providing any cash consideration to the shareholders while rewarding insiders and management.

  • The cash consideration offered by Tecpetrol will be paid to the Company and to management and not to the shareholders, despite the fact that the Company is effectively exiting its principal business. The cash consideration should instead be paid to shareholders.
  • According to the Company's management information circular dated July 29, 2015, the Company will be responsible for paying up to $6 million worth of "change of control" and "severance" payments whereas shareholders will not see a penny.
  • Shareholders will be left with limited options. Selling stock in the secondary market is an inferior alternative given (i) the illiquidity of the stock, and (ii) the fact that the current market price is significantly below the cash consideration per share agreed in the Proposed Transaction. Furthermore, the Board has failed to explain the value proposition for shareholders if the Proposed Transaction proceeds.

The interests of the largest shareholder in the Company, Indian Farmers Fertilizer Cooperative Limited ("IFFCO"), which has committed to vote in favor of the Proposed Transaction, might not be aligned with the interests of the rest of the shareholders. 

  • It is reasonable to assume that, as a fertilizer producer, IFFCO has a strategic interest in the Company's fertilizer business and that it has little or no interest in the Company's oil and gas business. This represents a major misalignment of interest with the Company's other shareholders, including Horizon. As such, it is not surprising that IFFCO has entered into a lock up agreement with the Company and is supporting the Proposed Transaction.
  • Such a lack of interest in the oil and gas business from one of the largest shareholders is likely to have influenced the Board's decision to pursue the Proposed Transaction to the detriment of the interests of the Company and its other shareholders.
  • In addition, IFFCO is a minority shareholder of the Company's fertilizer business. This further exacerbates the misalignment of interests with the rest of the shareholders.
  • We are appalled at the fact that, despite such clear misalignment (and even in the absence of a requirement under Multilateral Instrument 61-101), that as a matter of good governance the Board determined that a "majority of the minority" vote (excluding IFFCO) would not be required as part of the Transaction Resolution.
  • From a commercial perspective, it would have been possible to correct such misalignment by, among other things, splitting the Company into two publicly-traded entities, one holding the fertilizer business and the other the oil and gas business.

The Board has not outlined a clear plan for the future of the Company.

  • We believe it would be reasonable to expect that the Board outline a clear plan for the Company going forward before shareholders are asked to vote for or against the Proposed Transaction. We would like to know how the Board is planning to use the cash consideration paid by Tecpetrol to create value for shareholders.
  • We fear the cash collected by the Company in connection with the Proposed Transaction will be wasted on non-productive uses, such as "change of control" and "severance" payments and on SG&A expenses. This misguided allocation of Company resources could quickly destroy value for shareholders.
  • Historically, the Company has had extremely high SG&A expenses. At 57%, the Company recorded the worst LTM SG&A / Revenues ratio among the junior Latin American comparable companies. That means in the LTM the Company has spent 57% of its revenue on SG&A expenses. Comparable companies to Americas Petrogas such as Gran Tierra, Parex, Canacol and Geopark recorded LTM SG&A / Revenues of between 7% and 20%. Madalena Energy, perhaps the closest comparable, recorded LTM SG&A / Revenues of 18%.
  • Moreover, the Company has made little effort to reduce SG&A, with LTM SG&A having come down only approximately 18% from the previous 12-month period, whereas peers have generally cut SG&A from 30% to 50%.

We call upon the Board to:

  • Disclose the details relating to the Fairness Opinion delivered by Mackie Research Capital Corporation, including the comparable company analysis, the precedent transaction analysis and the sum of the parts (NAV) valuation analysis, and explain how such analysis supports the agreed valuation.
  • Disclose more information regarding the terms and counterparties of the alternative offers it received during the strategic review process.
  • Renegotiate the deal with Tecpetrol or find a different partner in order to:
      1. achieve a valuation that is closer to market, 
      2. retain additional upside in the properties it has agreed to sell, preferably through a fully carried structure, and   
      3. retain its interest in the conventional assets, which provide an important production base and revenues. 
  • Explain to shareholders the details of the Board's plan going forward, including:
      1. a clear vision and business plan for the Company including how the cash balance is expected to be utilized, 
      2. how two completely different businesses in Peru and Argentina fit together and how the Board is planning to allocate capital among them, and
      3. how SG&A will be reduced from the absurdly high historical levels. 
  • Correct the misalignment of interests between (i) IFFCO and the other shareholders and (ii) management and all shareholders. 
  • Postpone the date of the Meeting, to allow for enough time to address our concerns and those of other shareholders who, no doubt, will share our opinions. 

Horizon would favorably consider any action of the Board that addresses the important issues outlined above.  Should the Board not address these issues, we intend to VOTE AGAINST the Proposed Transaction.  We urge all shareholders of Americas Petrogas to demand that the Board address these important issues or otherwise VOTE AGAINST the Proposed Transaction. 

Information in Support of Public Broadcast Solicitation:

The following information is provided in accordance with Canadian corporate and securities laws applicable to public broadcast solicitations. Horizon is relying on the exemption under section 9.2(4) of National Instrument 51-102 – Continuous Disclosure Obligations ("NI 51-102") to make this public broadcast solicitation.

This solicitation is being made by Horizon and not by or on behalf of the management of Americas Petrogas. The registered office address of Americas Petrogas is 3911 Trasimene Crescent S.W., Calgary, Alberta T3E 7J6.

Horizon has filed this press release containing the information required by section 9.2(4)(c) of NI 51-102 on Americas Petrogas' company profile on SEDAR at www.sedar.com.

Horizon may solicit proxies in reliance upon the public broadcast exemption to the solicitation requirements under applicable Canadian corporate and securities laws, conveyed by way of public broadcast, including through press releases, speeches or publications, and by any other manner permitted under applicable Canadian laws. All costs incurred for the solicitation will be borne by Horizon.

A registered holder of common shares of Americas Petrogas that gives a proxy may revoke it: (a) by completing and signing a valid proxy bearing a later date and returning it in accordance with the instructions contained in the form of proxy, or as otherwise provided in Americas Petrogas' management information circular; (b) by depositing an instrument in writing executed by the shareholder or by the shareholder's attorney authorized in writing, as the case may be: (i) with Computershare Trust Company of Canada, at any time, not less than 48 hours, excluding Saturdays, Sundays and statutory holidays in the Province of Alberta, preceding the Meeting or an adjournment or postponement thereof; (ii) at the registered office of Americas Petrogas at any time up to and including the last business day preceding the Meeting or any adjournment or postponement thereof, or (iii) with the chairman of the Meeting prior to its commencement on the day of the Meeting or any adjournment or postponement thereof; or (c) in any other manner permitted by law.

A non-registered holder of common shares of Americas Petrogas will be entitled to revoke a form of proxy or voting instruction form given to an intermediary at any time by written notice to the intermediary in accordance with the instructions given to the non-registered holder by its intermediary. It should be noted that revocation of proxies or voting instructions by a non-registered holder can take several days or even longer to complete and, accordingly, any such revocation should be completed well in advance of the deadline prescribed in the form of proxy or voting instruction form to ensure it is given effect in respect of the Meeting.

Horizon Capital Global Investments Inc., an affiliate of Horizon, has beneficial ownership over 12,757,000 common shares of Americas Petrogas, representing approximately 5.72% of the issued and outstanding common shares of Americas Petrogas.  With the exception of the foregoing, to the knowledge of Horizon, neither Horizon nor any associates or affiliates of Horizon, has any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in the Proposed Transaction or any other matter to be acted upon at the Meeting.


Founded in 2004, Horizon Capital Management Inc. is a merchant banking firm with advisory and principal investment activities and with substantial focus on the oil and gas industry in Latin America. 

Cautionary Statements
All statements, other than statements of historical fact, included in this news release constitute "forward-looking information" as such term is defined in applicable Canadian securities legislation.  Forward-looking information can generally be identified by the use of forward-looking language such as "will", "expect", "intend", "plan", "estimate", "anticipate", "believe" or "continue" (and grammatical variations and the negatives thereof) and include statements concerning Horizon's intentions and strategies regarding the Company, and the impact on the financial condition, operation, business, strategies and competitive position of the Company and its future management if the Proposed Transaction is not approved by the shareholders.  Such forward-looking information is based on certain understandings, assumptions, beliefs, opinions and expectations of Horizon, including, without limitation, the Company's future growth potential, results of operations, future cash flows, ability to monetize assets, the future performance and business prospects and opportunities of the Company and the regulatory environment and economic and market conditions that the Company faces.  Shareholders should not place undue reliance on such forward-looking information, which is not a guarantee that any particular outcome, event, result, performance or other achievement will occur.  Many risks, uncertainties and other factors could cause the actual outcomes, events, results, performance or achievements expressed or implied by such forward-looking information to vary materially from those described herein should any of those risks, uncertainties or other factors materialize.  Such risks, uncertainties and other factors include, without limitation, the impact of legislative, regulatory, competitive and technological changes; the state of the economy; credit and equity markets; availability of credit and other financing; the financial markets in general; the ability of the Company to retain and hire key personnel and maintain relationships with customers, suppliers or other business partners; and all other risks and uncertainties detailed in the Company's' filings with applicable Canadian securities commissions, copies of which are available on SEDAR at www.sedar.com.   Accordingly, readers of this news release are cautioned not to place undue reliance on any forward-looking information contained in this herein.  All forward-looking information contained herein is expressly qualified in its entirety by this cautionary statement.  All forward-looking information contained herein is made as of July 6, 2015 and Horizon undertakes no obligation to publicly update or revise any such forward-looking information, except as required by law.

SOURCE Horizon Capital Management Inc.