Dear reader,
This week the BoD of Touchstone and Trinity were pleased to announce that they had reached agreement on the terms of a recommended all share offer where Touchstone will acquire the entire issued share capital of Trinity.
Under the terms of the Acquisition, Trinity Shareholders shall be entitled to receive:
For each Trinity Share: 1.5 New Touchstone Shares
Trinity Shareholders will, in aggregate, receive approximately 58,341,102 Touchstone Shares. Immediately following completion of the Acquisition, Trinity Shareholders will own approximately 19.9 per cent of the share capital of the Combined Group (based on the existing issued common share capital of Touchstone and the fully diluted ordinary share capital of Trinity as at 30 April 2024 (being the latest practicable date prior to the date of this announcement).
Based upon Touchstone's closing share price of 41.25 pence as of 30 April 2024 (being the last practicable date prior to this announcement) the Acquisition represents an implied value of 61.9 pence per Trinity Share (approximately US$0.77 per Trinity Share), valuing the entire issued share capital of Trinity at approximately £24.1 million (approximately US$30.1 million).
The key question here is:
Is this a good deal for Trinity? And/or for Touchstone?
TRIN has risen on the news and TXP Touchstone has fallen 5% on the news.
Strange.
When the Oak Bloke analysis is that Touchstone get the better end of the deal. Touchies get 80.1% of the enlarged company, leaving just 19.9% for TRINies.
But while TXP scores more on a “top trumps” basis (see my analysis below) it is also fair to say that TRIN has suffered from a number of frustrations with its Jacobin well, limited cash flow and reductions in its 2P reserves (being reclassified 2C) and this has reflected in a 55% fall in the share price in 2024. A merger with TXP provides more oomph to progress its capital programme.
On a market cap basis, Touchies acquire a company valued at £20.57m for surrendering £18m (20% of £90.76m), they win by £2.5m
Moving to target prices, Trinies win on this metric. TRIN has a 50% upside according to Cavendish, while TXP has a 150% upside according to Shore & CG. So if you believe the analysts have their finger on the pulse then while both have upside TXP has more.
But intriguingly Cavendish tell us of TRIN:
“Significant Upside but Financing Required: Including the 38.7mmbbls of 2C resources into our valuation highlights Trinity’s upside potential if funding was available, increasing our target price to 347p, a significant c8.4x the current share price.”
TRIN is a 100% oily while TXP is a mainly gas (and some oil) play, but if we compare BOEPD Touchies win on this metric by “losing” prorata 1,574 BOEPD to the Trinies but gaining 2,135 BOEPD from them. Not only that but not Barrels of Oil equivalent are equivalent in financial terms. Oil is 6X more lucrative than Gas.
Comparing the BOEPD as a ratio to the market cap, TRIN is a win where per flowing BOEPD you’d pay £7,707 vs £11,530 per BOEPD. Notice I’m using the 7,871 BOEPD 2024 post royalty forecast amount here for TXP. If I used the 2023 BOEPD then you’d pay over £20k per BOEPD. But if I used the forecast FY2025 BOEPD for TXP that’s forecast to drop to below £6k per BOEPD. So which offers the better value is a value judgment.
Moving to reserves (2P and 2C) both TRIN and TXP have roughly the same 67mmbls reserves. So Touchies are clearly the winners here “losing” 13.5mmbbls and gaining 53.4mmbbls. Arguably the quality of TXP’s reserves is more near term, is onshore and more certain, but potentially Touchies have a great deal here. This is further shown by calculating the market values TXP at £1.35 per BOE while valuing TRIN at £0.31 per BOE - 4 times less. This is mainly explained by 38.7mmbbls of TRIN’s reserves are 2C (Contingent) rather than 2P (Probable).
It’s interesting to see that cash and debt differ too. TXP loses £4m of debt and gains £3.2m of debt from TRIN. TRINies are therefore more indebted than before. On cash TXP loses £2m and gains £5.50m so gains net £3.5m cash. (based on the last known numbers as at 31/3/24)
These losses and gains are calculated by Touchstone “losing” 19.9% of its assets and liabilities to Trinity, while Trinity is “losing” 80.1% of its assets and liabilities to Touchstone.
So overall TXP wins (although there are benefits for TRINies too) yet inexplicably the TXP share price has dropped 5% on the news.
Synergy
As well as gaining from the merger, there is a bigger picture of:
Shared technical and operational expertise
Synergy in running costs & economies of scale especially for corporate overheads.
Combined funds flow
Rebalances TXP with a better oil & gas combination and exposure to offshore
TRIN’s public listing costs around £0.5m so that is another saving.
The business combination takes the business over the £100m mark, so into a larger size bucket - so more attractive to investors.
Last but not least, accrued tax losses of $199.3m in TRIN can be fully used by TXP
At a 31.5% rate that $199.3 could provide over $60m of additional post tax profit.
Next Steps:
The deal is due to close in Q3 2024 and requires sanction by TRINies, Trinidanian authorities and the courts.
With TRIN’s management backing the move (1.2% of shares) and various II’s (holding 37.7% more) nearly 40% of votes back the move. So just over half of remaining TRINies need to say yes (36.1% of 61.1% of votes) to be over 75% in favour overall.
Conclusion
The scale and savings means this is a win-win for TRINies and Touchies. Saving of several million dollars per year should be achievable.
With oil achieving around $60 per barrel and gas achieving $15 per BOE, after Trinidadian royalties and taxes, TXP is forecast to begin generating serious levels of cash in 2024 (in a year with heavy capex) but FCF is forecast to grow in FY25 to £14.1m and doubles again to £28.9m FY26.
TRIN has a forecast FY2024 additional £5.2m FCF (£5.1m reported earnings).
Combined, FY25 should comfortably be above £20m FCF, with earnings potentially £25m. Assuming £22m this equates to 13.3p for each TRIN/TXP shareholder, potentially doubling to 27p in FY2026. That could be incredibly attractive (considering the TXP share price of 40p, that’s a FY26 PE of just 1.5.
It makes the 5% fall this week feel very strange indeed.
Regards
The Oak Bloke
Disclaimers:
This is not advice
Micro cap and Nano cap holdings might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip".
I’m not sure Touchstone made the right decision in making an offer, or at least I believe they may have overpaid for TRIN.
1) Top heavy with Execs and non-execs – they appear to be quite top heavy with a lot of foreigners both at the executive and non-executive level all of whom are probably calling quite high salaries with no results to show. Why have they brought in all these foreigners I’m seeing on their site? Sure these people may have worked well in foreign geographical regions but they wouldn’t have a clue about the local subsurface developments or what’s required.
2) Jacobin Failure –
a. Surely, they should have put a cap on how much to spend on Jacobin instead of letting the costs run to $8 mln USD. These funds could have been used to maybe maintain current infrastructure instead. How did the petroleum and geological teams get the initial expected production so wrong for Jacobin? Yes it was a much greater depth than they tested before but there’s enough data on T&T and enough surrounding prior well developments to make proper gauges of what realistically they could have gotten out of a highly matured oil field. I think they got too greedy and expected to pull a miracle well.
3) Financial Hedges –
a. The hedging they had implemented for 2022 was absolutely crazy. My fear is they got too greedy again and didn’t consider the potential for prices to exceed what they became at the time. But they should have gauged their exposure better. They already knew before that what their exposure would look like, there’s no way they don’t have some sort of financial knowledge to test the limits of what they would have given up prior to the execution of the instruments. They know they aren’t a huge company that can offset such losses. Any little upside is what would have put TRIN in a much better position.
4) Cyber-attack
a. I’d genuinely worry about what the hackers could have gotten from the company at that point in time. Any additional access logs to data or software that may be corrupted and then transferred to Touchstone. Provided all of TRIN’s past failings in I wouldn’t expect much from their IT analysts and teams either.