Question List 2

Are the Net Asset Values (“NAV”) for the Proposed Acquisitions Based on Realistic Assumptions?

As detailed in ARCM’s press release on 24 January 2020 (available here), over the next few weeks, ARCM will pose a series of questions to the Company relating to the proposed acquisitions. As previously emphasized, ARCM believes these acquisitions will expose the Company and its business to significant incremental risks.

For the benefit of all the Company’s stakeholders, we call upon the Company to provide full and transparent responses to these questions.

The second list of questions focus on whether the NAVs presented for Shearwater and Tolmount were calculated based on realistic assumptions. We refer to the Company’s NAV slide on page 12 of the January 7 presentation and the following table (available here):

  • In the footnotes for the table above, the Company stated that the NAVs were based on the Competent Person Reports (“CPR”) prepared by TRACS for Shearwater and ERCE for Tolmount.
  • As suggested in the table heading “NAVs (pre-tax, US$m)”, these appear to be pre-tax NAVs so already incorporate the benefit of the Company’s existing UK tax losses.
  • There is limited disclosure regarding the assumptions used by these CPRs. However, in the Appendix of the same presentation (page 17), the Company did provide the commodity price assumptions used to derive the CPR NAVs shown above. These assumptions are as follows:
  • The Tolmount and Shearwater assets are primarily gas fields (with Shearwater also producing gas condensate) and they account for 59% (48 mmboe out of 82 mmboe) of reserves and contingent resources of the proposed acquisition. Below we compare the UK gas price assumptions used by the two CPRs to the forward curve. We note that the CPR assumptions are 20 to 50% above the forward curve.
  • In order for stakeholders to be able to understand the value of the Shearwater and Tolmount assets that the Company wishes to acquire, we call on the Company to provide answers to the following questions:

    1. What would the CPR NAVs for Shearwater and Tolmount be based on the actual forward curve?

    2. As shown in the chart below, forward prices of the UK gas market have deteriorated significantly over the last 3 months as the market has re-calibrated its view of supply/demand fundamentals. Accordingly:

    • When were the acquisition prices for these assets negotiated?

    • The fact that the average CPR Calendar 2020 UK gas price estimate is 50% higher than current levels leads us to believe that these NAVs were not updated despite the significant move lower in forward prices. What forward UK gas price estimates would these two CPRs use today?

    3. Will the Company disclose the CPR reports to its stakeholders so that the stakeholders can have full transparency regarding the NAV calculations?

Source: Bloomberg on 24 January 2020

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