Completion of the Transaction is subject to a number of conditions and approvals including, but not limited to, the approval of the TSX, and shareholders of both Tenaz and SDX. It is expected that Tenaz will hold a shareholder meeting to approve the Transaction in late June or early July, with SDX expected to hold a shareholder meeting to approve the Transaction in July.
Tenaz is focused on the acquisition and sustainable development of international oil and gas assets capable of returning free cash flow to shareholders. SDX has producing assets in Egypt and Morocco which are well suited to Tenaz’s corporate strategy. Both countries are within Tenaz’s primary regions of focus, and SDX’s assets create a production base with the potential to build an operating presence of significant scale over time. Egypt is a resource rich country that recognises the importance of the oil and gas industry to its economy and energy security, and accordingly, encourages sustainable hydrocarbon development. Morocco has a supportive fiscal environment with local natural gas demand that provides a ready market for domestic production.
As at year-end 2021, SDX held approximately $23.7 million of working capital (including $13.5 million of cash), no debt and $89 million of Canadian tax pools.
With the Transaction, we will have proforma proved and plus (2P) reserves of 17.3 mmboe (as of December 31, 2021) and production in excess of 4,500 boe/d, as outlined below:
SDX Previously Stated 2022 Public |
Tenaz Energy Previously Stated 2022 |
|
Production (mboe/d) |
3,300 – 3550 |
1,200-1,300 |
Capital Expenditures** ($Million) |
$27.5 – $29.4 |
$5.8 |
* SDX production guidance excludes minority interest associated with 33% WI sale in the South Disouq area announced subsequent to year end 2021. See “Reader Advisories” below. |
** Non-GAAP measure. See “Reader Advisories” below. |
The Transaction is 141% accretive to Tenaz on production per share based on the mid-points of 2022 production guidance for each of Tenaz and SDX. To remain compliant with The City Code on Takeover and Mergers (the “Code”) of the United Kingdom, Tenaz cannot provide a forward-looking estimate of cash flow or profitability accretion. Using historic reported financial data for Q4 2021, the Transaction would have been 212% accretive to Tenaz for operating income per share.
Following completion of the Transaction, existing Tenaz Shareholders will own approximately 64 percent of the issued and outstanding shares of the combined company, and existing SDX Shareholders will own approximately 36 percent.
As part of the Transaction, Tenaz has invited two independent SDX Directors to join the board of directors (the “Board”) of Tenaz, the appointments of which are to be effective, subject to, and conditional upon, the consummation of the Transaction and approval by Tenaz shareholders:
Michael Doyle Independent Director |
Principal of CanPetro International Ltd Previously Chairman of SDX Energy, Chairman of Equal Energy Ltd., CEO of Petrel Robertson Ltd, Founder and Ex-Chairman of Madison PetroGas. Bachelor of Science (Math and Physics) from University of Victoria
|
|
Catherine Stalker Independent Director |
Partner at Independent Audit Ltd and Director of PUMB Previously Director of SDX Energy, Director of DTEK Grids BV and DTEK Energy BV, and Partner at PwC. Master of Science from London School of Economics and BA (Honours) from Heriot Watt University
|
Each of Marty Proctor, Anna Alderson, John Chambers, Mark Rollins, and Anthony Marino will form the remainder of the Tenaz Board as existing Tenaz Directors.
In Egypt, SDX has production in two areas:
- a 36.9 percent operated interest in the South Disouq and Ibn Yunus gas fields, and a 67.0 percent operated interest in the Ibn Yunus North gas field, each of which are in the Nile Delta. These gas fields are serviced by a central processing facility, a ten-kilometer export pipeline. As per previously disclosed guidance, South Disouq is expected to have company interest production of 3,025 to 3,205 boe/d for 2022 (2,280 to 2,420 boe/d on an entitlement basis); and
- a 50 percent non-operated interest in the Meseda and Rabul fields, located onshore in the Eastern Desert, situated in the G and H blocks of the West Gharib concession. At present, SDX and its partner are undertaking a 13-well drilling campaign that commenced in Q4 2021 and is expected to continue into 2023, with the goal of increasing gross field production from 2,400 bbl/d to 3,500 – 4,000 bbl/d by early 2023. As per previously disclosed guidance, net entitlement production (reflecting SDX share of cost and profit oil), is expected to be 420 to 505 bbl/d during 2022.
In Morocco, SDX has a 75 percent working interest in four exploration permits, with expected 2022 production of 600 to 625 boe/d. The permits are situated in the Gharib Basin, are characterized by attractive gas prices and low operating costs, as follows:
- Sebou Central and Gharb Occidental permits comprise SDX’s core production area as well as possessing further development prospectivity. A significant portion of these permits is covered by high-quality 3D seismic which has historically yielded a high exploration/development success rate. Produced gas is delivered to seven industrial customers via an 8″ 55km pipeline and distribution network to the industrial city of Kenitra;
- a Mimouna Sud exploration permit is adjacent to the producing Sebou/Gharb Occidental permits. Future discoveries will be tied into the existing gas distribution network; and
- Moulay Bouchta Quest exploration license was awarded to SDX in 2019 for a period of eight years. SDX is required to reprocess 150 kilometers of 2D seismic data, acquire 100 km2 of new 3D seismic, and drill one exploration well within the first three-and-a-half-year period of the license.
As of year-end 2021, SDX has net proved and probable (2P) reserves of 7.0 mmboe (or 6.0 mmboe as adjusted for sale of 33% interest in South Disouq subsequent to year end 2021) as per independent reserves report generated by Gaffney, Cline and Associates Limited. The SDX asset base contains limited asset retirement obligations totaling $7.3 million.
In respect of the existing awards granted under the SDX Share Option Schemes, it is the intention of SDX’s remuneration committee that, in aggregate, options over 3,183,713 SDX Shares will be determined as fully vested on the date of the Scheme Court Order (comprising 50% of all unvested awards outstanding as at the Latest Practicable Date). Vested SDX options granted under the SDX Share Option Schemes will be exercisable until six months (or, in the case of the SDX CSOP, twenty days) after the effective date (unless they lapse earlier under the terms of the SDX Share Option Schemes).
Completion of the Transaction is subject to a number of conditions and approvals including, but not limited to, the approval of the TSX, the governments of Egypt and Morocco, and shareholders of both Tenaz and SDX. We expect to hold a special meeting of Tenaz shareholders to approve the Transaction in late June or early July 2022. In accordance with the rules of the TSX, Tenaz shareholder approval is required as the Transaction is expected to result in the issuance of Tenaz Shares in excess of 25% of the Tenaz Shares outstanding as of the date hereof. SDX is expected to hold a shareholder meeting to approve the Transaction in July 2022. Closing of the Transaction is expected late July or early August following shareholder approvals.
After considering, among other things, (i) the anticipated benefits of the Transaction; and (ii) the risks associated with completing the Transaction, the Tenaz Board has unanimously determined that the Transaction is in the best interests of Tenaz and the Tenaz shareholders, and unanimously recommends that Tenaz shareholders vote in favour of the resolutions relating to the Transaction.
Anthony Marino, Tenaz CEO and Director, commented that:
“This Transaction is an important step in the execution of our strategy for international growth. The Egyptian and Moroccan operations are within our primary regions for long-term focus, and we believe that these are high quality assets with numerous desirable organic investment opportunities. In addition, we believe that these areas offer opportunities for continued consolidation and resulting growth. Finally, we expect that the combination of our technical teams will enhance the operating, HSE and sustainability performance of these assets and future assets that we may acquire as we pursue our corporate strategy.”
Similarly, SDX Directors believe the Transaction with Tenaz represents a compelling opportunity for SDX shareholders, its employees and wider stakeholders to participate in Tenaz’s growth while advancing its current endeavours on the assets. As such, following careful consideration, the SDX Directors intend to unanimously recommend the Transaction to SDX shareholders.
The SDX Directors have irrevocably undertaken to vote in favour of the Transaction at the SDX court meeting, and in favour of the SDX resolution to be proposed at the SDX general meeting, in respect of their own beneficial holdings (and the beneficial holdings which are under their control) of 5,020,606 SDX Shares representing, in aggregate, approximately 2.5 percent of SDX’s issued ordinary share capital as at the close of business on the May 24, 2022.
finnCap Ltd. is acting as the sole financial advisor to Tenaz. Torys LLP and Watson, Farley and Williams are acting as Canadian and U.S. and UK counsel respectively, to Tenaz. N.M. Rothschild, Sons and Co is acting as financial advisor to SDX in connection with the Transaction. Blakes LLP and BCLP are acting as North American and UK counsel to SDX respectively, in connection with the Transaction.
To remain compliant with the Code, Tenaz has released a “Rule 2.7” announcement in the UK market in connection with this Transaction. This announcement and other details of the Transaction can be found at www.tenazenergy.com.