32 thoughts on “An Open Letter to the Board of Serica Energy Plc”
Thanks Jeremy. Many on the LSE chat forum share your concerns and, by taking soundings, posters on there speak for over 2% of the equity and virtually all have intimated that they will vote NO.
thank you kindly Barry. Please feel free to share this link/letter (its open access/no paywall), to all message boards you partake in. the more we can get the word out, the better.
Great letter Jeremy! Increased my stake today. Will be interesting to follow this. How has communication with other shareholders been? Other large shareholders onboard at this point?
for what its worth, and for anyone involved here and sharing my aims – you can write directly to the company at info@serica-energy.com, requesting said message to be delivered to Mr Anthony Craven Walker (the Chairman), suggesting your support of this letter and intention to vote against. I believe it is worthwhile as every vote will count in this one and think it will be a close vote regardless.
This is to acknowledge receipt of your email below.
I am sorry to hear that you have decided to vote against the Resolution at the 27th January EGM but hope that you were able to attend the on-line presentation by Mitch on 10th January where he answered most of the questions posed by shareholders.
The Board fully believes that, in the complex world in which we have to operate, the Company will be much stronger and resilient and able to maintain its growth objectives as a result of the transaction than on a stand-alone basis and stands by its recommendation.
I am also a very significant shareholder and have been for many years. I would not be supporting this transaction if I felt that it was value-destructive or impacting the Company’s independence.
On the specific question of valuations the important point which appears to be missed is that the valuations were done on a relative value of underlying assets using the same metrics for both companies. That determines the relative shareholdings but that should not be used to try to determine absolute values or imply a discount to value which some observers seem to be doing.
I apologise if any questions that you had were not answered in full.
If you are able to attend the meeting on 27th January I look forward to meeting you there.
Best regards
Tony Craven Walker
Chair
Serica Energy plc
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thanks for sharing. in other words he didnt answer you directly, i dont really even understand what that paragraph about the valuations even means…
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Hey Jeremy, quick question – I know last time we did this with RESAP – we had to submit our votes early do you have the timeline for submitting via IBKR for the vote on the 27th? Want to make sure we all get our votes in on time.
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yes i believe the last day would be sometime about a week from now. technically the last day electronic proxies can be lodged in the 25th. i will inquire w IBKR and come back
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if you raise a ticket on IBKR, stating 1) your shareholding in SQZ: 2) how you wish to vote (AGAINST all resolutions at the upcoming EGM); and 3) the EGM date (Jan 27), IBKR will input your details for you.
just make sure you get a reply back confirming your voting instructions have been followed through.
thank you for your efforts!
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thank you Jason! i am trying my best!
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Thanks Jeremy my votes are in looking forward to the podcast tonight with Andrew!
My analysis of this deal isn’t as negative. Why do you ignore the GBP 470m in future tax savings that is coming with Tailwind? Even if they can only use these losses against Tailwind’s assets, it seems like the PV of these are still about GBP 400m, which if included would make your math look much different. My math is that this deal is only slightly worse on a NAV/share basis than if they did a tender offer at 300p (although I am worried management may have portrayed Tailwind’s assets as better than they are in reality). I am reluctant to see them issue shares at a discount to NAV, but don’t you think they are getting assets back that are also at a sizable discount to NAV (including the tax assets).
Mercuria and Tailwind’s founders owning 30% of the company and having board representation seems to me to be a resounding positive. Having more of an ownership mentality and a shrewd industry participant in the board room strikes me as a big improvement from the status quo. Their record with Tailwind certainly seems impressive (taking equity value from GBP 120m in Dec 2018 to GBP 370m of equity at the headline value of this deal, which given the discount in Serica’s shares likely is understated). Why do you see it as a negative?
thank you for the most thoughtful feedback. let me counter with how i think about it:
1) Tax assets: you are right they have some value, but i believe nowhere near 470mm. firstly that is a gross number, not discounted, you would need at the very least to NPV it versus the likely applicability. assuming zero changes in the tax rules and full utilization, it would take i believe 2-3yrs to extinguish that 470mm number, so you could say NPV is somewhere around 350mm? before considering…
…that Labour is likely to win in 2024 (polls) and is extremely anti O&G. since using these tax losses is essentially just to dodge to excess profits levy, i wouldnt be surprised if there were further changes to the tax code, perhaps over night, to limit the applicability of legacy NOLs to specifically get out of the excess profits tax. you may argue this is punitive but SQZ management notably didnt want to talk about the NOLs on the call; and specifically avoided including any tax synergies in their numbers.
so even if you accorded the taxes some decent amount of value, given the riskiness inherent in actually getting the value, i would think a simple recapitlization strategy (ie buying back shares to create huge accretion) is far less risky than this transaction.
Mercuria assets: you appear to take a bullish view of the actual assets Tailwind is contributing. that may turn out to be true, but keep in mind we have ZERO historical information about how the assets have performed; no Competent Persons Report (quite unusual, this would not be the case if this were structured as an acquisition, but since it is simply a share issuance, they dont need it legally speaking); and also note that this suite of assets was producing at a much, much lower level until recently (11-12k boepd in Jan 2022). i am not saying you are wrong, i am saying the way management has presented the info (or rather not presented any info), it is impossible to tell, creating a lot of additional execution risk. Keep in mind the information circular describing the deal was only 23 pages, of which 9 were filler/definition, and there was almost no new information included versus other filings. this all increases risk – again, versus the available alternatives.
Controlling position of Mercuria in the equity: I totally disagree with you here. your point would conceptually make sense if say Mercuria had a 5% or 10% lookthrough stake. but at 25% you give up actual control – for no premium. this is enough to block any competing Scheme and practically any Takeover. it is nonsensiscal. the ‘skin in the game’ point has merit, partially, but given the overall value of Mercuria is still likely much, much larger than the delta in a 25% stake in Serica now/in the future versus what they would have received in cash for selling their Tailwind business in the market, I don’t think we can realistically say they are aligned. Especially not given the marketing and hedging relationships that exist outside of pro-forma Serica. I have seen these kinds of minority/related party deals in many other situations (look at TRQ/Rio Tinto, Noranda Income Fund/Glencore, etc as two that come to mind) and the opportunities for abuse are rife.
For all those reasons, I dislike the form, terms, and outcome of this transaction.
Hi Jeremy, excellent explanation of three key issues which concern a number of us, in particular your views on the use and value of the tax loses which have been the subject of a lot of discussion on the various forms.
I was going to mention this response on the LSE Forum where I post as posters are still reflecting on the merits of that particular aspect of the deal.
Is it ok if I quote from it or refer posters to your reply to Daniel as I wouldn’t want to breach any confidentiality issues.
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please feel free to quote/send any of this letter. it is in the public domain! the commentary with Daniel should, as well, be considered public access, i believe. thank you Barry
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Small point but there is a fair amount of information available about Tailwind on their website. Annual accounts are linked to brief new releases about their annual results.
if you raise a ticket on IBKR, stating 1) your shareholding in SQZ: 2) how you wish to vote (AGAINST all resolutions at the upcoming EGM); and 3) the EGM date (Jan 27), IBKR will input your details for you.
just make sure you get a reply back confirming your voting instructions have been followed through.
a reminder the deadline to submit your votes on IBKR is today!
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thank you yes. i imagine everyone has already voted but if not, all you need to do is send a message (via ticket) to IBKR asking to vote against all resolutions at the Serica EGM. they should reply to confirm the instruction has been input via Crest. then you are good to go.
thanks again for all your help, fingers crossed for the right outcome here.
Jeremy (or anyone) — are you hearing anything this week regarding the vote? Last couple days’ stock action makes it seem that someone is throwing in the towel.
the vote is on the 27th, i am not sure how to assess the odds of it passing or not, basically every single investor (bar one) ive spoken to has said they will vote against, but i have to assume Hardy (at 10%) will vote For the deal, i have not been able to contact him.
keep in mind Dutch TTF prices have been pretty weak last couple days (though UK gas prices holding up a bit better).
obviously, i am really hopeful the deal gets blocked and think the stock would rally substantially on this. but i still believe it is too close to call at this time.
Thanks Jeremy. Many on the LSE chat forum share your concerns and, by taking soundings, posters on there speak for over 2% of the equity and virtually all have intimated that they will vote NO.
thank you kindly Barry. Please feel free to share this link/letter (its open access/no paywall), to all message boards you partake in. the more we can get the word out, the better.
Another superb letter to management. The prose exceeded that contained in the HDG missive, which was a very high bar.
Well done!
thank you very much Steve! i am trying my best!!
Great letter Jeremy! Increased my stake today. Will be interesting to follow this. How has communication with other shareholders been? Other large shareholders onboard at this point?
Jeremy the activist!
A collection of Letters to the Board
Available on Amazon at some point in the future…
for what its worth, and for anyone involved here and sharing my aims – you can write directly to the company at info@serica-energy.com, requesting said message to be delivered to Mr Anthony Craven Walker (the Chairman), suggesting your support of this letter and intention to vote against. I believe it is worthwhile as every vote will count in this one and think it will be a close vote regardless.
E-mail sent 🙂 Have a great weekend Jeremy! Thank you so much for taking the time out of your schedule to take on another activist campaign.
thank you Jason and have a great weekend.
Tony Craven Walker
1:37 PM (13 minutes ago)
to me
Dear Mr XXXXXX
This is to acknowledge receipt of your email below.
I am sorry to hear that you have decided to vote against the Resolution at the 27th January EGM but hope that you were able to attend the on-line presentation by Mitch on 10th January where he answered most of the questions posed by shareholders.
The Board fully believes that, in the complex world in which we have to operate, the Company will be much stronger and resilient and able to maintain its growth objectives as a result of the transaction than on a stand-alone basis and stands by its recommendation.
I am also a very significant shareholder and have been for many years. I would not be supporting this transaction if I felt that it was value-destructive or impacting the Company’s independence.
On the specific question of valuations the important point which appears to be missed is that the valuations were done on a relative value of underlying assets using the same metrics for both companies. That determines the relative shareholdings but that should not be used to try to determine absolute values or imply a discount to value which some observers seem to be doing.
I apologise if any questions that you had were not answered in full.
If you are able to attend the meeting on 27th January I look forward to meeting you there.
Best regards
Tony Craven Walker
Chair
Serica Energy plc
thanks for sharing. in other words he didnt answer you directly, i dont really even understand what that paragraph about the valuations even means…
Hey Jeremy, quick question – I know last time we did this with RESAP – we had to submit our votes early do you have the timeline for submitting via IBKR for the vote on the 27th? Want to make sure we all get our votes in on time.
yes i believe the last day would be sometime about a week from now. technically the last day electronic proxies can be lodged in the 25th. i will inquire w IBKR and come back
if you raise a ticket on IBKR, stating 1) your shareholding in SQZ: 2) how you wish to vote (AGAINST all resolutions at the upcoming EGM); and 3) the EGM date (Jan 27), IBKR will input your details for you.
just make sure you get a reply back confirming your voting instructions have been followed through.
thank you for your efforts!
thank you Jason! i am trying my best!
Thanks Jeremy my votes are in looking forward to the podcast tonight with Andrew!
notifs
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Hi Jeremy,
My analysis of this deal isn’t as negative. Why do you ignore the GBP 470m in future tax savings that is coming with Tailwind? Even if they can only use these losses against Tailwind’s assets, it seems like the PV of these are still about GBP 400m, which if included would make your math look much different. My math is that this deal is only slightly worse on a NAV/share basis than if they did a tender offer at 300p (although I am worried management may have portrayed Tailwind’s assets as better than they are in reality). I am reluctant to see them issue shares at a discount to NAV, but don’t you think they are getting assets back that are also at a sizable discount to NAV (including the tax assets).
Mercuria and Tailwind’s founders owning 30% of the company and having board representation seems to me to be a resounding positive. Having more of an ownership mentality and a shrewd industry participant in the board room strikes me as a big improvement from the status quo. Their record with Tailwind certainly seems impressive (taking equity value from GBP 120m in Dec 2018 to GBP 370m of equity at the headline value of this deal, which given the discount in Serica’s shares likely is understated). Why do you see it as a negative?
thank you for the most thoughtful feedback. let me counter with how i think about it:
1) Tax assets: you are right they have some value, but i believe nowhere near 470mm. firstly that is a gross number, not discounted, you would need at the very least to NPV it versus the likely applicability. assuming zero changes in the tax rules and full utilization, it would take i believe 2-3yrs to extinguish that 470mm number, so you could say NPV is somewhere around 350mm? before considering…
…that Labour is likely to win in 2024 (polls) and is extremely anti O&G. since using these tax losses is essentially just to dodge to excess profits levy, i wouldnt be surprised if there were further changes to the tax code, perhaps over night, to limit the applicability of legacy NOLs to specifically get out of the excess profits tax. you may argue this is punitive but SQZ management notably didnt want to talk about the NOLs on the call; and specifically avoided including any tax synergies in their numbers.
so even if you accorded the taxes some decent amount of value, given the riskiness inherent in actually getting the value, i would think a simple recapitlization strategy (ie buying back shares to create huge accretion) is far less risky than this transaction.
Mercuria assets: you appear to take a bullish view of the actual assets Tailwind is contributing. that may turn out to be true, but keep in mind we have ZERO historical information about how the assets have performed; no Competent Persons Report (quite unusual, this would not be the case if this were structured as an acquisition, but since it is simply a share issuance, they dont need it legally speaking); and also note that this suite of assets was producing at a much, much lower level until recently (11-12k boepd in Jan 2022). i am not saying you are wrong, i am saying the way management has presented the info (or rather not presented any info), it is impossible to tell, creating a lot of additional execution risk. Keep in mind the information circular describing the deal was only 23 pages, of which 9 were filler/definition, and there was almost no new information included versus other filings. this all increases risk – again, versus the available alternatives.
Controlling position of Mercuria in the equity: I totally disagree with you here. your point would conceptually make sense if say Mercuria had a 5% or 10% lookthrough stake. but at 25% you give up actual control – for no premium. this is enough to block any competing Scheme and practically any Takeover. it is nonsensiscal. the ‘skin in the game’ point has merit, partially, but given the overall value of Mercuria is still likely much, much larger than the delta in a 25% stake in Serica now/in the future versus what they would have received in cash for selling their Tailwind business in the market, I don’t think we can realistically say they are aligned. Especially not given the marketing and hedging relationships that exist outside of pro-forma Serica. I have seen these kinds of minority/related party deals in many other situations (look at TRQ/Rio Tinto, Noranda Income Fund/Glencore, etc as two that come to mind) and the opportunities for abuse are rife.
For all those reasons, I dislike the form, terms, and outcome of this transaction.
Hi Jeremy, excellent explanation of three key issues which concern a number of us, in particular your views on the use and value of the tax loses which have been the subject of a lot of discussion on the various forms.
I was going to mention this response on the LSE Forum where I post as posters are still reflecting on the merits of that particular aspect of the deal.
Is it ok if I quote from it or refer posters to your reply to Daniel as I wouldn’t want to breach any confidentiality issues.
please feel free to quote/send any of this letter. it is in the public domain! the commentary with Daniel should, as well, be considered public access, i believe. thank you Barry
Small point but there is a fair amount of information available about Tailwind on their website. Annual accounts are linked to brief new releases about their annual results.
https://files.cargocollective.com/c1321272/NSV-Energy-Consolidated-Stats-2021—signed.pdf
https://files.cargocollective.com/c706834/NSV-2020-consolidated-stats_vFinal.pdf
https://files.cargocollective.com/c706834/Tailwind-Energy-Consolidated-2019-financial-statements—signed.pdf
thank you very much – i will investigate those, i was unaware they were in the public domain!
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How do those of us with $SQZ holdings via Interactive brokers exercise our votes? I haven’t yet seen it come up in the corporate action section.
if you raise a ticket on IBKR, stating 1) your shareholding in SQZ: 2) how you wish to vote (AGAINST all resolutions at the upcoming EGM); and 3) the EGM date (Jan 27), IBKR will input your details for you.
just make sure you get a reply back confirming your voting instructions have been followed through.
thank you for your efforts!
a reminder the deadline to submit your votes on IBKR is today!
thank you yes. i imagine everyone has already voted but if not, all you need to do is send a message (via ticket) to IBKR asking to vote against all resolutions at the Serica EGM. they should reply to confirm the instruction has been input via Crest. then you are good to go.
thanks again for all your help, fingers crossed for the right outcome here.
following comments
Jeremy (or anyone) — are you hearing anything this week regarding the vote? Last couple days’ stock action makes it seem that someone is throwing in the towel.
the vote is on the 27th, i am not sure how to assess the odds of it passing or not, basically every single investor (bar one) ive spoken to has said they will vote against, but i have to assume Hardy (at 10%) will vote For the deal, i have not been able to contact him.
keep in mind Dutch TTF prices have been pretty weak last couple days (though UK gas prices holding up a bit better).
obviously, i am really hopeful the deal gets blocked and think the stock would rally substantially on this. but i still believe it is too close to call at this time.