Sunday, January 29, 2017

Looking Back at Texas Vanguard Oil (TVOC)

I wrote about Texas Vanguard Oil in March 2011 - it was a great micro cap value idea. I guess at the time it was trading at $8.50 and seemed to be worth comfortably more. Today I was taking a look at what had happened to it subsequently. Management liquidated it at the top of the market in 2014 and paid out $13.11 per share:

The Merger is part of a plan to liquidate the Company and distribute the assets to shareholders. In the Merger, shareholders other than the majority shareholder and Chairman of the Board, Linda R. Watson (who owns a majority of the stock through Robert Watson, Inc., a company controlled by her), will receive cash in exchange for their shares, and their shares will be canceled. The Company will then own the non-operated oil and gas properties, some furniture and equipment, and the remaining cash that has not been distributed to minority shareholders in the Merger.

The amount per share to be paid to minority shareholders in the Merger will be approximately $13.30 per share, which is the estimated value of the Company (including the estimated value of the non-operated oil and gas properties, furniture and equipment) divided by the total outstanding shares.

After the Merger, the surviving company will pay cash bonuses to long-time employees and consultants as compensation for their past services. The surviving company will then pay all remaining liabilities of the Comp any and liquidate the Company by distributing the remaining cash and the non-operated oil and gas properties, furniture and equipment to the sole remaining shareholder.

The board of directors believes that this is a good time to liquidate the Company. We sold our operated oil and gas properties in 2013 because prices for properties like the ones we owned were near historic highs. In fact, prices are so high that we have concluded that it would be very difficult to purchase new properties to add to our portfolio, and to replace our properties that are being depleted through production, at prices that would yield a good return on investment given our small size and asset base. We believe that the best alternative for our shareholders is to liquidate our holdings and distribute the proceeds.

We have chosen this plan of the Merger followed by a liquidation because we want to accomplish two goals. First, as stated above, we want to liquidate the Company and distribute the proceeds to shareholders. Second, we want to pay long-time employees and consultants for their years of faithful service, but we do not want to have those payments reduce the proceeds to be paid to minority shareholders. We have never had a stock option or incentive compensation plan . The majority shareholder believes there is an obligation to compensate these employees and consultants, and she is willing to do so solely from her share of the assets of the Company. To accomplish this, we will (i) value the Company’s assets prior to making the compensatory payments, (ii) cash out the minority shareholders based on this valuation, (iii) make the compensatory payments, and finally, (iv) distribute the remaining assets to the majority shareholder.
When the liquidation/merger closed in fall 2014, the oil market had already collapsed, but the properties were sold in July 2013 when crude oil was over $100.

What great management and governance. I've never seen anything like it.


CP said...

The bidding process opened on May 16, 2013, and closed on June 19, 2013. Approximately 600 potential buyers were solicited to review the information we made available on the properties. Of those, approximately 15 potential buyers executed confidentiality agreements that enabled them to review the data in the virtual due
diligence room. During the process, we also had meetings with representatives of two potential buyers at our office in Austin, Texas, so that they could question our management about the properties. We asked that bids be submitted by July 3, 2013. In the end, we received three bids, all of which were from privately held exploration and production companies. As we had requested, all bids were for cash sales. Tivista Energy’s offer of $10 million was the highest we received. We had not had any contacts or transactions with Trivista Energy or its founder, Mr. Roach, prior to their offer to purchase the assets.

Mr. Gotham said...

To play devil's advocate, how do you know they valued the non-op properties fairly?

Seems like the most equitable thing to do would have been to give all shareholders the same distributions...the non op stuff could have gone in a liquidating trust or could have been sold too.

CP said...

I think those were worth a fraction of the other properties. And I think they had more than one appraisal done.

You don't think selling at the top was pretty cool? Is there another oil company that sold at the top?

Mr. Gotham said...

No it was cool, it's just when an insider says here's I'm going to take these illiquid assets that I've paid an appraiser to value, my eyebrows go up.

CP said...

Most of the Company’s assets currently consist of cash, but about 10% of the remaining assets consist of non-operated oil and gas properties. To be sure that the minority shareholders receive the fair market value of their shares, we seek to establish the fair market value for these assets as of the day before the merger takes effect. To do this, we will use a recent engineering report on the total oil and gas reserves of the non-operated properties (reduced by the value of oil and gas produced and sold from those reserves since the date of the report) and then apply a discount based on the range of discounts being applied to other current arms-length sales of oil and gas reserves. Oil and gas reserves are typically sold at a discount to their current absolute value to account for the timing of future expected production and normal production costs. After consulting with our reserve engineer, we expect to apply a discount to the reserve valuation. We will also consider other relevant factors that would apply to a sale at fair market value in a negotiated, arms-length transaction, including overall rate of return on the properties and time required to receive a return of 100% of the investment based on current cash flow.

There is a risk that, if we undervalue the non-operated oil and gas properties, minority shareholders may receive less than their fair market value per share in the Merger. On the other hand, if we overvalue the non-operated oil and gas properties, Ms. Watson may receive less than the fair market value per share for her shares in the liquidation.