Letter from the Chairman of Nostra Terra
30 June 2017
Nostra Terra Oil and Gas Company plc
("Nostra Terra" or the "Company")
Magnolia Petroleum plc ("Magnolia") - General Meeting
Further to the announcement of 21 June 2017, Nostra Terra (AIM:NTOG) sets out below an open letter from the Chairman of the Company to shareholders of Magnolia (AIM:MAGP) in response to the announcement made by Magnolia on 20 June 2017.
"Letter from the Chairman of Nostra Terra
Dear Magnolia Shareholders,
I am writing this letter to clarify some points concerning Nostra Terra's ("the Company") investment in Magnolia Petroleum Plc ("Magnolia" or "that Company") and to address the boardroom changes proposed at that Company's forthcoming General Meeting.
However, before I begin, I would like to assure all shareholders that if I were voted onto the board of Magnolia my primary goal as a director of that Company would be to work in the best interests of Magnolia. Just as I have helped oversee the restructuring of Nostra Terra's business model over the last year and a half, I am confident I can make a valuable contribution to the repositioning of Magnolia and restoring value to that Company.
As Nostra Terra's representative on the Magnolia board I will not take any salary from Magnolia for at least the first year of my tenure. Nostra Terra wishes to help Magnolia's position and excessive boardroom compensation is one of the first problem areas we wish to address.
It is clear from the outside that Magnolia's current business model is in danger of failing. By Magnolia's own admission that Company is "non-compliant on all (banking) covenants". Magnolia's borrowing base limit was $1,604,565 as of 31 December 2016, yet that Company's borrowings on the facility "amounted to $2,638,447". Magnolia's borrowing base limit "is due for repayment in full on 8 August 2017 and the decision to extend is at SNB Bank's (Magnolia's bank) discretion."
Magnolia's 2016 Annual Report, states that they have net current liabilities of $3,928,983, including the $2,638,447 borrowings to SNB Bank and $1,290,536 in trade and other payables. Magnolia has warned its shareholders:
"As noted in the Company's recently published report and accounts, the Company does not have the cash reserves to repay this loan in full and would therefore be required to raise funds or sell down its assets to repay this loan. In the event that the bank is unwilling to allow the Company time to achieve this, the bank would be entitled to call upon its security which could involve a formal insolvency of its subsidiary."
Despite this obvious looming threat to Magnolia, the current Chief Executive has failed to take sufficient action to avoid a potentially catastrophic outcome for Magnolia's shareholders. I believe there is still time to avert such a catastrophic outcome, but only if decisive action is taken now. As such I urge all shareholders in Magnolia to vote IN FAVOUR of all the resolutions proposed at the forthcoming General Meeting.
Background to Nostra Terra's Investment in Magnolia
Over the past few years the oil industry has continued to wrestle with the persistently lower oil price environment. The bear market has hurt the entire sector and led to a re-evaluation of strategy by many companies.
At Nostra Terra we took steps to act early in response to such challenging conditions, both restructuring and repositioning the Company. Although our efforts have not yet been reflected in Nostra Terra's share price, I am confident it is only a matter of time before the market recognizes the Company's ever-improving fundamental strength.
Nostra Terra's business in the USA now has assets that are profitable below $30 oil, with growing production and an inventory of proven locations that can be drilled delivering a 2:1 return at $40 oil. After one time costs, our repeating overheads are low and the company reduced board remuneration. Nostra Terra's operations team is based in Dallas and has experience in several basins in the Mid-Continent of the US. Lastly, Nostra Terra's debt levels have been substantially reduced and the company is in compliance with all of its covenants with its bank, for its $25 million Reserves Based Lending facility.
Nostra Terra is now extremely well positioned to benefit from any improvement in the oil market and is actively looking for deals, which it believes can deliver considerable shareholder value over the medium term.
This is why Nostra Terra has taken a 10.9% stake in Magnolia. Although Magnolia's business model appears on the verge of failure, as that Company struggles under an unsustainable debt burden, Nostra Terra believes it can make a valuable contribution in turning that Company's fortunes around. However, to achieve this I believe urgent changes are required at that Company's board level.
The Requisition
In May 2017 Steven Snead, former CEO of Magnolia, contacted Nostra Terra about the potential sale of his and his family's ("the Snead Group") shares in Magnolia. Mr Snead has recently resigned from the board of Magnolia, citing irrevocable differences with Magnolia's current board concerning the future path of that Company. As Magnolia's former CEO, Mr Snead was well positioned to identify the fundamental flaws in that Company's business model.
On 26 May 2017, Nostra Terra announced that it had reached an agreement with Mr Snead to acquire the Snead Group's stake in Magnolia. For the avoidance of any doubt, Nostra Terra does not have any other agreement (explicit or implicit) with Mr Snead or any other member of the Snead Group about any future business relationship, beyond the share purchase and direction of voting at the forthcoming General Meeting of Magnolia.
Nostra Terra's agreement to purchase the Snead Group shares is fixed. There is nothing conditional about it. The only reason Nostra Terra has not yet taken full ownership of the Snead Group shares is because of the legal, and compliance technicalities surrounding calling and voting at a company's General Meeting.
Magnolia's current board has recently claimed that, if successful, the proposed resolutions at the forthcoming General Meeting on the 18th July 2017 could constitute a "change of control" and "trigger an obligation to immediately repay the bank loan". We do not believe this is correct and, by its own admission, Magnolia is already non-compliant on all its banking covenants in any event. The bank can already demand immediate repayment of the loan.
It is not correct as clearly the proposed resolutions are not seeking control. If shareholders accept the resolutions, Magnolia's board will comprise four directors (two existing and two new). Of the two new directors only one (myself) is from Nostra Terra, the other being an independent from the UK.
It's our opinion that refreshment of Magnolia's board and a change in executive management will likely help improve relations with SNB Bank. With Nostra Terra's track record in managing its debt appropriately, the changes it has made to its business model, and its 10.9% stake in Magnolia, it is my expectation that SNB Bank will welcome Nostra Terra's involvement in turning around Magnolia's fortunes.
Restoring value to Magnolia
On joining Magnolia's board my first priority would be to initiate an immediate strategic review of that Company's cost base and asset portfolio. It is clear to me that Magnolia is in urgent need of restructuring. The Company has spent a great deal on board remuneration and corporate overhead, while its asset portfolio has underperformed in the lower oil price environment. If we act quickly it is my belief we can preserve shareholder value.
The next serious concern is Magnolia's debt position. According to Magnolia's 2016 Annual Report, that Company had net current liabilities of £$3,928,983, including the $2,638,447 debt to SNB Bank and $1,290,536 in trade payables. Magnolia has admitted that it is non-compliant with all of its banking covenants and that it is expected to repay its borrowing base on 8 August 2017 (at least $1,604,565). This requires instant action. At Nostra Terra we have maintained excellent relations with our bankers and creditors. We have worked hard to restore value to our Company's balance sheet. On joining the board I am confident I would have a positive role to play in helping Magnolia navigate out of the challenging financial position it now finds itself in.
Once the strategic review has been completed and Magnolia's debt position resolved, it will then be possible to reform that Company's business model to restore value to shareholders. With its 10.9% stake in Magnolia, Nostra Terra is highly incentivized to see this happen. Our interests are directly aligned with Magnolia's existing shareholders in seeing that Company's share price rise.
As such, I urge Magnolia's shareholders to vote IN FAVOUR of all the proposed resolutions at that Company's forthcoming general meeting.
If any Magnolia or Nostra Terra shareholders have further questions please contact me through investor_relations@ntog.co.uk.
Yours sincerely,
Ewen Ainsworth,
Non-Executive Chairman
Nostra Terra Oil & Gas Plc"
For further information, visit www.ntog.co.uk or contact:
|
Nostra Terra Oil and Gas Company plc Matt Lofgran, CEO
|
|
+1 480 993 8933 |
|
||
|
Strand Hanson Limited (Nominated and Joint Broker) |
|
+44 (0) 20 7409 3494 |
|
||
|
Rory Murphy / Ritchie Balmer / Jack Botros |
|
|
|
||
|
|
|
|
|
||
|
Smaller Company Capital Limited (Joint Broker) |
|
+44 (0) 20 3651 2910 |
|
||
|
Rupert Williams / Jeremy Woodgate |
|||||
This information is provided by RNS
Latest directors dealings
- 56 minutes ago Judges Scientific
- 1 hour ago AB Dynamics
- 1 hour ago Henry Boot
- 1 hour ago TPXimpact Holdings
- 1 hour ago Ithaca Energy