Xplorer is a newly established company incorporated under the laws of England and Wales and formed for the purpose of acquiring a company, business or asset that has operations in the oil and gas exploration and production sector that it will then look to develop and expand.
In early July 2013, Xplorer raised gross proceeds of £1,000,000 through a placing as part of its listing on the London Stock Exchange and these funds have been earmarked to cover the professional costs associated with an acquisitions policy.
The Board is responsible for the Company’s business strategy and its overall supervision, including the approval of a future acquisition. The Board will also be responsible for the identification and assessment of acquisition opportunities, the structuring and execution of an acquisition and determination and execution of strategy for the acquired companies, businesses or assets. Xplorer’s directors have considerable experience in identifying acquisition targets and in executing such transactions which it is hoped will establish Xplorer’s presence in the oil and gas sector and will form the basis of Xplorer’s growth in that sector. It is not intended that Xplorer simply acquire minority stakes in oil and gas entities but that it acquires and operates oil and gas businesses.
The Value Opportunity
The Directors believe that increasing global industrialisation and urbanisation, particularly in Asia (outside Japan) and the other emerging markets, is likely to lead to increased global demand for commodities. At the same time, the Directors believe that the supply of commodities will be constrained by insufficient investment to keep pace with increased demand and by exploration and development challenges, which are likely in each case to generate sustained inflation in commodity pricing. The Directors’ views in this area are supported by the findings of the Organization of the Petroleum Exporting Countries (OPEC) in their World Oil Outlook 2012 report.
The Directors consider these dynamics to be particularly apparent in the oil & gas industry. In recent years, the oil & gas industry has become significantly consolidated. Such consolidation has resulted in the acquisition of many mid-sized companies and the domination of the industry by a small number of non-state owned, vertically integrated companies (commonly known as the “oil majors” or “majors”) and national oil companies. However, many valuable resource assets have been acquired by non-majors, which often do not have access to capital or sufficient know-how to realise their development potential, especially in an increasingly complex technical environment. Many of these businesses have a bias towards exploration and development assets, so consequently do not have sufficient producing assets to benefit from the currently high oil prices in order to de-lever their balance sheets. Other parts of the natural resources sector demonstrate similar characteristics.
Accordingly, the Directors believe that the natural resources sector, and especially the oil & gas industry, presents multiple attractive investment opportunities. These include the opportunity to acquire privately owned natural resource businesses, or illiquid emerging market listed entities without the ‘know-how’ or capital to unlock the value of their natural resource assets.
Business strategy and execution
Xplorer (including subsequently acquired or incorporated subsidiaries) will form a trading business, rather than an investment entity. The Company intends that the acquisition be of an operating oil and gas exploration and production business that can act as the cornerstone for building a substantial group within the same sector. Xplorer intends to grow this operational oil and gas exploration and production business both organically and by acquisition. The Company aims to achieve its objective through the identification and acquisition of companies, businesses or assets where the existing owners are attracted to the Xplorer proposition, namely the opportunity to sell for cash or hold an ownership interest in a London listed company, with cash, access to capital markets and the “know-how” to unlock the value of their acquired resource assets.
The Company aims to generate value for Shareholders by focussing on opportunities where there is less visibility on transaction pricing owing to a combination of context and geography.
In terms of context, the Company intends to focus on acquiring operating businesses or assets where value is trapped by virtue of a capital or expertise deficit. The Directors believe such trapped value may often occur in family controlled businesses and small companies with complex or diverse ownership structures or where the business or assets are considered to be non-core by a larger natural resources company. The Company will look to provide liquidity and/or cash to owners through the issue of new Ordinary Shares as consideration for the Acquisition or to raise capital, as well as the strategic and financial management expertise that the Board has identified as lacking in many of the target group businesses. The Directors consider this flexibility to be particularly attractive to owners who wish to remain operationally involved in, and participate in the future of, a target. The Board will look to identify and recruit suitable operational expertise to address any weaknesses in the management team of the Acquisition.
Geography and Sector Focus
In terms of geography, the Company intends to focus primarily on emerging and under-developed geographic regions where the Directors collectively have prior knowledge and experience. These include Asia, the Middle East, and Latin America. However the Company will not exclude other geographic regions where an opportunity presents an appropriate investment proposition. Similarly, while the Company intends to adopt an oil & gas focus, it will also remain open to opportunities in other commodities in the natural resources sector should an appropriate investment opportunity present itself.
The Company anticipates that it will acquire the whole voting control and equity interest of any target company or business.
The initial equity capital base of Xplorer will be relatively small compared with the likely value of the Acquisition, so it is intended to use Ordinary Shares as a material element of the consideration for the Acquisition. As the Acquisition is expected to be of a business valued at substantially more than Xplorer, it will constitute a Reverse Takeover under the Listing Rules, and a new Prospectus, a circular to Shareholders convening a general meeting and a new Standard Listing application will be required. The vendors of the Acquisition may receive a controlling stake in Xplorer as part of the transaction, which may well also result in a person or concert party owning 30 per cent. or greater of the issued Ordinary Shares. As the vendors of the Acquisition are unlikely to be connected with Xplorer and/or own any Ordinary Shares, it is expected that the Company will apply for dispensation under Rule 9 of the City Code, through a vote of independent shareholders (known as a “Whitewash”). The information required under the City Code for a Whitewash will be incorporated in the circular to be sent to Shareholders to accompany a Reverse Takeover and will require their vote at a general meeting. It is expected that concurrently with the Acquisition that Xplorer will need to raise new capital by making an offer of new Ordinary Shares for cash. The Acquisition is more likely to be successfully completed if the vendors agree to receive Ordinary Shares as a material element of the consideration and the Company is able to raise additional capital through the issue of new Ordinary Shares. It is likely that the completion of the Acquisition will be contingent on these events.
The Board brings considerable expertise that is specifically relevant to this stage of the Company’s development, i.e. in relation to identifying, assessing and executing the Acquisition, and negotiating and securing the required financing for the Acquisition:
- Christopher McAuliffe and Jaqueline Lim have experience of sourcing and executing acquisitions within the natural resources sector in a number of emerging economies. A list of the particularly relevant transactions are in the following paragraph. This experience will be important in successfully sourcing and executing the Acquisition.
- John Roddison is a Chartered Accountant with 35 years post qualification experience. He was also Finance Director of AIM quoted Silvermere Energy plc, which he left following the successful reverse takeover of the Mustang Island assets (an oilfield off the coast of Texas) in August 2011, which valued the enlarged group at £4.25m. He has specific expertise in relation to assessing, structuring and executing acquisitions, notably the implementation of financial reporting procedures, undertaking financial due diligence, managing capital requirements, and raising debt and equity finance. This experience will be important in successfully executing the Acquisition.
- John Davies and Christopher McAuliffe have been involved in a wide range of fundraisings of both equity and debt on public and private markets. They have an extensive range of investor contacts, which are expected to be important in successfully executing the Acquisition.
- Jacqueline Lim is a qualified corporate lawyer with 17 years post qualification experience. She has particular expertise in mergers, acquisition and capital markets transactions, both as a lawyer and as a private equity investment manager, which will be important in successfully executing the Acquisition.
The current Board has a focus on financial, transactional, legal and strategic expertise, and these are the key strengths that they will bring to the enlarged business following the Acquisition. The Board believes that these are the most important areas of expertise for the Company at this stage of its development, where the focus is to identify, finance and execute the Acquisition. Christopher McAuliffe has originated and advised on a large number of key mergers & acquisition, debt, equity capital markets and private equity transactions in Asia, including many deals in the natural resources sector, notably:
- Advising First Resources Limited, an Indonesian palm oil producer on their S$295m IPO on the Singapore Stock Exchange in 2007;
- Advising GMR Group, an Indian conglomerate, on their 2009 acquisition of Indonesian coal mining assets for US$100m;
- Advising Indika Energy Tbk, an Indonesian energy group with interests in coal mining, oil services and power generation on their US$300m IPO on the Jakarta Stock Exchange;
- Advising China Coal Energy Company Limited, one of China’s largest coal mining companies, on their US1bn IPO on the Hong Kong Stock Exchange in 2006; and
- Advising on the 2007 principal investment of US$150m into DP Cleantech (formerly Dragon Power), a leading Chinese biomass energy group.
The Company intends to leverage the Directors’ extensive and complementary network of contacts across the natural resources industry to access a number of quality acquisition opportunities. The Company and its Directors intend to assemble high calibre transaction and operating teams to conduct due diligence on targets and structure and execute the Acquisition and apply discipline to transaction selection.
One of the key considerations when assessingthe Acquisition will be the quality of the operational management. It would be expected that following the Acquisition, one or more of the senior management team of the Acquisition would join the Board in order to add operational expertise at that point, especially in relation to the Acquisition. Information on the new Directors would be detailed in the Prospectus and circular to Shareholders that will accompany a Reverse Takeover. Additional Directors and management may also be recruited externally if the Board identifies such a requirement.
Following completion of the Acquisition, the Company intends to implement a strategy designed to maximise Shareholder value by optimising the capital structure of the acquired activities, implementing disciplined operational improvements and strengthening management, including through the services of the Directors who may assume executive roles. The Company may also undertake targeted investments within the operations of the acquired activities and pursue strategic “bolt-on” acquisitions to increase the scale of the Company’s operating business.
The Company’s Competitive Strengths
The Directors believe that the Company should be well placed to compete against other market participants in the oil and gas exploration and production sector on the basis of the following competitive advantages:
- The Directors have a strong track record of operating in emerging and under-developed markets and a significant understanding of the sector.
- The Directors have an extensive network of relationships with the key decision-makers and owners of potential targets in the sector; and
- The Company has considerable flexibility in how it would be able to finance the consideration for the Acquisition, which will include the Net Proceeds together with the potential to incur indebtedness and/or to issue additional listed equity (whether to raise additional cash or as transaction consideration).