I have finally come to a decision in regards to the SKW/MQE merger thanks to the joint management information circular that you can find on sedar. I was thinking of voting against the merger initially but have come around to become a proponent of this merger. There is no doubt about it; we are getting shafted in this deal thanks to a management team that describes selling the company at half its NAV as “exciting”.
I do not expect to make perfect picks when I invest and I insist that by investing in SKW I was not investing in a distressed company. There are plenty of juniors exploiting the Cardium, there’s nothing new there. However, I failed when it came to management because I invested in a distressed management team. Frankly, I would have never known management was of such low caliber. Note to self: focus on management track record and insider holdings not just the assets next time as this would have saved the portfolio a lot of pain.
These guys have been trying to sell the company since January of 2011 and this is all they ended up with. They entered in confidentiality agreements with 20 parties that were potentially interested in buying SKW and failed to achieve the sale. We all knew its asset base would end up getting the company sold, but what we didn’t know is that it would end up on these terms. Which brings me to my decision; it was largely based on the following quote in anticipated benefits from the document on page 34:
“the combined company will benefit from a strong management team and Board of Directors with a proven track record, which is capable of growing the combined company to the next level of success as compared to SkyWest’s current position”
This is exactly it; we do not have a strong management team with a proven track record. I would not want the vote to fail because we will be stuck with the same incompetent team again.
Financially speaking, the company is using 94% of its credit line. Under the leadership of a management team of this caliber, forget about tapping the market for money. This leaves them with one choice: monetizing non-core assets as stated in their Q3 report:
“The Corporation has received offers on non-core properties and is considering disposing non-core properties in order to strengthen the balance sheet and deliver a meaningful 2012 capital program.“
At 2,000 boe/d, they can generate about $20MM in 2012 which can fund 6-7 net wells at $3MM a pop but that would not even replicate2011’s capex program unless they close on those dispositions or else we will not get to see a substantial increase in production.
These guys are burnt and their career in the O&G industry is practically over. If the merger fails, we will be stuck with a team lacking credibility that can only grow the company at a snail’s pace going forward not to mention difficult access to financing. I believe that giving Marquee’s CEO, Richard Thompson, his chance to build a new light oil weighted company with the combined entities is the best bet for the long run.
For those who believe voting against the deal would help them sell to a higher bidder, my answer is: if there’s a higher bidder interested, he will step forward before Dec. 5 but so far it doesn’t look like it. Not everyone is happy with this deal, particularly the institutional holders as they are getting the same haircut as us. This creates an uncertainty around the merger that will only dissipate in the positive outcome of the vote.
I decided to vote in favor of the merger largely because I want this management team out. If you’re voting against the deal, I would love to hear the alternative you have to offer.
How will you be voting?