WTI (Oct) $85.55 u/c*, Brent (Nov) $89.00 +45c, Diff -$3.45 +45c.

USNG (Oct) $2.76 u/c.*, UKNG (Oct) 83.25p -5.75p, TTF (Oct) €32.99 -€3.05.

Oil price

With the USA shut yesterday for Labor Day, which marks the end of the summer vacation and of course the driving season markets were quiet. Today both the KSA and Russia have announced that they are maintaining the cutbacks and accordingly the oil price is up by about a dollar.

I am not writing about Reabold today, will roll today’s news into the current note.

Molecular Energies

Molecular Energies is today publishing a circular to be sent to shareholders relating to the proposed sale of its Argentinian oil and gas business to PLLG Investments Limited, a company beneficially owned by Peter Levine, for a total potential consideration of up to US$40 million.

The Sale is of the entire issued share capital of President Energy Holding UK Limited being the beneficial owner of President Petroleum S.A, the owner and operator of the Company’s business and assets in Argentina and is more fully detailed below and in the Circular. All other assets and businesses of MEN including in Paraguay and elsewhere in the world are not affected.

The consideration for the Sale comprises:

·      US$2m cash payment on the date falling 12 months from completion of the Sale;

·      The Purchaser to procure the repayment of US$13 million debt and interest owed by PPSA to MEN;

·      Contingent consideration of up to 20% of the net free cashflow of PPSA over the next 5 years.

All of the above up to the sum of US$40 million in aggregate and subject to certain conditions.

The Sale constitutes a substantial property transaction pursuant to s190 of the Companies Act 2006 and a fundamental change of business pursuant to Rule 15 of the AIM Rules for Companies. Accordingly, the Sale requires the approval of shareholders in a general meeting and consequently the Circular contains a notice of general meeting to be held at 3pm on 21 September at The RAG Army & Navy Club, 36 Pall Mall, London, SW1Y 5JN. The Directors have also determined that it is appropriate, taking into account the size of the Company, to extend the share authorities granted to the Directors to allow more flexibility in the future as the Company moves forward in its business and strategy. Shareholders will accordingly be asked to vote on such extension at the General Meeting.

The Purchaser of PEH is a company ultimately beneficially owned by Peter Levine. Since Peter Levine is a Director and substantial shareholder in the Company, the Sale represents a related party transaction pursuant to Rule 13 of the AIM Rules for Companies.

The Independent Directors (being all those save for Peter Levine), having consulted finnCap Ltd, the Company’s Nominated Adviser, consider that the terms of the Sale are fair and reasonable insofar as the Company’s shareholders are concerned. 

Notice of the General Meeting and a form of proxy are available on the Company’s website at www.molecularenergiesplc.com/investors/documents-circulars/.

General Meeting

The Independent Directors of the Company being all directors apart from Peter Levine (the “Independent Directors”) unanimously recommend the passing of the Resolutions as being in the best interests of the Company. Accordingly, the Independent Directors intend to vote in favour of such Resolution in respect of their entire beneficial holdings. 

Peter Levine also intends to vote in favour of such Resolutions in respect of his entire beneficial holding, which in aggregate with the Independent Directors, represents approximately 29% of the entire issued share capital of the Company.

Robert Shepherd, Financial Director, commented:

“The proposals contained in the Circular represent the best interests of the Company. It is clear that the market is not appreciative of investment in Argentina and the current economic and political environment combined with the rampant inflation and severe restrictions on foreign investment have led the Independent Directors to conclude that the divestment of our Argentine business is appropriate.

“The Sale preserves potential upside for the Company from both future trading of the Argentine business as well as repayment of certain existing inter-company debt depending on the circumstances whilst removing Argentine exposure and debt from group and allows Molecular to build a substantial business free from those concerns.”

The good thing here is that I can probably use the vernacular where the company cannot, also having known President throughout all of its life I think I can get away with a degree of familiarity. The bottom line is that Argentina is a basket case as an economy, rampant inflation, disastrous flirtations with politics of all shades and no place for a UK quoted energy company. 

President has suffered from a particularly tricky double whammy, an investment in Argentina which, while whilst operationally pretty sound and with decent rocks has been financially marginalised by the currency and more and of course the energy sector as a whole in London being out of favour.

The machinations within country mean that you can’t get money out or pay off debt, even between company subsidiaries and buying anything from outside the country is ruinous, say twice as much if you deal through the official currency changing channels.

On the political front the most recent changes ahead of the October 22nd presidential elections involve libertarian Congressman Javier Milei who, after recent storming performances in regional and preliminary elections remains the top contender for the elections. However, the country needs more than just another good orator who can draw the crowds, even if he has threatened to destroy the system and start again. 

The country needs a huge injection of cash and the peso is so weak, and getting weaker, after calls for overseas investment after recent drought which has caused crop shortages. 

So I’m sure with a feeling of regret the company has decided to divest its Argentinian assets and is turning Molecular into something that will be appreciated, indeed the beginnings and the creation of Atome out of nothing leads to a more Paraguayan based home to Green House Capital which is already pregnant with green projects in the alternative energy market.

Finally, before I hear the noises off, this is no ‘gift’ for Peter Levine, he is effectively ‘taking one for the team’ as he leaves MEN clean and personally takes over the debt and with the safety net of the contingent consideration of up to 20% of the net free cashflow of PPSA over the next 5 years means that shareholders are protected pretty much whatever happens. 

As I understand it a number of the larger shareholders have approved the deal and will still have a fascinating exposure to Paraguay with its exploration well and all the other green energy projects I mentioned. Under the circumstances holders could have a real result here, I like the look of Atome and Green House and all that comes from them.

Circular to Shareholders

The following is extracted from the Circular:

Introduction

The Sale provides MEN with the potential to grow significantly as a public company without the anchor drag of being involved in a country sadly regarded by many investors in both the London and international markets as uninvestable at the present time.

Additionally, the Sale will enable MEN, as a Group, to be free of approximately US$33 million of third-party financial debt which sits in the Argentine company. This will leave the only remaining financial debt in MEN as a long-term and interest-free loan currently standing at US$12.1 million provided by one of Peter Levine’s beneficially owned companies with a maturity date of end of December 2025 and capable of extension if the parties agree.

MEN will continue to be an active trading company upon completion of the Sale, retaining its interest in a highly prospective exploration licence in Paraguay, with an exploration well currently due to commence drilling in September, as well as its material and valuable interests in Atome Energy PLC and Green House Capital. 

The Sale requires approval by the shareholders of MEN pursuant to s190 of the Companies Act 2006 due to the fact that Peter Levine is a director of the Company and the ultimate beneficial owner of the Purchaser, and due to the Sale being of sufficient size relative to that of the Company to constitute a disposal resulting in a fundamental change of business pursuant to Rule 15 of the AIM Rules. Completion of the Sale is, therefore, conditional upon (amongst other things) the approval of shareholders at a General Meeting of the Company. The matters referred to in this Circular do not affect the intention of MEN to spin-out its Green House Capital division via an Initial Public Offering during the course of this year.

At the same time, the authorities granted to the Directors to issue shares are proposed to be enlarged to give MEN the flexibility to use capital increases for the benefit of expansion going forward.

Background to PEH

PEH is the beneficial owner of the entire issued share capital of President Petroleum S.A (“PPSA”), a company registered and operating under the laws of Argentina.

PPSA is the owner and operator of MEN’s oil and gas interests in Argentina comprising 3 oil and gas producing concessions and one producing exploration licence in the Rio Negro Province and an oil producing concession in the Province of Salta. The concessions held in Rio Negro are 90% beneficially owned and expire subject to renewal in 2027/8, the exploration licence is wholly owned and expires within 12 months and the concession in Salta is entirely beneficially owned and due to expire in 2050 subject to renewal.

Current Position 

All of the concessions/licences are conventional mature fields and are subject to inevitable natural declines, the consequences of which have seen net oil and gas production decrease from an average of 1,650 boepd in 2022 to 1,514 boepd in the second quarter of 2023.

PPSA is operationally profitable with an EBITDA registered with the Argentine authorities of approximately US$3.5 million for the first 6 months of 2023 on turnover of approximately US$16 million. Much of this operational profit is used to service its third-party financial debts which are currently approximately US$33 million. All financial debts, both capital and interest, are being serviced. Current registered 2P hydrocarbon reserves as at 31 December 2022 are approximately 19 mmboe. PPSA will on the contemplated completion of the Sale owe MEN approximately US$13 million, comprised of the sum of US$10.9 million by way of an intercompany loan and US$1.9 million of accrued interest, which it is currently prohibited to service due to Argentina Central Bank restrictions on all such foreign payments.

Reason for Sale

The independent directors (being all directors save for Peter Levine) consider that the Sale is in the best interests of shareholders in MEN for the following reasons:

1.  The country of Argentina is economically and politically volatile and unstable and has degraded materially since the Company became invested there, especially so this year. In effect, the country has run out of dollars and a primary election for President of the country in August produced a surprising result creating significantly more instability and uncertainty and resulting in an approximate 22% depreciation of the Peso overnight. Inflation is running at over 100% per annum and projected to increase with no certainty of the country restoring its economic and political stability in the medium term. Since the primary election the country has imposed a Medanito (domestic crude) reference price of US$56 a barrel.

2.  PPSA is currently prevented from paying any of its intergroup debts or interest on them by Central Bank restrictions, nor can it pay overseas service providers and there is in effect a Federal block on it being able to pay for any assets or service equipment from abroad. No dividends can likewise be paid out of the country to foreign interests. These are general restrictions affecting all areas of business in Argentina and, whilst PPSA is a dollar-based business, it is adversely limited by the environment in which it operates.

3.  The public markets in London have shown a consistent lack of appreciation of foreign investment in Argentina, demonstrated by the present market capitalisation of MEN. Of the three AIM companies with material oil and gas interests in Argentina (including MEN), one has been privatized by its largest shareholder (Phoenix Global Resources) and the other (Echo Energy) has reduced its Argentine exposure to a relatively minimal level with its shares at the date hereof suspended from trading on AIM.

4.  The mature fields owned and operated by PPSA, whilst operationally profitable, require sustained investment. The Board considers it inadvisable for foreign investment to be made into PPSA from MEN to continue expanding the business. There is no guarantee when or if at all that monies can be repaid, and dividends paid. This acts as a severe inhibitor when it comes to using the capital markets for the benefit of MEN’s other businesses.

5.   The Independent Directors therefore consider that Argentina is not a country into which MEN as a London Stock Market company should continue to invest and accordingly PPSA should no longer be held by MEN.  

The Independent Directors also consider that the Sale will preserve the structure of PPSA and permit a smooth and expeditious transfer of ownership without requirement of any Argentine regulatory consents and approvals.

By selling to an entity of Peter Levine, it will also preserve, as far as is reasonably possible, the financial integrity of PPSA in the face of its third-party financial creditors, the Provinces and business partners. It also avoids the usual costly and lengthy due diligence, warranties and indemnities that are required by independent third parties given there are in this case none required by the Purchaser other than as to title to the shares of PEH so any risk to MEN in this regard is obviated.

The Sale has been deliberately structured to provide MEN with a near-term cash injection, provide for repayment in due course of the US$13 million of debt and accrued interest owing by PPSA to MEN and provide MEN with exposure to any enhancement in PPSA’s profitability and ability to pay dividends by way of the contingent consideration linked to free cash flow generation all subject to conditions.

The Terms of the Sale

The terms of the Sale are:

1.   Subject to PPSA continuing to carry out its operations in the normal and ordinary course during the period of 12 months from completion of the Sale, the Purchaser will, on the date falling 12 months from completion of the Sale, pay to MEN a cash sum of US$2 million.

2.   By way of further consideration, the approximately US$13 million intercompany debt and interest owed by PPSA to MEN shall be procured by the Purchaser to be repaid by PPSA subject to, and as may be permitted by, Argentinian law and as may be able to be paid subject to cash flow requirements of PPSA and third-party financial debt to which such loan is subordinated. As the debt will no longer be owed intercompany, it will after the Sale be recognised as a form of receivable in MEN’s accounts contrary to the present position where it does not feature in the Group balance sheet. 

3.   Subject as in paragraph 1 above, over the period of a maximum of 5 years from completion of the Sale, the Purchaser will pay to MEN a sum equivalent to 20% of net free cash flow of PPSA each year after taking into account capital and operating expenditure, debt conditions and servicing, reasonable working capital requirements and repayment of the intercompany debt and subject to PPSA being able to pay from time to time net dividends out of the country and to the Purchaser.

Providing always that the total consideration as above shall be limited to the aggregate sum of US$40 million.

Authorities

The Resolutions numbered 2 and 3 relate to the authority of the Directors to issue Ordinary Shares including on a non-pre-emptive basis.

Taking into account the current relatively small market capital of the Company and Company’s initiatives recently announced as of today, it is considered that increasing the relevant authorities to: 

·      an amount representing 50 per cent of the aggregate issued share capital in respect of the general authority of the Directors to allot Ordinary Shares; and

·      an amount representing 30 per cent of the aggregate issued share capital in respect of the general authority of the Directors to allot Ordinary Shares for cash on a non-pre-emptive basis,

·      will allow the Company to have more flexibility in expanding its businesses.

Related Party Transactions

Peter Levine is a Director and substantial shareholder in the Company. The Purchaser is a company ultimately beneficially owned by Peter Levine. Accordingly, the Sale represents a related party transaction pursuant to Rule 13 of the AIM Rules for Companies.

The Independent Directors comprising all the Directors of the Company other than Peter Levine, having consulted finnCap Ltd, the Company’s Nominated Adviser, consider that the terms of the Sale are fair and reasonable insofar as the Company’s shareholders are concerned.