18.12.2015 – 20:02
Montrusco Bolton Investments Inc. Invites Shareholders to Urge the Board of Directors of TransGlobe Energy Corporation to Take Action
Letter Sent on December 15th, 2015
Mr. Robert G. Jennings Chairman TransGlobe Energy Corporation Suite 2300, 250 - 5th Street S.W. Calgary, Alberta T2P 0R4
cc: The Board of Directors, TransGlobe Energy Corporation
Dear Mr. Jennings
As you are aware, Montrusco Bolton Investments Inc. ("MBI") has been a significant shareholder of TransGlobe Energy Corporation ("TGL" or the "Company") for the past eight years. We were initially attracted to TGL's stock after conducting significant due diligence which supported our investment thesis. Key elements were: (i) low operating costs, (ii) low finding and development costs, (iii) rapidly growing reserves and production, (iv) attractive stock valuation, and (v) a strong balance sheet.
While TGL's share price did outperform its peers in the first three years following our initial investment, it has grossly underperformed its peers over the last 5 years. TGL's shares now trade at a significant "board/management discount" and the stock has become a "show-me" story. We believe this discount is caused by what we perceive as poor governance and apparent corporate missteps, including: (i) the stalling and lack of exploration which have delayed reserve and production growth, (ii) last year's major pump failures which took longer than anticipated to resolve and impacted production, and (iii) a failed merger attempt in March of 2014 which would have resulted in a share exchange for a participation in a company operating in one of the riskiest countries in the world. Even more concerning to us is the agency issue at the Board level, with the Chairman owning a larger investment in the Company's debt than in its equity. We are also concerned by the fact that some board members have a non-meaningful real share ownership in the Company. To our disappointment you have decided to reject our request for setting minimum "real share" ownership guidelines for executive officers and board members (rather than DSUs).
We believe that TGL is a highly attractive acquisition target due to its strong balance sheet and its unique position in Egypt where the country risk has significantly declined in the last two years. Additionally, we strongly believe that TGL's assets would garner a significant premium from either a strategic buyer or a private equity sponsor with a pre-existing portfolio of assets in the oil industry, since TGL can export and market its oil production directly outside of Egypt.
TGL's shares currently trade at 3.2 times 2016E Cash Flow, which represents a material discount of 35% to the 2016E Cash Flow average multiple of the FactSet Industry Energy Exploration & Producers peers sub-index. Based on the current net cash position on TGL's balance sheet, the valuation discount is even more dramatic and stands at 68% (or 1.6X 2016E Cash Flow, based on consensus).
We believe that TGL's shares based on a 2P NAV should be worth approximately CAD $3.07 per share, representing an upside of 36% to the current market price based on the current forward strip. We hereby urge the board of directors to take the following actions immediately in order to unlock shareholder value:
(i) Deploy no less than half of the current net cash position into a substantial issuer bid in order to buy back up to 30% of outstanding shares (ii) Improve the Company's oil reserves more aggressively and efficiently through an acceleration of the Company's exploration program (iii) Introduce a minimum "real share" ownership policy for board members and senior executives (iv) Refresh the board of directors to include individuals who can bring a fresh new perspective on core actions that can enhance shareholder value. We also urge you to eventually initiate a proper process to sell the Company
Montrusco Bolton Investments is committed to adding value by engaging with the companies in which it invests.
Christian Godin, Senior Vice-President, Head of Equities, Montrusco Bolton Investments Inc., +1-514-842-6464, firstname.lastname@example.org