Vaalco Energy Inc. (NYSE: EGY) shares were revitalized today after the company’s largest shareholder demanded a sale in a Schedule 13D filing
with the SEC. The news comes after shares in the company fell around
30% in 2007 compared to a 45% rise in its peer group during the same
period. Meanwhile, the company’s expenditures on failed drilling
projects in the North Sea has pushed its valuation down far below where
it should stand. So, will this new call to action be heard by
management?
Nanes Delorme Partners, which owns an 8% stake, sent a letter to
Vaalco’s board expressing its belief that the company is undervalued
and suggesting that the best way to unlock value would be to
immediately evaluate a range of strategic alternatives. Those familiar
with activist investors know that “strategic alternatives” generally
just means one alternative - a sale of the company. Such a move could
unlock substantial value for shareholders.
Nanes Delorme estimates that the net asset value of Vaalco lies
around $420 million, which equates to about $7.12 per share. This
represents a substantial 46% premium to its closing price on Tuesday.
The activist hedge fund also conveyed the fact that the company had
rebuffed private inquiries regarding a potential acquisition several
times at substantial premiums to the current share price. This means
that there is clearly interest in the company.
As always, there is a reason for this undervaluation that should not
be dismissed. Management has been spending cash acquiring and drilling
minor North Sea interests that have been total exploration failtures.
Recently, this included a $12 million drilling hole that has yielded no
oil. These and similar projects have resulted in a substantial cash
drain that could continue to destroy value unless someone stops it.
Shareholders are now hoping that Nanes Delorme is that someone.
In the end, this is all great news for Vaalco shareholders. Nanes
Delorme is committed to unlocking value for all and even went so far as
to say that it could bid for the entire company if it felt its concerns
were unheard. And why not? If there is already other interest, it could
be flipped for a quick profit! Regardless, this is a situation that is
definitely worth watching over the next few months!
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