Minority Stake In Stock trading at near cash value, likely to realize soon

Just put a small (3% portfolio weight) into KazMunaiGas (Exploration and Production).

This is an unconsolidated subsidiary of the Kazakhstan National Gas company.  This subsidiary is quite a large company – worth c$4Bn.  The value of the cash / current assets is about $10.1 per share (more if you exclude treasury shares) whilst the share price is about $10.  In effect, you can buy an oil company pretty much for free.

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Earnings / of this over the past 5 years / projected from the half year seem to be around 2000 KZT.  As the USD denominated GDR is 1/6th a share this gives a value of about $1 earnings.  This might be a bit optimistic – with oil prices lower one can expect lower profitability.  If you apply a rough 10X multiple to this the operating business is probably worth another $10.

Lots of ways you can value the oil company component of this.

Proven reserves 684 mbo, probable 1061 mbo, possible 1433 mbo.  They recon this has a NPV of $4bn (2016 AR), or the current market cap.  This doesnt include the shares of the joint ventures they hold.

This is all highly contingent on the price of oil – inherently unpredictable.  For a bear case one can look at where this traded in Jan 16 when oil hit $30 – $6.60 or thereabouts – a 33% loss.  The company was cash flow negative at this point.  Equally when oil was north of $100 in early 2014 this traded at $16.  The production is very ineficient – flowing through to cashflow/ profitability when the oil price dips.

Ultimately the actual valuation of the business isn’t too important as this a minority buy out situation so more a case of being driven by logic and the incentives of various actors.

The shareholding structure of this is as below:Kazmunai gas structure

This means the real free float is about 24% of the shares – I assume as CIC is a state-based actor they will be happy to hold a stake in a larger, restructured group.

NC KMG is KazMunaiGas – the parent.  They are unable to consolidate KMG as there is a relationship agreement / shareholders agreement limiting their control.  This is set out here (P40+).  Given the shareprice they may also want to buy a larger stake.  I have quite a bit of confience in this agreement – the controlling shareholder has offered to pay to get round it – therefore it must have value.

KazMunaiGas needs control of KMG EP (KazMunaiGas Exploration and Production) as they are quite highly indebted and could use a consolidated KMG’s cash pile to reduce their indebtedness, as well as having control of more assets.  They have tried to buy out minorities / ammend the relationship agreement a number of times in the past:

June 2016 – Offer of $7.88 – the value of the cash.  This was then revised to $9.  75% of the shares voted against.

July 2014 – Offer of $18.50.  This was withdrawn in early 2015.  The offer was made when oil was over $100, it fell very rapidly to $50 when the offer was withdrawn.

I saw comments (I believe) from the chairman of NC KMG stating that the situation “needed to be resolved” unfortunately I can’t find them – I will edit this when I do.

It is particularly import that this is resolved as the Kazakhstan government wants to privatise various assets to improve performance and NC KMG is one of the largest.  A very good article is here also here .  Ultimately while the government wants to privatise lots of people stand to lose out if this happens – so the bureaucrats are opposing this.  This has been delayed but I think it likely to happen, regardless KMG EP is still a good buy at this price.

Note that the President / dictator of Kazahstan is 77 so we don’t know what will happen if he dies.  He seems to have a firm grip on power at present but there is a risk.

There are lots of ways the government could expropriate here – taxes, licenses, regulation.  I dont think they will – if they want to sell assets they need to show that shareholders are treated fairly.  No sense in stealing small ammounts here to lose larger more when IPOs go for lower valuations.

The likely outcome here is a revised, fair(ish) offer probably within the next year or two offering the opportunity to make 25-50% and possibly more if the oil price is co-operative.  Look at it this way – by paying There is also the possibility of buybacks / tender offers – making any aquisition cheaper.  This also pays a small dividend which could be increased, though I think this unlikely.

Worst case is theft / expropriation (very unlikely) or a large fall in the oil price, or possibly a long drawn out period when nothing at all happens.

Not my usual cup of tea – I usually dont like minority stakes but I am making an exception here.  I may well add to this if we get a dip in the price…  As ever, comments positive or negative are encouraged….

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