Oil slump spurs merger wave among juniors

NSW coal seam gas explorer Metgasco on Monday announced a plan for an all-scrip merger with Elk Petroleum, and will provide it with a $2.5 million short-term loan to cover Elk's immediate funding needs. It is offering 0.6727 of its own shares for each Elk share, and will assume a $US12 million limited recourse finance facility held by Elk if the deal goes through.

With Metgasco's shares closing on Friday at 4.1¢, the offer is worth about 2.76¢ a share for Elk, less than its 3.9¢ closing price on Friday.

The merger would result in a $25-million company with a broader portfolio of assets, including both Metgasco's focus on coal seam gas and conventional gas in NSW and Elk's oil venture in the Rocky Mountain region of the United States. Metgasco, which is being advised by Miro Advisors, said the initial focus would be on bringing into operation Elk's Grieve enhanced oil recovery production in 2017, in partnership with much larger US player Denbury Resources.

Metgasco's own projects in NSW have been troubled by regulatory hurdles, with the NSW government suspending its licence in the Northern Rivers area for failing to consult adequately with the community. The suspension lead to a battle by the junior against the state government in the Supreme Court.

Repeated changes to the NSW regulatory regime for coal seam gas has meanwhile delayed its other projects and created uncertainty for investment. Metgasco shares are at about a third of their January peak of 12¢.

Elk shares have also slumped, driven down by the more than 50 per cent dive in global crude oil prices since June. Elk shares traded at a high of 20¢ in January and are now less than a fifth of that value.

It said on Monday that diversifying its assets outside NSW made sense given the delay in its timetable for commercialising its gas resources in the state. It evaluated numerous options before deciding on the deal with Elk, which it said would provide shareholders with positive operating cash flows in the "medium term" and

Elk chairman Neale Taylor said the board welcomed Metgasco's offer as "an opportunity to ensure Elk's assets are appropriately funded for the benefit of all of Elk's shareholders". It is unanimously recommending Metgasco's offer to shareholders. Elk, which has a market value of $7.7 million, is being advised by DJ Carmichael.

Meanwhile, $18.8 million oil and gas player Neon Energy called off a proposed scrip merger with $15 million junior MEO Australia and has instead agreed to a revised proportional takeover bid by private Perth-based company Evoworld, which it had earlier rejected.

Under the terms of the revised offer, Evoworld will bid 3.8¢ a share for half of interests held by Neon shareholders. It was previously proposing to pay 3.5¢ per share for only 30 per cent of the shares it didn't already own.

Neon shares closed at 3.4¢ on Friday, down from 41¢ a year ago after the failure of an exploration well in Vietnam.

Neon had earlier agreed to a "merger of equals" with MEO Australia which it said implied a value of 3.8¢ a share, better than Evoworld's original offer. However on Monday it said that Neon's board had unanimously determined that Evoworld's revised offer is superior to MEO's. It has therefore scrapped the merger agreement it had with MEO and paid a penalty fee of $400,000.

Evoworld directors Timothy Kestell and Peter Pynes have been appointed to Neon's board as non-executive directors, while John Lander has resigned. Neon managing director Ken Charsinsky is also to resign once Evoworld acquires 30 per cent of the Neon shares on issue and its offer becomes unconditional.

The scrapping of the Neon-MEO deal leaves the way clear for Mosman Oil and Gas to proceed with its intended takeover bid for MEO. MEO is advising shareholders to take no action on Mosman's bid until directors make a formal recommendation.

MEO shares closed Friday at 2¢, down from 8.4¢ as recently as August.