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2 Under-The-Radar Takeover Targets With Strong Catalysts Ahead

The M&A environment often offers opportunities where there is a spread between the stock price and the potential acquisition price.

Many investors fish for profits in takeover targets by exploiting this disconnect.

Tethys Petroleum and Petrodorado Energy deserve a closer look because there is significant spread between their stock prices and their potential acquisition prices.

Introduction

The event-driven investment strategy involves investments, long or short, in the securities of companies undergoing significant change and often helps the investors capitalize on the opportunities inherent in specific corporate events, including mergers and acquisitions. This strategy has a significant advantage over other strategies. It is often unrelated to broad market conditions and especially when we are in a flat or down market, making money this way is like "manna from heaven". Actually, this is the reason why I suggested the subscribers to my Newsletter buy grossly undervalued Metalico Inc. (NYSEMKT:MEA) at and below $0.35/share in early June 2015. Back then, Metalico was undergoing a strategic review and finally announced a buyout offer at $0.60/share in late June 2015. The deal went through as planned, and those who bought at $0.35/share had a return of approximately 65%.

On that front, I also presented:

1) Xueda Education Group (NYSE:XUE) when its stock was at $5.08/ADS, given that the company had received a buyout offer at $5.50/ADS. Xueda Education Group currently stands at $5.30/ADS, and I am waiting for an update with respect to the completion of the deal. My article is here.

2) Africo Resources Ltd. (OTC:AFCRF) and PhosCan Chemical Corp. (OTC:PCCLF), which are two debt-free small caps with ongoing strategic reviews that are potential takeover targets for their cash. Both companies are currently selling below their cash per share. My article is here.

In my linked article above, I also suggested you stay tuned because I planned to unveil additional compelling opportunities in my next articles. Given that I always keep my promises, I am back to present you the following two companies:

The equity investors who are looking for investment opportunities with strong catalysts ahead have to check out these two small caps, because the successful completion of Tethys' pending deal and Petrodorado's ongoing strategic review can push their stocks much higher.

The Details Always Matter

In this paragraph, let's dig into the details about these two companies which could potentially offer significant yields in the coming weeks:

1) Tethys Petroleum: This is an energy company whose primary listings are on the Toronto and London stock exchanges under the ticker TPL. The biggest shareholder is Pope Asset Management (PAM) from Memphis/TN with 64.2 million shares (19.1% of the company) as of January 2015.

It operates in Kazakhstan which has expanded its economy more than 400% over the last 20 years thanks to its enormous hydrocarbon reserves, Tajikistan and Georgia, as illustrated below:

and below:

Tethys' most mature assets are in Kazakhstan where the company has experienced considerable exploration success with significant growth of its natural gas production over the last few years, which will be sold into China once the Kazakh-China pipeline becomes operational.

In Tajikistan and Georgia, the company is currently undertaking exploration and evaluation activity. In Tajikistan, the company has an effective 28.33% interest (33.33% interest via its 85% owned subsidiary) in Bokhtar Operating Company BV with partners French company Total (NYSE:TOT) and PetroChina's (NYSE:PTR) parent company CNPC each having a 33.33% interest, as illustrated below:

and below:

However, the company is looking to farm-down or sell the Georgian assets to focus on the Central Asian assets in Kazakhstan and Tajikistan. The Board is also looking to reduce its interest in Tajikistan whilst still retaining a material interest.

Furthermore, Tethys operates a corporate segment with a number of drilling rigs and related oil and gas equipment which are utilized in Kazakhstan and Tajikistan according to operational requirements.

From a fundamental standpoint, the company's Enterprise Value currently is approximately $56 million, the stockholder equity is $175 million and its chart is illustrated below:

It must also be noted is that the company has a "Going Concern" note because it currently doesn't have sufficient funding to fund its obligations for the next twelve months. As of September 2015, the company had approximately $4.3 million cash and cash equivalents, while the interest-bearing debt was approximately $32 million. Additionally, during the first nine months of 2015, the company had negative operating CF of $10.7 million and the cash used in investing activities was $7.6 million.

Furthermore, the company holds 2P Reserves of 27.08 MMboe and produced 5,204 boepd in Q2 2015 (approximately 40% oil, 60% natural gas) in Kazakhstan, but its production in Q3 2015 dropped to 4,823 boepd. The production is coming from the Kyzyloi and Akkulka fields while Tethys is undertaking exploration and evaluation activity in the Kul-bas field, as illustrated below:

From an operational standpoint, and once additional funding is secured, the company plans to maintain and increase shallow gas production with the objective to supply gas to China through the newly built pipeline once operational, and drill the Klymene exploration well in Kazakhstan, subject to the extension of the Kul-Bas contract.

In April 2015, Tethys Petroleum initiated a strategic review of the business which encompasses options including asset sales, farm-outs, financing, investments at the corporate level, or the sale of the company. Since then, a bidding war has started and discussions have been ongoing with a number of interested parties on these potential avenues. On that front, this is a brief summary with the key corporate events over the last six months:

A) In June 2015, Tethys announced that it would not make a deal with SinoHan and was negotiating with privately-held AGR Energy Holdings a potential larger financing as part of the strategic review. AGR Energy Holdings is owned by the Assaubayev family, which is one of the most renowned business families in Kazakhstan.

B) In July 2015, the company announced a strategic collaboration with privately-held AGR Energy Holdings whereby it had signed an agreement for a $47.7 million private placement of 318,003,951 new ordinary shares at a price of C$0.192/share with AGR Energy Holdings. In connection with this placing, the company also entered into a convertible loan for up to $5 million with AGR Energy Holding's parent company, AGR Energy, whereby the company could draw down an advance on the placing proceeds before closing to support short term liquidity. Pursuant to this agreement, it had also agreed with PAM, the company's largest shareholder, that PAM would subscribe for 100,000,000 new ordinary shares on substantially the same terms as the AGR Placing. However, following further correspondence and discussions with AGR Energy during which AGR Energy indicated changes to the proposed structure and terms, the company announced on August 10, 2015 that it would no longer be proceeding with the AGR Placing or the PAM Subscription.

C) In August 2015, the company announced that it had received a further non-binding indicative proposal from Nostrum Oil & Gas PLC regarding a possible offer for the entire issued and to be issued share capital of the company. As also linked above, the Possible Offer provided for a price of C$0.2185/share, which would be satisfied in cash or, at the election of each eligible shareholder of Tethys, fully paid ordinary shares in Nostrum, or a combination of both cash and shares. This price represented a premium of 15% to the price at which AGR Energy Holdings had agreed to subscribe for new ordinary shares in Tethys pursuant to the...


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