The merits of combining the production expertise of Melrose with the development potential of Petroceltic International (PCI) looked pretty straight forward when the merger of these two London-quoted companies was announced in August. Despite that, Petroceltic's share price has drifted downwards since the autumn and reflects neither the underlying value of the combined group's assets, nor the logic of the merger.
- Shares trade far below underlying asset value
- Better balance between exploration and production
- Go-ahead for key Ain Tsila development
- Probable resources upgrade
- Riskier operating in Algeria
- Egyptian receivables
Before the merger, Melrose's value was checked because it was difficult to deal in its shares. Simultaneously, investors worried that Petroceltic would have to raise lots of additional equity, diluting the interests of existing shareholders. Put the two companies together, however, and Melrose's daily production of 28,000 barrels of oil equivalent (boe) from existing, albeit ageing, wells in Egypt and Bulgaria would generate enough cash to fund the combined group's exploration programmes in Kurdistan, Egypt, Romania, Bulgaria and Italy. Melrose had modest capital commitments so, in return for providing funding, it would eventually profit from the development of Petroceltic's main asset, a 56.6 per cent holding in the hugely promising Ain Tsila gas/condensate field in Algeria.