JOHNNY IN NO RUSH TO GUSH
The debt-at-centre is unlikely to soon be culled to a level that would facilitate an unbundling of HCI’s listed investments
Suggestions that Hosken Consolidated Investments (HCI) could be close to a value-unlocking moment might be a tad premature. Investors hoping for an indication of this at Monday’s investor briefing — following the release of results for the year to endMarch — would have been sorely disappointed. HCI CEO Johnny Copelyn made it plain that a considerable amount of oil still has to flow under the debt bridge before any dramatic tampering can be considered.
Still, shareholders — myself included — can’t really be faulted for getting a little excited about a potential value unlock. Last week Aktiv Investment Management issued a note that pointed out the strong cash generation and dividend declarations across the handful of HCI’s listed subsidiaries: gaming giant Tsogo Sun, hotel operator Southern Sun, industrial group Deneb, Frontier Transport and broadcast group eMedia.
Aktiv argues HCI will be debt free within the next six to 12 months. “This scenario raises the prospect of HCI embarking on a restructure of its entire portfolio with an unbundling of the listed portfolio being the most value-enhancing option.”
I tallied total dividends declared of about R620m for these listed counters, of which HCI would receive about R430m on a net basis. Then you have to factor in HCI paying out a dividend of 100c a share (or about R85m), which means the absolute net gain in dividends is about R354m. HCI’s debt-at-centre sits at about R2.5bn — so the dividend inflow from its listed positions is more than useful in terms of degearing. There was also the sale of HCI’s stake in the Karoshoek renewable energy project, which raised R350m recently.
Of course, the more significant chunk will come from the farmout agreement on lucrative Namibian concessions that unlisted subsidiary Impact Oil & Gas has with energy giant TotalEnergies. A reimbursement of about $99m is expected at Impact, possibly within a few months. HCI, technically, claims 49.9% of these proceeds — which translates into about R900m. If Impact declared a special dividend, it would lop a chunk off HCI’s debt.
But that does not seem likely at this juncture, with Copelyn stressing the need to retain capital in Impact not only to participate — as a significant minority shareholder — in TotalEnergies’s oil operations in Namibia but also in other exploration thrusts off the South African coast. Copelyn says there will be “in principle some kind of dividend” from Impact. But less than half the TotalEnergies monies? A quarter? One-eighth?
While there has been a fixation on Impact’s Namibian exploration interests, Copelyn at least to me seems awfully keen to stress that there are South African offshore oil and gas exploration interests in the company too. While activity off the Eastern Cape coast has been halted by environmental challenges, Copelyn still believes there is a good opportunity to find oil in those waters. Attitudes around environmental impact litigation will bog down efforts to explore for energy for at least another year may well be put into stark economic perspective should Namibia’s recent (and very promising) oil discoveries start yielding rich rewards. Copelyn reckons Namibia’s oil and gas exploration efforts could be transformative for that economy. As much as threequarters of Namibia’s economy could be oil exploration and production within 10 years at which point one hopes South Africa is not left wondering how it fell so far behind.
More legal delays in exploring local waters will no doubt test the patience of the few remaining oil majors still floating around. Africa Oil another major shareholder in Impact seems far less enthusiastic about the company’s South African operations and might only be interested in the Namibian effort. One might then imagine a dispute or three between HCI and Africa Oil about how exactly to apply proceeds from TotalEnergies. Copelyn indicated that HCI is now probably in a better position to increase its stake in Impact over the 50% shareholding level not a bad move if other shareholders are inferring that the South African concessions carry zero value.
With HCI probably having more funding commitments on its investment in Platinum Group Metals (albeit not nearly as demanding as those for oil and gas exploration), the debt-at-centre is unlikely to soon be culled to a level that would facilitate an unbundling of its listed investments. Copelyn reckons unbundling is “not a bad aspiration” but is not practical. However, he does not rule out the sale of assets, which, in the case of HCI’s smaller and more illiquid investments, might be a far more prudent value-unlock mechanism than an unbundling exercise that might initially pressure the respective share prices.
Speaking of slow burns, HCI’s unsung coal mining interests continued to chip in meaningfully to the value proposition and cash flows. In the year to end-March, the coal mining segment turned revenue of R2.2bn into headline earnings of R226m in what was a tricky trading period.
There is not an abundance of detail around the coal operations particularly future prospects. What did stand out is that there is now a segment called HCI Resources, which appears to house, for the moment, only the coal operations. Clearly both the oil and gas as well as the platinum mining interests could also be bundled under HCI Resources.
Might the creation of HCI Resources signal the group’s willingness to pursue other mining activities? We’ll wait and see. But for now, shareholders can perhaps mull one of the more unexpected forays by HCI (which does have a formidable reputation for smart capital allocation): “investing” R369m in “high-yielding unit trusts”. Who would have thought