High Arctic Energy Services Quick Update - $HWO.to

Quick update after Q3 2023 and some other things

Quick reminder. HWO is my arb play. They originally announced a transaction to return capital to shareholders and spinoff the PNG business. Some specific details were lacking but a circular was promised for September. Of course, things have changed. The last we heard the plan is as follows (from the Q2 2023 news release)

If the reorganization proceeds, it is expected to result in:

• The payout to shareholders of $38.2 million, equivalent to approximately $0.75 per fully diluted share, by way of tax efficient return of capital distribution,

• The sale of High Arctic International to existing shareholders who opt to participate through issuance by the Corporation of a right for shareholders to purchase from the Corporation one (1) ordinary share of High Arctic Energy Services Cyprus Limited (a wholly owned subsidiary of High Arctic immediately prior to the Reorganization) for each common share held in High Arctic,

• A shareholder election process whereby shareholders can:

  • Do nothing, and receive their return of capital distribution as cash;

  • Elect to exercise their purchase rights (in full or in part);

  • Elect to use some or all of the funds to be received pursuant to the return of capital, toward the exercise of purchase rights; and

• Receipt by the Corporation of the proceeds of the sale of ordinary shares of High Arctic International.

Myself and all the other minority shareholders are hoping they come back to the table with a fair value to the PNG assets and some way to get some liquidity if we decide to exercise the purchase rights.

Price: $1.13

MC: 55 mil CAD

EV: 9.7 mil CAD

1 year performance:

HWO reported Q3 last week and provided some operational updates. Results were in line with my expectations and the stock hasn’t done much.

Quarter Recap and Call Notes

Here is a quick recap on operations for the quarter

• Rev up to 17.8 mil from 12.5 mil last year

  • Rig 103 fully utilized for the quarter

• Adj EBITDA of 3.2 mil vs 0.6 mil last year

• Took an impairment charge on 20.5 mil related to the PNG biz due to lack of contracts

• Their investment in Team Snubbing seen record revenue in the quarter

PNG specific

• Rig 103 has drilled 2 of the 4 wells in the customers drilling program

• No other tenders out for their other rigs

• They are waiting Total Energies to go ahead with the final investment decision

  • This is expected in Q1 2024

  • https://totalenergies.com.pg/system/files/atoms/files/komunity_toksave_issue_8_english.pdf

• Their rigs may be less competitive if roads are built out making land based rigs available for drilling

• If Total Energies goes ahead then they also see lots of opportunity in ancillary services in PNG

Transaction Update

VN Capital submitted a letter to the board on August 29. VN owns 5.6% of HWO.

The company responded at the end of September stated that they are reviewing feedback from investors regarding the transaction.

The Corporation has received feedback from shareholders and is working with its advisors on the reorganization plan to incorporate key elements of the shareholder feedback. The High Arctic board has reserved its final decision to proceed with the reorganization until these matters and ongoing strategic review have been addressed to their satisfaction, requisite regulatory approvals have been received, and the materials are ready to present to shareholders.

This was added to a news release on Nov 8.

On October 20, 2023, the Corporation received a shareholder meeting requisition notice (the “VN Requisition”) from VN Capital Management, LLC, as beneficial owner of not less than 5% of the issued and outstanding shares of the Corporation, requesting that the directors of the Corporation call a meeting of the shareholders for the purpose of (a) removing the Chairman of the Board of Directors of the Corporation and; (b) if the removal resolution is approved, to elect a replacement director.

The Board intends to address the VN Requisition at a special meeting of shareholders that will be held on January 10, 2024, along with any other business that may be properly brought before the meeting.

I believe this helps protect the downside to the transaction.

Closing Thoughts

HWO is a weird arb. There is so much uncertainty on what may happen and what may be brought to the table for shareholders. There is no breakup fee or anything and no specific timeline like a more typical arb.

The upside is clearly there, so I’m not going to bother crunching the numbers to see how big of a potential discount is here. I will be able to attend the meeting in person on Jan 10, 2024. I’m hoping there is a circular with more details available by that time.

I continue to hold my shares.

Thanks for reading.

Dean

* long HWO.to