Q: This proposed sale of approx. 2/3 of Gear's (GXE) current oil production for only $110 million is a terrible offer for GXE (very nice for the buyer Cenevous (CVE) especially if they get the benefit of most of Gear's tax pools). GXE is virtually debt free and can afford to pay the existing dividend (currently yielding in excess of 11 per cent) so why is this new management team offering us such an awful deal? If this is the best deal they can make then they should just leave the company as it is. With no debt by early next year Gear could start to buy back shares and when those shares are yielding better than 10 per cent the reverse compounding effect is enormous. It would only cost about 13 million in free cash flow in 2025 to buy back 10 per cent of the float and with 10 per cent of the float gone the .5 cent per month dividend gets easier to easier to pay, right? The naysayers will say that if oil goes down a lot that the dividend is not sustainable, well I say, if you think oil is going to go down a lot then you should NOT buy any oil stocks, or better yet you should be brave and short the oil stocks. So watch your mail box and when you get the circular in the mail vote NO. My understanding is that if you don't vote then your shares are considered to be a vote in favor, right?
5i Research Answer:
Our only explanation here is that management likely believes strongly in the spin out company. Don Gray as Chairman is very experienced in the sector and owns 8.5M shares of GXE. While the optics of this deal are not great, we do not believe insiders are trying to pull a fast one on shareholders here. But its valuation is very low and dividend very high. We think GXE could have done better, certainly. Shareholders can vote down this deal, though, and while we do not expect another offer, this is the best move if a holder is unhappy. Typically a no vote favours the deal so being proactive is better.