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2006 Business Review
Technology Venture Capital Management
The Group manages the Hong Kong SAR Government's Applied Research Fund ("ARF") through the Softech Investment Management Company Limited ("Softech"). Softech is a 50:50 joint venture with Softbank China Venture Investments Limited. The ARF is a HK$750 million fund with the objective of providing funding support to Hong Kong based technology ventures and research and development projects that have commercial potential. The long-term objective of the fund is to increase Hong Kong's technological capability and enhance the competitiveness of local industries with the aim of promoting higher value-added economic development in Hong Kong. Softech was allocated HK$250 million of the fund for management.
Direct Investments — Oil and Gas Investments
In April 2006, shareholders approved the commitment of US$42.5 million to acquire a 35% working interest in three high impact/high risk deep gas exploration prospects, Big Mouth Bayou, Endeavor and North West Kaplan, on-shore in Louisiana USA.
The Big Mouth Bayou well has been drilled to a target depth of 19,490 feet. Gas was encountered in several zones and the operator of the well, Pel-Tex Petroleum, is currently examining ways in which to commence commercial production. It is expected to take several months to finalise these plans. At the Endeavor prospect, drilling is in progress, having reached a depth of 14,370 feet as of 30th March 2007, and is expected to be completed by mid-2007. Planning and preparation for drilling at North West Kaplan will only begin after operations at Endeavor have been completed.
Direct Investments – Legacy Investments
The Group continues to hold some legacy technology direct investments, the investment cost of which was fully written off at the end of 2002. During the year, there has been substantial progress in two of these investments.
The Group owns 523,528 shares of White Energy Company Limited ("White Energy", ASX: WEC) arising from a legacy investment in Spike Energy. The Group's merchant banking team has been actively involved with White Energy during 2006 and as a result has increased its holdings in White Energy as detailed below.
In October 2006, the Group sold its interest in Upstream Asia Limited to AIM quoted Raven Capital Inc. (which was simultaneously renamed as Upstream Marketing and Communications Inc.) in consideration for 20,276,384 shares of Upstream Marketing and Communications Inc. ("Upstream", AIM: UPS) which valued its interest on completion at £2,635,930. Upstream is a leading Asia Pacific-focused corporate and marketing communications services network firm. Upstream is well positioned to meet Asia's growing demand for branding and communication services with offices in Bejing, Shanghai, Hong Kong, Singapore and Taipei.
Merchant Banking
During the year Crosby's initiated two new takeover deals: Orchard Petroleum Limited ("Orchard", ASX: OPL) and Marathon Resources Limited ("Marathon", ASX: MTN).
| | Orchard
In October 2006, Crosby initiated a cash take-over bid for the Australian Stock Exchange ("ASX") listed Orchard at A$0.68 per share. In November 2006, the offer was increased to A$0.81 per share and Orchard's management recommended that shareholders accept the offer. In March 2007, the remaining bid conditions were waived and the offer became unconditional. At the offer price, Orchard has a market capitalisation of approximately US$130 million.
Orchard owns a portfolio of 11 oil and gas production and development assets located onshore in the prolific San Joaquin and Sacramento petroleum basin. Since recommending Crosby's offer, Orchard has successfully drilled 12 wells of a 20 well drilling programme at South Belridge. All the wells drilled to date have so far recorded good oil and gas shows and two of the wells are now producing. Orchard's management has so far been able to complete its drilling programme at a lower cost than originally forecast due to the utilisation of an improved drilling rig.
Marathon
In July 2006, Crosby led a cash offer for ASX listed uranium miner Marathon at A$0.68 per share, a premium of 23.6% to the previous day's close. By the end of 2006, the Marathon stock price had risen by 236% to A$1.85 per share. On March 9 2007, the offer was increased to AS$3.52 per share, a 6.7% premium to the previous day's closing price. At A$3.52, Marathon has a market capitalisation of approximately US$161 million. Marathon has prospects in South Australia of which the most advanced project is the Mt. Gee uranium deposit which, based on current resource estimates, is one of the 25 largest known uranium deposits in the world.
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Asset Management
Crosby's Asset Management business increased its assets under management ("AUM") to approximately US$1.2 billion. The business is divided into two main operating areas: fund management and wealth management.
| | Fund Management
In addition to the Asian funds managed by Crosby, December 2006 saw the launch of Crosby's first hedge fund, the Crosby Active Opportunities Fund ("CAOF") – an Asian and Australasian event-driven hedge fund. CAOF aims to produce absolute unleveraged returns in excess of 25% per annum. Although CAOF utilizes a similar approach to identifying and extracting value as the Group's merchant banking team, its business is both complementary, and additional to, that of the merchant banking team as CAOF commits its own capital to initiate a deal. CAOF also benefits from having the first right of refusal (but no obligation) to commit capital to support a merchant banking team led deal.
Wealth Management
During 2006, Crosby Wealth Management has continued its growth and further improved its capacity for future growth with the addition of new relationship managers and assets under management.
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Investment Portfolio
The Group's investment portfolio largely consists of its equity participations derived from merchant banking deals. Its two largest positions at 31 December 2006 are an approximately 24% equity interest in JASDAQ listed IB Daiwa Corporation ("IB Daiwa"), through Crosby, and an approximately 6% effective equity interest in AIM quoted Indago Petroleum Inc. ("Indago").
| | Indago
In 2004, the Group obtained an economic interest in the oil and gas assets previously owned by Novus Petroleum Limited located in the Middle East. These assets were ultimately transferred to Indago (AIM: IPL) and floated on AIM in December 2005. Indago has continued to develop these assets and in March 2007 announced that it had agreed, subject to shareholder approval, to dispose of 100% of its production and development assets and of approximately 50% of its exploration assets. Following the completion of the sale, Indago also announced that, subject to shareholder approval, they will declare a special dividend of £0.6 per share. The net effect of this is that the Group received approximately US$17.4 million of cash in April 2007, whilst still retaining further upside through the still listed Indago entity that holds the remaining exploration assets plus sufficient cash to undertake its exploration programme.
IB Daiwa
IB Daiwa is a JASDAQ listed oil and gas exploration, development and production company with assets onshore and offshore in Texas and Louisiana, USA. Crosby continues to own 24.02% of IB Daiwa.
IB Daiwa's two operating subsidiaries Lodore US Holdings Inc. ("Lodore") and Darcy Energy ("Darcy") balance high impact/high risk deep gas exploration (Lodore) and low risk exploration and development (Darcy).
| | Darcy
Despite delays to production enhancements at existing wells and in bringing new wells onstream, there was considerable progress at Darcy in 2006. The acquisition, in April 2006, of two lease blocks at Grand Isle in the Gulf of Mexico resulted in a 167% increase in independently audited 2P reserves to 64.2 bcfe, and a 299% increase in 3P reserves to 163.8 bcfe.
In July 2006, Darcy installed a new platform at the East Cameron Block 318. The B3 well was successfully hooked up to the platform in December 2006. The B4 well at East Cameron Block 318, which completed drilling at the end of the year, discovered commercial quantities of gas and commenced production after the year end in February 2007.
During 2006, it was decided to restructure the Darcy group to facilitate fundraising in the international capital markets. The benefits of this restructuring were realised after the year end. In February 2007, Darcy raised US$18 million by issuing new shares that represent 13.4% of the enlarged share capital, valuing Darcy at an enterprise value of US$215 million. This fundraising will provide the capital to develop the Grand Isle acquisition and to pursue further growth opportunities.
Lodore
In January 2006, Lodore announced the discovery of commercial quantities of gas at the Kami Prospect (onshore Louisiana). Production from the Kami Well commenced in May 2006. Kami has independently audited 2P reserves of 5.2 bcfe. In December 2006, the well encountered problems and was shut-in for repair work. The repair work was completed in late February 2007. Details of the status of Big Mouth Bayou, Endeavor and NW Kaplan are provided above in the context of Techpacific's own direct investment. At Padre Island, drilling at the first well, Plum Deep, started in August 2006. Drilling and testing of the three deepest zones has been completed and it has been determined that the zones are noncommercial. The operator of the well, Golden Gate Petroleum, estimates that testing of the shallowest zone will be completed in first half of 2007 at the earliest.
Corporate Governance and the Kanri Post
During 2006, IB Daiwa made substantial progress in enhancing its corporate governance, risk management and regulatory reporting regime, and hence, towards securing its return to JASDAQ's "main" list from the restrictions of the Kanri Post.
In September 2006, IB Daiwa recruited an experienced, senior executive officer to oversee relations with JASDAQ and a new auditor was hired with experience of the international oil and gas industry. In November 2006, Japan Asia Securities was appointed as its Shukanji (the equivalent of a nominated advisor for AIM companies). The Shukanji plays an important role in a company's corporate governance and can be seen as a major step for IB Daiwa to return to the normal post of JASDAQ.
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White Energy
In August 2006, the Group's merchant banking team successfully completed a cash placement for Australian listed White Energy raising approximately A$23 million from a small group of financial investors based in Australia, Asia, Europe and North America. This placement was in addition to A$5 million the Group's merchant banking team raised in April 2006. As a result of arranging these placements, the Group's merchant banking team earned an interest in warrants with a five year life exercisable into 2,036,296 shares of White Energy at an exercise price of A$0.01 each.
The Group also subscribed for 100,000 shares in the aforementioned placement at A$0.90 per share. At 31 December 2006, the quoted market price of White Energy was A$1.75 per share.
White Energy is entering a very exciting growth phase. It owns the worldwide license to a coal briquetting process that increases the energy efficiency of low quality coal. The result is emissions savings, and reduced transportation and operational costs. White Energy has already entered into two joint ventures to develop processing facilities in Indonesia and is currently in discussions about further joint venture agreements.
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SBI Crosby
SBI Crosby (Holdings) Limited ("SBI Crosby") is a corporate finance boutique that assists small-to-mid size private enterprises in China to raise growth capital and position them for listing in leading stock exchanges. SBI Crosby was initially a 50/50 joint venture with Softbank E2 Capital. During the year, the Group's stake in SBI Crosby was reduced to 26.72%. The joint venture remains a source of Asset Management opportunities for the Group.
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