As one of the largest, independent shareholders of Saxon Energy our opinion has been much sought after with regard to our views on the Schlumberger takeover offer.  ABC Funds’ unitholders, individual investors, members of the press and even hedge funds have inquired about our analysis and fundamental valuation of the Company.  We have gone on record clearly stating that we believe the current takeover offer for the Company, at $7.00 per share, is below fair value.  Here is our rationale.

The current bid offers essentially no premium to the market price.

On April 18, 2008, the day before the discussions with Schlumberger and First Reserve were made public, the shares closed at $6.99.  Admittedly, the shares had spiked higher in the last hours of trading to reach a high of $7.39 before settling back.  However, based on the April 17th close, the current bid represents only a 4% premium.  Note that the share price performance of Saxon (up 38% for the year) is not out of line with the Company’s peers, including Savanna (up 32% for the year), Ensign (up 48% for the year) and Precision Drilling (up 73% for the year).  In consequence, it is clear that Saxon’s share price has not been artificially inflated by takeover speculation in advance of the deal.

The current bid offers no premium to account for superior operating and financial results.

The $7.00 price implies a forward EBITDA multiple of approximately 8 times, which was in line with the Company’s Canadian peers at the time of the offer.  However, as we pointed out in our previous comments, Saxon reported vastly better operating and financial results than its competitors for 2007.  Operationally, Saxon outperformed the sector quite nicely with an average utilization rate of 72% in 2007 compared to the Canadian industry average utilization rate of 38%.  Financially, revenue totaled $242.3 million in 2007, an increase of 42% from 2006.  EBITDA (earnings before interest, taxes, depreciation and amortization) amounted to $68.6 million or $0.81 per share, an increase of 50% and 45% respectively.  Net earnings in 2007 were $26.8 million, or $0.32 per share, up 71% and 68% from $15.7 million, or $0.19 per share, in 2006.  Over the comparable period, the Canadian sector reported, on average, flat or negative revenue, EBITDA and net income growth rates.

The current bid offers no premium to account for superior growth prospects.

Going forward, there are several avenues of growth that warrant a more competitive bid.  First, Saxon has exposure to US shale resource plays, one of the hottest areas for exploration and development spending.  Just as an example, EOG and Southwestern Energy are looking to increase the number of wells drilled and the number of rigs they employ in 2008.  Second, one of Saxon’s major customers, PEMEX (Mexico’s state owned petroleum Company) recently announced a major increase in capital expenditures in an effort to boost production.  PEMEX raised its 2008 exploration and production budget 28% to US$20 billion.  Saxon could potentially drill hundreds of wells for PEMEX in 2008.  Third, Saxon has its foot in the door in several higher risk but higher growth locations such as Columbia, Peru, Venezuela and Russia.  The $7.00 takeover offer does not adequately compensate shareholders for this potential upside.

The current bid is now actually below-market given the strong recent performance of the peer group.

Since the takeover offer became public, the share price has been capped at approximately $7.00.  However, rising commodity prices have triggered a huge run in the oil and gas services stocks and the $7.00 takeover offer now actually values the Company at a discount to its peers.  Based on consensus estimates, the current offer implies a forward EBITDA multiple of 8 times without including any takeover premium.  Again based on consensus forecasts, the peer group of Canadian oil and gas services companies is trading at 8.5 times forward EBITDA.  The group includes such stocks as Precision Drilling, currently trading at 8.6 times forward EBITDA, and Savanna Energy, trading just over 10 times forward EBITDA.

In summation, we are confident in our analysis.  Moreover, in light of the fact that Saxon Energy is now trading above the current $7.00 takeover offer, we are not alone in our view.

Irwin A. Michael, CFA