On 18-Sep-09, Verenex Energy Inc (VNX CN - VRNXF.PK), the Canadian oil and gas exploration company, announced and recommended a binding memorandum of understanding (MOU) to sell all its shares to the the Libyan Investment Authority for CAD 7.09 a share plus any residual positive working capital. A definitive agreement is expected to be signed by 20-Oct-09, at which time, the Libyans will escrow the necessary funds to complete the transaction. This offer comes after the Libyans themselves blocked a CAD 10 per share offer from the China National Petroleum Corporation on 08-Sep-09. 

 Although there is always room for more creative gamesmanship from the Libyans, we believe that Verenex's current CAD 6.25 share price (or minimum 13% spread to the CAD 7.09 + working capital offer price) reflects excessive fear for non-closure of the deal (mainly attributed to the past observed behavior of the Libyan partners). 

 We believe, however, that -in this long Verenex story, which commenced a sale process late 2008- this deal at last provides clarity with regards to both price and timing, and that the memorandum conditions of due diligence, regulatory, court and shareholder approval should now be easily fulfilled in the short-term:
 
 1) Shareholder approval is highly likely as firstly, Vermillion -Verenex's 45% shareholder who was involved in the negotiation process with the Libyans- has already agreed to tender its shares. Secondly, other shareholders are expected to follow suit given the lack of other credible sale alternatives/parties and the risk of being at the mercy of the Libyan powers, should a deal not be approved (e.g. any significant decisions on Verenex's Libyan operations need to be approved by the Libyans, such as the commercial development of their Area 47; any extension to the Libyan exploration term beyond March 2010).
 
 2) Regulatory approval: Given the fact that the transaction has already received all necessary Libyan government approvals, we do not see any regulatory risk as more than 85% of Verenex' assets are in Libya.
 
 3) Due diligence completion: As the Libyans are familiar with Verenex's Libyan assets and its technical data, we believe that the due diligence process is restricted to the financial and judicial data, we do not expect material difficulties for this normal course of action.
  
 As we believe the conditions for the memorandum of understanding are to be fulfilled, we would recommend to buy Verenex around the CAD 6.25 price and receive the CAD 7.09 + working capital proceeds (estimated around CAD 0.15-0.20 a share) in the first half of 4Q ‘09, realizing a minimum return of 13.4% (annualized 80% return assuming end-Nov closing).