Takeover Chatter in the Oil Patch
Takeovers in the Oil Patch – Who is Loading Up?
When a company raises cash and issues equity, compliance and good investor relations require the company to say how it will use the cash. Often the press release will contain the phrases, “for working capital” or “for general corporate purposes”.
Those are magic words. Almost anything can fit into those parameters so the company can safely use the cash as it sees best. There is no secondary market liability since there was no misrepresentation. This gives management and the board a great deal of flexibility, although it comes at the expense of transparency.
Transparency is a key element in building long term value, but there are times when transparency comes second to corporate strategy, as long as governance standards are met. Raising cash to fund a takeover strategy is one of those times. Issuing equity to raise takeover capital under the guise of “general corporate purposes” allows a company to engage an investment banking firm on a bought deal basis for assistance without tipping its hand to the target or to the market, and that’s happening in the oil patch today.
A bought deal happens when an investment bank (or a syndicate of investment banks) commits to buy an entire offering from the company. The IB house is risking its own balance sheet. If the IB can’t sell the securities to its clients, it must still put up the cash to the company. A bought deal is a clear sign that the investment bank believes in the company and its strategy. Almost always, the IB house knows more than the average investor, but under insider trading and tipping laws is prohibited from discussing that strategy with any outsider. This is one of the reasons for the “Chinese walls” between IB and retail.
An issuer likes a bought deal because it eliminates the financing risk and usually eliminates the distraction of a road show. The trade-off is the IB firm will likely get a lower price than by taking on a brokered placement.
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Last week ARC Resources Ltd. closed a $350M bought deal with another $52M in overallotment, with a syndicate led by RBC Capital Markets. The stated reason for the raise was, “to temporarily reduce bank indebtedness, increase working capital and to finance continuing capital expenditure programs”. There are those magic words.
ARC is a dividend-paying conventional oil and gas company with an extensive resource base of high quality oil and natural gas. Like the oil patch worldwide, its share price has taken a beating lately, well off from its year high of $33.80 and now trading around $24- $25. However, its balance sheet is in good shape, it has a 15 year reserve life index, its cash flow is strong, and it has extremely low operating costs.
One has to question why ARC was in the markets at all. Given the low share price and the overall positive condition of the company, one plausible explanation for the raise is ARC is building a war-chest to fund acquisitions. Keep an eye on news from this 20-year old producer.
Similarly, Raging River Resources Ltd. just completed a $88M bought deal and its Saskatchewan neighbor Rock Energy Inc. announced a $13M bought deal. Neither one of these companies “needed” to do an equity financing, especially with their shares trading at or near year-lows. An equity raise was dilutive to the existing shareholders. Again, the only explanation that makes sense is that they are loading up to go hunting.
Contrast those three bought deal financings with the recently announced financing by Transatlantic Petroleum Ltd., a Bermuda-based junior producer with operations in Turkey and Albania.
In December, 2014 TPL announced it had received $47.4 million of subscriptions in a non-brokered private placement of convertible notes paying interest at 13.0% per year. The Notes are convertible after July 1, 2015, into TPL common shares at $6.80 per share. The shares are currently thinly traded around $6.30.
The stated use of net proceeds was “for short-term debt repayment, working capital, and general corporate purposes, primarily in its Albanian operations.”
This wasn’t a bought deal. It wasn’t straight equity. Even a cursory review of TPL’s financial statements makes it clear that TPL needs cash to maximize its Albanian properties and to fund part of its capital program for 2015. A company like Transatlantic Petroleum must raise as much cash as possible, whenever possible, without a lot of regard for the current market price.
Here, the use of proceeds is exactly as stated. TPL needs the working capital. TPL is not in the hunt, and until there is more certainty around its Albanian assets, will not the hunted either.
As the oil market continues to roil, keep an eye open for bought deal equity financings for “general corporate purposes”.
Mr. Clausi is an experienced investment banker, executive and director. A graduate of Osgoode Hall Law School called to Ontario's bar in 1990, Mr. Clausi ... <Read more about Peter Clausi>