Shares in north Sea oil producer Enquest (ENQ) dive 10% to 34.75p as the company announces a $100m heavily discounted rights issue. The new funds are being raised to acquire the remaining 75% of the Magnus oil field it does not already own, and carry out some future drilling work.
The actual cost of the deal is $300m but the remainder will be met by a loan from the selling party, oil major BP (BP.).
This is a non-recourse loan which will be payed out of future cash flow from Magnus and associated assets the Sullom Voe Terminal and Ninian Pipeline System, meaning BP can seize the assets if it is not repaid but cannot pursue Enquest for further compensation in that event.
DETAILS OF THE RIGHTS ISSUE
The three for seven rights issue at a 21p strike price effectively means existing shareholders have the right, but not the obligation, to buy three shares at 21p for every seven shares they already own. The strike price is a 45.6% discount to last night’s closing share price.
The discount to the so-called theoretical ex-rights price or TERP of 33p is 37%. The TERP is a calculated price for a company's shares after a rights issue with the assumption that all these newly issued shares are taken up by the existing shareholders.
If the transaction succeeds in delivering the cash flow management hope then the dilution may be justified by the ability to pay down the company’s troubling $1.97bn of net debt.
This borrowing figure is revealed in a set of first half results which are otherwise quite encouraging with production up more than 40%, and earnings more than doubling to $311.9m.
Cantor Fitzgerald comments: ‘A solid set of results with just about everything trending in the right direction (as one might expect given commodity pricing during the period), while the Magnus deal is no doubt a sensible one. However, that discount is eye-watering.’
