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Oil Search Shifts the Paradigm from Just Cost-Saving to Capital Raising, Completes Institutional Placement

  • April 12, 2020 12:35 AM AEST
  • Kunal Sawhney
    CEO Kunal Sawhney
    2365 Posts

    Kunal Sawhney is founder & CEO at Kalkine and is a richly experienced and accomplished financial professional with a wealth of knowledge in the Australian Equities Market. Kunal obtained a Master of Business Administration degree from University of T...

Oil Search Shifts the Paradigm from Just Cost-Saving to Capital Raising, Completes Institutional Placement

ASX-listed oil producers are caught between the dual-edged gizmo of the ongoing oil price war between the oil kingpin-Saudi Arabia and Russia and falling demand and are presently undergoing a rapid change in cost structure amid the weak oil price and lower demand for oil products in the wake of travel restrictions imposed by the Federal and State Governments.

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To Know More, Do Read: EIA Trims Crude Oil Average Price Forecast, While Saudi and Russia Scheduled to Pull A Chair to the Negotiation Table

The current tough market conditions are prompting many oil-related companies to adopt some cost-saving measures in order to sail across the challenging times.

To Know More, Do Read: ASX Energy Companies Holds Fast To Preventive Measures Amidst Turbulent Market- SXY, PDN, CTX

While many prominent names on the exchange such as Woodside Petroleum Limited (ASX:WPL), Senex Energy Limited (ASX:SXY) are taking a relook at the cost and trimming the capital expenditure, another leading oil producer on ASX- Oil Search Limited (ASX:OSH) is trying to shift the paradigm from just cost trimming to raising capital to support the balance sheet, which could provide an impetus to the Company in the low oil price environment.

Also Read: Cost-Cutting, Cash Preservation, Revenue Hedge- New Drilling Tools of Woodside and Senex

Despite reporting a ~ 3.26 per cent increase in the revenue for FY2019, the net profit (post-tax) of the Company took a hit of ~ 8.43 per cent, and the stock of the Company fell by ~ 77.15 per cent from its January 2020 high of $8.120 to trade at a low of $1.855 (intraday low on 23 March 2020), during the quarter.

To Know More, Do Read: Oil Search and Caltex Encountering Weaker Price Challenge Amid Market Disturbance from IMO 2020 and Coronavirus

However, an array of development announcement provided a cushion to the stock with price recovering from $1.855 to reach a high of $3.240 (as on 3 April 2020). It was then; the Company announced a proposal for capital raising, which many industry experts anticipate, is the right decision in the prevailing weak oil price scenario; however, the stock is slightly down despite such anticipations in place and is presently trading at $2.730 (as on 9 April), down ~ 15.74 per cent from its recent high of $3.240.

Equity Raising For Prolonged Sustainability

OSH announced an accelerated pro-rata non-renounceable entitlement offer, an institutional placement, and an offer to eligible PNG shareholders on 7 April for raising about USD 700 million or approx. $1,160 million. The Company suggested to use the capital raised in strengthening the balance sheet and increase liquidity for prolonged sustainability in the low oil price environment.

OSH decided to conduct the equity raising at an offer price of $2.10 a share, reflecting a discount of 23.1 per cent over its closing price of $2.730 on 3 April 2020.

Apart from raising capital, the Company decided to suspend or defer discretionary activities within its control to trim about 40 per cent forecasted investment expenditure guidance of USD 710- USD 845 million for the year 2020.

OSH also introduced preliminary cost reduction measures such as, salary cuts, headcount reductions in Sydney, and started a systematic review of operating costs, which would be implemented by June 2020.

A Boost to the Debt Facilities

The Company is anticipated to have Pro-forma gearing of 28 per cent and liquidity of approximately USD 1,835 million post the Equity Raising, including USD 1,079 million cash, USD 760 million of undrawn debt facilities, and excluding a USD 4 million bank guarantee.

Post assuming an average Brent oil price of USD 20 per barrel or higher from 1 April 2020, OSH anticipates the available amount to provide sufficient liquidity till 31 December 2021.

OSH also suggested that over 85 per cent of its drawn debt relates to the non-recourse PNG LNG project finance facility that has no financial covenants, and the Company is maintaining a cash balance tantamount to six months of forecast principal and interest repayments within the PNG LNG project accounts, all the time.

The Completion of Placement and Brokers View

OSH has now successfully completed the Placement to institutional investors and the institutional component of its 1 for 8 accelerated pro-rata non-renounceable entitlement offer, which has now raised ~ $1,080 million for the Company, excluding the transaction costs.

In the status quo, Australia's largest national full-service stockbroking and wealth management firm- Morgans upgraded its rating on the stock from ‘hold’ to ‘add’ following the equity raising, quoting that the Company has now improved its risk profile.

The broker also hiked its target price on the stock by $0.37 to $3.53 and suggested that while the dilution of shares hurts, it is a reasonable measure considering the size of liquidity buffer it provides to the Company.

The stock of the Company last traded at $2.700, up by 5.05 per cent against its previous close on ASX.

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