It’s not a great a time to be invested in small oil and gas producers, and today’s news about Ophir Energy‘s (LSE: OPHR) placing just reinforces that view. Its shareholders were the biggest losers in the FTSE 250 on Thursday at the time of writing.
The Placing
Ophir announced today that Kulczyk Entities, its second-largest shareholder, had sold 56.6m shares at 140p apiece for about £79.3m. Following the completion of the placing of its 8% stake, Kulczyk Entities will not hold any ordinary shares in the company.
This is a big problem, for two reasons. First, Ophir loses credibility and a key, cash-rich shareholder at a critical time when relationships are vital to its success, particularly when it comes to looking for new partnerships.
Second, it loses a possible source of cash: Ophir is solid financially, and has cash on the balance sheet, but may need to raise funds in the next 36 months if its assets do not produce the required level of cash flows.
Inevitably, the shares were hammered in early trade today, having lost 11% of value so far. More pain may lie ahead, and here’s why you’d do well to cut your losses if you are invested.
My Take
If weakness in oil prices persists, the oil and gas producer could become less comfortable with its cash position, as heavy investment remains core to its strategy.
As I recently argued, the good news is that Ophir’s balance sheet isn’t stretched, but to fund its ambitious expansion plans, it may need up to $500m a year in heavy investment — and those are funding requirements for much bigger players.
Ophir, whose core assets are based in Africa, has recently announced to have almost halved its capex programme to $250-300 million, but nobody really knows if it’ll manage to stick to the plan as it needs investment to grow as a profitable entity.
Opportunity/Salamander/Oil
If you think this is a good opportunity to snap up the shares, also consider that Ophir has lost about $250m in the past three years, and is unlikely to report meaningful economic profits at least until 2017.
M&A is also core to its strategy, which heightens the risk of the investment.
When Asian oil explorer Salamander Energy was bought at the end of 2014, the all-stock deal held a “compelling strategic logic”, according to management, but only analysts seem to have bought into such an argument. It has yet to be seen whether the deal makes any sense financially and economically.
The acquisition of Salamander, which was completed last month, hasn’t done much to lift spirits, and Ophir stock has gone nowhere since November, in spite of bullish price targets from analysts, according to which Ophir should now be worth more than 200p a share, rather than 143p.
Ophir remains a “high-risk/uncertain-return” investment — one for which you may record hefty losses if Brent stays below $65 per barrel into 2016.
